Best practices for small business finance management

Apr 05, 2024

Whether you are a salaried employee or an owner of a small business, finance management is a term dreaded by all.

Managing your expenses against your salary is a delicate balance.

Still, the entrepreneurial responsibility of ensuring that business operations run smoothly and employees & vendors are paid regularly is a different ball game altogether.

While personal finance rules may not always be applicable when it comes to small business finance management, there are some golden rules that benefit individuals and small business owners alike.

What are the challenges of managing personal & business finance?

All individuals and small business owners walk the tightrope of personal finance and business finance management, whether knowingly or unknowingly. This delicate balance comes with its own unique and shared obstacles.

Cash flow issues

Cash flow is the number one roadblock in finance management for small business and individuals.

Cash flow issues in personal finance can appear as a struggle to manage monthly outflow (rent, utilities) against their monthly inflow (salary).

For a small business owner, one month of unstable cash flow can result in a year-long struggle to achieve a stable standing once again.

For individuals, this can lead to the beginning of credit card debt; for small business owners, this can land them in hot water with their employees and vendors.

Not saving for retirement

One of the most overlooked portions of personal finance by young professionals is creating their retirement fund.

Even if your retirement seems like a long way into the future, not actively saving for it today can rob you of your financial freedom tomorrow.

By not taking advantage of Government-sponsored retirement accounts and plans, individuals can increase their years of service well beyond sixty years old.

Lack of business financial reporting

Small business owners are usually so involved across all departments that oftentimes, they unknowingly skip out on an essential practice – reporting.

Without following a dedicated financial reporting schedule, it is far too easy to lose track of your bookkeeping and accounting records.

This situation can become even more severe when owners are facing time-sensitive deadlines.

Overburdening debt

Having cash flow issues can lead both individuals and small business owners to accrue debt to help them with their expenses.

If used poorly, taking on debt can quickly put individuals and entrepreneurs into a debt trap.

Credit card debt and business credit can wreak havoc on salaried employees and small business owners alike.

Without consistent revenue and smarter borrowing decision, personal finance and small business finance management can go out for a toss in the blink of an eye.

Best practices for small business finance management

There are some golden rules of personal finance that can truly help strengthen finance management for small business immensely:

1. Create budgets

From managing house rent to managing departmental expenditures, creating and following a budget is a great way for individuals and small business owners to keep track of their cash flow.

Budgeting can help small business owners to create feasible long-term goals while being cognizant of their current expenses.

For personal finance and business finance management, budgeting helps you create an actionable course for your goals, save money, and track your costs simultaneously.

Budgets reduce the need to accrue personal or business credit and help small businesses spend wisely and proactively.

2. Emergency fund

Emergency funds are the holy grail of personal finance, which is perfectly applicable to small business finance management as well.

Emergency funds are necessary capital set aside to tackle any and all personal or business emergencies.

It is important to keep this fund as liquid as possible to make it easier to withdraw when needed.

While it is advisable in personal finance to create an emergency fund ranging anywhere from a total of 3-18 months of an individual's monthly expenses, business finance management suggests retaining at least 10% - 30% of your annual revenue in the bank as an emergency fund.

3. Investing wisely

Investing is a game-changer for individuals and business owners. While investing for individuals doesn't happen at a corporate level as it does for small businesses, it is still a great way to save money and invest for bigger returns later on.

Through the power of compounding interest, investments have become a crucial element of personal finance and small business finance management. 

Through corporate investing, business owners can invest their profit or surplus into various securities and stocks, creating a diversified portfolio to help generate even more money for their business.

4. Build your credit score

Having a strong credit score is a great indirect asset for individuals and business owners.

A good credit score opens many doors and opportunities to wide-ranging, flexible credit options with reduced interest rates.

Not only that, but it also builds a creditworthy reputation in front of credit bureaus and vendors.

Note that while small business owners may have a good personal credit score, it is also important to build a business credit score separately.

A good business credit score is a must-have under business finance management since it produces favorable credit options and strengthens vendor relationships.

5. Closely monitor your expenses

There are two types of expenses – necessary and frivolous. Understanding the difference between the two can uplevel your personal finance and small business finance management exponentially.

From paying for rent and utilities to paying suppliers and employees, individuals and small businesses need to monitor their expenses on a day-to-day basis.

Investing in innovative tools to track your daily, monthly, quarterly, and annual expenses can help streamline your personal finance and business finance management.

For small business owners, using an all-in-one expense management solution like Volopay can help you save loads of time and money!

Suggested read: 18 small business expense categories you need to know

Simplify and streamline your business finance process