How to Organize Your Small Business Finances

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Organize Small Business Finances
Many small businesses face a similar question shortly after they open their doors – how do we manage our money? Like your personal finances, there is no “one-size-fits-all” approach to manage your small business finances. But there are some good practices that you should follow. Today, I’m going to give you a quick peek under…

Many small businesses face a similar question shortly after they open their doors – how do we manage our money?

Like your personal finances, there is no “one-size-fits-all” approach to manage your small business finances. But there are some good practices that you should follow.

Today, I’m going to give you a quick peek under the hood of how I organize my small business finances and give you some alternative resources to help you find the best products and services for organizing your business finances.

The setup I use is applicable to many small businesses, freelancers, sole proprietors, and contractors. However, it may not be right for your situation (for example, I won’t cover payroll, maintaining or tracking inventory, and similar topics).

Consult with a financial advisor or tax professional for more advanced needs.

Separation of Personal and Business Funds

I recommend using separate accounts for your personal and business funds. Separating your funds may offer you protection and will make it easier to sell your business if you ever decide to sell (determining valuation, tax reasons, etc.).

It also makes it easier to handle your taxes on an annual basis. You aren’t required to separate your personal and business finances, but it is generally a good idea if you are bringing in a decent income.

Depending on the size and nature of your business, you may not need to separate your personal and business funds. For example, if you have what could be considered hobby income (arts and crafts, part-time web design, and similar endeavors).

Regardless of whether or not you decide to separate your funds, you need to keep accurate financial records for tax reasons, tracking income and expenses, and other business reasons.

Decide on Your Business Structure

Shortly after my small business became profitable I decided to incorporate it as an LLC. The how’s and why’s for that decision will be left for another article, but one of the main reasons I did it was to create a clear legal entity for my business and facilitate opening a business savings account.

 

Some banks or financial institutions will allow you to open a business account as a sole proprietor*, but many require you to have a business formed as an LLC, S-Corp, C-Corp, or other legal business entity. I recommend speaking with a business lawyer or doing further research on your own if you are unsure of which legal business structure you should use for your small business.

(*A Sole Proprietorship is not a legal business entity, it is considered an extension of the person running the business).

Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a specific tax number for your business, similar to an SSN for your individual taxes. A specific tax number for your business is helpful when opening business savings and checking accounts, self-employed retirement plans, and separating income for tax purposes.

This is also the number you give to people you do business with, so it is a good way for sole proprietors to avoid identity theft. Obtaining an EIN from the IRS is free and easy and takes about 5 minutes.

You can apply for free at the IRS website.

Open Business Savings and Checking Accounts

As previously mentioned, separating your business savings and checking accounts from your personal accounts is usually a good idea. I recommend opening a business checking account with a local branch to make it easier to deposit checks and handle other tasks.


In general, you want your business checking account to be conveniently located so you have access to customer service and other banking needs. And you want to avoid as many fees as possible.

Chase Bank has numerous locations near me, which makes Chase Bank Business Checking an excellent solution for my business.

I also have a Chase Bank consumer checking account. You may find some economies by having personal and business accounts at the same location.

Unfortunately, many local banks don’t offer high-interest rates for their business savings accounts. So while I use a local bank for my business checking account, I opened a Capital One Spark Business Savings Account for my business savings accounts.

Capital One offers much higher interest rates than my Chase Bank Business account. Capital One does have physical branches, but none in my local area. You may run into something similar when you go to open a business banking account, so it pays to shop around.

Consider How You Will Receive Payments

Your goal as a business owner is to make money. So you need to pay attention to payment methods. You may want to consider using a service to produce invoices, receive money, handle physical payments, web transactions, etc.

My business is primarily online, so I don’t need to worry about merchant services, processing credit cards, or handling cash. Many banks can do this. But depending on your needs, you may wish to look for an all-in-one solution.

You may also wish to open an account with PayPal, Google Checkout, Dwolla, or other payment processing companies to facilitate sending and receiving money.

Some business banks also link to other payment processing services, so check with your bank before spending too much time researching other options.

Finally, you can also consider Intuit’s QuickBooks which has features that allow small business owners to send and receive payments, handle online transactions, create a payroll, and maintain their business accounting.

It’s a powerful tool for small business owners and is scalable depending on your needs.

Open a Business Credit Card (optional)

Chances are you will have a debit card attached to your business checking, but you may wish to have a business credit card for your expenses.

Advantages of using a business credit card include cash rewards, better consumer protections, lower liability, itemized expense reports, and the ability to float expenses, if necessary.

I’m a big fan of putting all my business expenses on my business credit card an paying it in full each month to avoid any finance charges or interest.

I currently use the Chase Ink Business Card and pay it in full each month. It’s a great all-around credit card and offers excellent rewards. Here is a list of featured business credit cards if you are searching for a credit card for your small business.

Small Business Accounting Software

You can always use a ledger to keep track of your income and expenses. But with the variety of high quality, low cost, or even free software options, there is no need to try to save a few pennies and do the work by hand.

Software is often quicker, easier, and more accurate than pen and paper. You can use a simple spreadsheet such as Open Office Calc (free), or Microsoft Excel, which is what I did when I started my business. Or you can use a more specialized business accounting program.

I currently use QuickBooks Online, which allows me to access my books from wherever I am (including from my smartphone if I’m on a business trip.

I can also share access with my bookkeeper and accountant, which makes reconciliation and tax time much easier!

If you aren’t ready for the full-fledged QuickBooks Online, then take a look at Quick Books Simple Start, which runs less than $100 and covers most needs (tracks income/expenses, create invoices, stores images of receipts, store client/customer information, notes, and more).

I started with QuickBooks Simple Start, and it’s a great solution. Quick Books is an Inuit company, so it is compatible with Quicken* and TurboTax.

*Note: Intuit recently sold Quicken to a private equity firm, so forward compatibility may change in the future. This change also led many users, including myself, to seek out alternative money management apps to Quicken.

A QuickBooks version to fit your needs. QuickBooks also has various product levels to meet virtually all business needs – Online, Simple Start, Pro, Premier, Enterprise, and a version for Mac users.

There are also QuickBooks versions to accept payments, run point of sale software, or do payroll. In short, there is something for most small business applications. You can check out the details for each of the various QuickBooks products at the QuickBooks website or check out some QuickBooks coupon codes for more savings.

Other popular business accounting programs include:

*A note about Quick Books and Sage Accounting: Most accountants should be familiar with QuickBooks and Sage, so it’s not a bad option to check out those or speak with your accountant for advice before purchasing or selecting a software program for your accounting needs. Xero also offers a robust platform and is becoming more well known, so take a look at that option as well.

Create a System to Organize Your Taxes

I use an accountant for my taxes, but I like to do everything in my power to make it easier on both of us. Creating a system for organizing your taxes makes everyone’s job easier.

My basic tax organization system involves using Quick Books for tracking income/expenses and storing images of receipts, and I maintain several manila envelopes for each tax year where I file my receipts and invoices.

I also maintain a separate folder for all legal documents and correspondences (i.e. LLC articles of corporation, IRS documents, tax forms, business permits, etc.). Finally, I scan everything to my hard drive and back it up to an external hard drive for additional protection against data loss.

Hire an Accountant that Specializes in Small Business (optional)

Not everyone needs to hire an accountant, but you may find that your personal and business tax situation dictates the need for professional help. Chances are, a good tax professional can help you find ways to maximize your business deductions and find other methods to help maximize your return.

An accountant will also help you calculate self-employment taxes and estimated taxes, both of which are essential for small businesses. A good accountant should stand by their work and help you if you are ever subjected to an audit and the tax preparation costs are a qualified business expense you can write off the following year.

Finally, outsourcing this business task frees your time for more important tasks, such as working on revenue-generating tasks.

Self-Employed Retirement Plans

Even if you run your business part-time and have an employer-sponsored retirement plan, you should still consider opening a self-employed or small business retirement plan.

There are many benefits, including investing more money for your retirement, tax deferrals, and more. Which small business retirement plans you are eligible for and which is best for your situation will vary depending on many factors, including your business size and structure, income, and other factors.

The most common SE Retirement Plans are:

I chose to open a Solo 401k with Vanguard. After examining the plans I was eligible for, I discovered a Solo 401k was the plan that offered me the potential to contribute the most money each year (business income allowing).

I chose Vanguard because they offer a wide variety of low-cost funds, excellent customer service, and I have had individual investments there for almost a decade.

There are many other financial institutions that may meet your needs, many of which are also among the recommended places to open an IRA.

*Consult with a tax professional, business advisor, or do thorough research before choosing your Self-employed retirement plan.

This is Not a Complete Guide on How to Run a Business

This article only covers how I manage my small business finances. Your needs may vary depending on your business situation, the size, and structure of your business, the type of business you run and other factors.

You may be required to obtain licenses, permits, or other documents based on your state and local laws. Other considerations include doing business as (DBA), trademarks, etc.

Customize Your Own Financial Plan for Your Business

This is my basic business setup, and it works well for me. It may also work for your needs if you are a freelancer or other small business owner who doesn’t deal with inventory or licensing issues.

Feel free to use this as a rough template to get started, but your business is unique, so customize it where necessary.

Questions or comments? Leave a comment and I will address it in the comments section or in the article, whichever is more appropriate.



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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Rose says

    Hi Ryan,

    I think this article is great! It really layer out a plan for how to set-up the financials which is exactly where I’m at currently. My questions is what tool do you use for your personal finance tracking? I’m considering purchasing Quickbooks and was looking to understand how I can also track personal expenses better so I can keep everything separate. I recently opened a separate business account and a separate paypal business account and I want to make sure that everything is separate, however I’m also looking to track personal finances better as well.

  2. Carol Gawrys says

    Ryan thank you for sharing your knowledge I have learned a lot from reading your information. I do have a question for you, I plan to launch my business in January as I am currently still building my business foundations and within my business plan I have indicated that I would not draw a paycheck until the business reaches $6,000 monthly in receivables I do not plan on having employees right away. I am trying to build working capital so I don’t have to borrow money as I grow. My question is do I have to pay taxes on the receivables and if so what kind of taxes would I be paying? Would I pay at my fiscal year end or my own personal income tax filing. I will be setting my company up as a partnership to start and as I grow into a viable company change to an LLC.

    • Ryan Guina says

      Carol, this is a question that is best addressed by a tax professional because the answer will vary depending on many factors, including what type of revenue is coming in, what is going out, where it is going, etc. Your expenses may offset some or all of the income, but no one can give you a full understanding of how it would apply to your situation in the space of a blog comment (or most likely even in a blog article or lengthy email). The only way to get a comprehensive answer here is to sit down with a tax professional or accountant who can help you understand the nuances that come with running a business. This would be money well spent, as it can also help you set up your business the right way when you start – saving you a lot of time, money, and energy in the long run. I did this when I was getting started and it was a huge help. Best of luck!

  3. Christine says

    Hi Ryan,

    Im not sure how old this thread is but I would love some advice. I own a company as a sole proprietor for 7 years. I was told by my tax advisor to incorporate. Now I am very confused about all the new rules of becoming incorporated especially when it comes to my finances. Apparently I have to be on payroll even if I subcontract everyone else out because I am now a corporation and that is the law in Maryland.

    But my main question is if all my companies money is now going into the company checking account and I am getting paid a set amount out of this checking account what if I need more money out of said checking account? Can I just transfer it over to myself? Do I have to write myself a check ?

    Any advice would be so helpful. thank you !

    • Ryan Guina says

      Christine, you should speak with your tax professional about this. Yes, you can withdraw money from your business account, but you need to make sure to track it properly and make sure not to co-mingle your business and personal funds. Speak with your tax advisor about how to track this so you keep your books clean and stay within the realm of the law.

  4. Tom says

    Hi Ryan –

    Tell me if this correct. I’m helping my wife start a private practice. I’m using a SEP IRA, so I need an untaxed account for the tax-sheltered deductions. I’m using ADP o deduct payroll taxes. I’m also having our vendors deduct from our checking accounts so I can track business expenses more easily. I’ll be using a business account, so should I have one savings and one checking account? Have the checking account by the one with the “taxed” income to pay the bills of the business? I could also send the taxed income to our personal account to live off of. I’m assuming it is tricky waters to pay bills with income that hasnt been taxed yet. Does that sound correct? How do you like the SEP IRA? Im using it for the high deductions (53K) per year.

    Thanks,
    Tom

    • Ryan Guina says

      Hi Tom, Small business accounts can get tricky quickly. In many cases it’s worth hiring a small business consultant, accountant, or other specialist to help you determine your needs and set everything up the right way.

      I have business checking and savings accounts, and I have my payroll automatically deducted from my checking account each month. You can take distributions from the business earnings and transfer those funds to your personal checking or savings accounts use those for personal and living expenses. Just make sure to track everything properly in your accounting software. You should be paying your estimated taxes and payroll taxes as you go. Your annual tax return will settle the score with the IRS.

      I personally use a Solo 401k (also referred to as an Individual 401k) instead of a SEP IRA. I find that it allows me to contribute more than a SEP IRA based on my income. You may find the same thing with your income, or a SEP IRA may be a better option. You have to consider the number of employees in the business and run the numbers to see which is better for your situation. You also need to consider whether you will have Roth IRA conversions, as a SEP IRA can make that tricky. Both small business retirement plans are great options – just make sure you understand the full ramifications of either choice.

      At this point, I would probably hire a consultant for an hour or so, just to make sure you get everything set up properly and you don’t miss anything. I wish you and your wife the best with the business!

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