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 managing 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:
- Out Right (Free)
- Gnu Cash. (Free)
- FreshBooks. Monthly fee. A great option for freelancers.
- Sage Accounting. Monthly Fee.
- Xero. Monthly Fee.
*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 Businesses (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, and 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 or small 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.