7 Proven Financial Management Methods for Small Businesses & Their Importance

The landscape of small business finance is constantly changing and evolving, so it’s important to stay on track and not get lost in the noise. That’s why we gathered advice from top financial executives, including CFOs and founders, to help steer your business towards fiscal stability and growth.

1. Adopt Business Envelope Budgeting

I advocate for the envelope system that’s adapted for business use. This system revolves around allocating a specific part of your budget to different business expense categories. Each “envelope” represents a category (marketing, utilities, payroll, whatever your business needs), and you spend ONLY what’s allocated in that envelope. This will make you more disciplined and prevent you from overspending in any one area. 

I think future business owners should focus on realistic budget allocation based on past trends and future projections. Still, they should avoid underfunding critical areas — research and development, for example. The envelope budgeting method is particularly effective for businesses that have irregular income patterns.

Gillian Dewar, chief financial officer of Crediful

2. Manage Taxes Diligently

One tried-and-true financial management method I’d recommend to any small business is diligent tax management that’s tailored specifically to their business structure. Keep a close eye on your tax obligations and ensure you’re complying and seeking out potential deductions or credits. You should always keep meticulous records of your expenses, deductions, and income throughout the year. It’ll make your tax season smoother!

Future business owners should also pay attention to the tax implications of their chosen business entity (LLC, Corp, partnership, or sole proprietorship). If you understand what impact your chosen structure has on taxes, it can have a significant effect on the bottom line of your business. 

Forget about neglecting tax planning or procrastinating on filing obligations. This can lead to unnecessary penalties and fines, and you don’t want that.

Joe Chappius, financial planner at Tax Climate

3. Implement a 13-Week Cash Flow

We are faithful adherents of the 13-week cash-flow report. What this cash report comes to is attempting to project cash flows in the next 13 weeks only. This narrow time allows us to create a number of good metrics bolstered by the historical record. Every business dies when it runs out of cash, so it’s important to nail this one before you move on to more sophisticated reports.

Trevor Ewen, COO of QBench

4. Practice Meticulous Bookkeeping

If done with accuracy and a proper understanding of one’s financial objectives, one of the most effective financial management strategies that I would recommend is detailed bookkeeping. 

Set SMART (Specific, Measurable, Attainable, Relevant, Time-bound) targets. Examples of that are increasing cash flow or cutting costs. After setting those goals, use reputable accounting software to keep track of every single transaction. Bookkeeping helps you stay organized all year round and makes you ready for tax time and any audits that might occur. 

Equally important for any business owner is keeping business finances separate from personal ones (to avoid legal tangles). You must adjust your budget regularly in line with the company’s performance and market changes. 

Also, being financially literate and educating yourself or working with a professional can be an investment that pays off over time. 

Long-term “visionless-ness” and the inevitable underestimation of expenses are major traps. These measures form a strong platform for sustainable financial management in your small firm.

Loretta Kilday, DebtCC spokesperson at Debt Consolidation Care

5. Forecast Cash Flow Regularly

A financial management method I find essential for small businesses is regular cash-flow forecasting: Projecting your future financial position based on anticipated payments and receivables. By doing so, you’ll anticipate and manage cash shortages or surpluses easier.

Pay attention to accurate record-keeping and realistic projections, but don’t be overly optimistic in revenue forecasts, or you may end up in a financial strain. Effective cash-flow management is a must in ensuring the business can meet all of its obligations and also invest in growth opportunities.

Jim Pendergast, senior vice president of altLINE Sobanco

6. Utilize Accounting Software

If you’re running a small business and want a solid handle on your finances, use some kind of accounting software. I’m using Wave, and it’s been a lifesaver! It automatically tracks your everyday expenses and income sources, which means you can spot those sneaky expenses that don’t seem like much but add up to an unnecessarily heavy load!

Online accounting tools are great at showing you which parts of your business are actually making money and which ones are just eating up your budget.

Another cool thing about using this kind of software is that you can compare your business growth month by month. You’ll see clearly which areas are thriving and which ones are lagging in ROI. This insight is gold — it tells you where to focus your energy and resources and what to maybe rethink (or even drop).

Juliet Dreamhunter, founder of Juliety

7. Build a Business Cash Reserve

A cash reserve is essentially an emergency fund for businesses. Building a just-in-case cash reserve has given us financial peace of mind. Here are some areas where it helped — keeping a positive cash flow, guarding against unexpected expenses, eliminating the need for loans, and providing funds for business growth and expansion. 

We deposit funds into our cash reserve on a regular basis to ensure we have emergency money available in case we need it. However, there was one mistake we made in the early stages: We failed to review and adjust our cash reserve to mirror the changes in our financial situation. 

As a result, we, unfortunately, didn’t have enough money to cover emergencies. We also missed out on opportunities for growth because we lacked the funds to capitalize on them.
Logan Nguyen, co-founder of NCHC.org