Starting a small business is no easy task.

There are so many things to think about – from the products and services you offer, to how you’re going to market them, to the day-to-day tasks of running a business.

But one of the most important aspects of being a successful small business owner is learning how to manage your money properly. When you’re a first-time small business owner, it can be nerve-wracking to shift to a different financial mindset when you’re used to a certain way of handling your personal and professional finances.

But don’t worry. In this article, we’ll discuss some essential money management strategies that every first-time small business owner needs to know.

So whether you’re just starting out or you’ve been in business for a while but could use some financial guidance, read on for tips that will help you and your business stay financially healthy!

Strategy #1: Separate Business and Personal Money

We get it, your business is too new and too small to open a corporate bank account. Maybe you’re not getting a lot of sales yet, and your sales go directly into your personal accounts.

But as soon as you’re able, you should use separate bank accounts for your business and personal funds, as well as consider opening a bank account for your kids. There are many banks that have minor’s bank account options.

Keeping things separate is crucial for managing your money. If you mix them together, you might end up spending for personal expenditures using critical business funds, and vice versa.

With a clear separation of business and personal funds, you can more accurately track your business expenses and income. Your bank statements for your business will be clearer and easier to understand. Plus, it will be more difficult to dip into one account to fund for the other.

You can check with local or online banks regarding opening a second bank account, even if it’s a personal account to start with.

If you need to accept payment with your personal account, that’s fine, but remember to transfer it right away to the business account. If you need to pay for a business-related expense using a personal credit card, that’s fine, but remember to transfer the money for it from your business account to your personal funds immediately.

Keeping separate accounts can also help you with the next tip:

Strategy #2: Set a Budget and Stick to It

One of the most important things you can do for both your personal finances and your small business is to start setting budgets and sticking to it. This will help ensure that you’re not overspending, whether it’s for your personal life or your business.

Have a separate budget for your business and your personal expenses.

For business expenses, list out your fixed costs, such as rent, utilities, and loans, as well as your variable costs, such as inventory, marketing, and travel. Make sure you give yourself a realistic estimate for how much you’ll spend each month. A startup cost template might help you figure out if you’re missing any important spending categories. Having a budget laid out like this will help you see how much revenue you’ll need to raise each month to stay afloat.

For your personal expenses, do the same. Depending on your business, it might be challenging to figure out which expense falls under your business and which is yours.

But this exercise is a good way to look at your expenditures with a critical eye — after all, you’re running a business now. You can’t just spend willy-nilly.

Once you know how much you and your business needs to survive, you should be able to do the next tip.

Strategy #3: Pay Yourself a Salary

With the budgeting exercise you just did, you now know how much you and your business needs to survive.

You’ve also separated your business and personal bank accounts, so unless you have other streams of income going, you might not have anything coming into your personal accounts if you’re working on your business full time.

That’s why you should also pay yourself a salary. Many new business owners can forget to put their own salaries and income into the equation when running a business — or doing the exact opposite and taking everything from the business. 

Paying yourself a salary means that you can live off of your personal income and not have to worry about dipping into business funds. This also allows you to reinvest money back into the business, so you can continue to grow and scale.

After budgeting your personal expenses, you’ll be in a better position to figure out how much you can pay yourself so you can continue working on your small business.

Strategy #4: Pay Bills on Time

One of the most important money management tips for small business owners is to pay their bills on time. This includes things like rent, utilities, insurance, loans, marketing expenses, and the like.

Late payments can lead to penalties, fees, and damage your credit score. For new business owners, having a good personal credit score is important when it comes to securing loans, which you may need at some point in your business.

Keep a calendar with all your regular bills and spending, or set up automatic payment methods for them so you have less to remember and worry about on a month-by-month basis.

You should also make sure that any bills or expected payments that arrive yearly are also tracked, so that you can budget for them appropriately.

Speaking of yearly payments…

Strategy #5: Plan For Big Expenditures and Emergencies

Sooner or later, you’ll have to deal with big expenditures, both for your personal life and your business.

Maybe it’s when your computer has a meltdown and needs to be replaced, or when you have to travel for an important work conference.

No matter what the emergency is, it’s important to have a plan in place so you’re not caught off guard. This means setting aside money each month so you have a cushion to fall back on.

Try to look at the next 6-12 months and see if there is anything you know you’ll have to pay for, such as new equipment, taxes, or important repairs, or the like. Go back to your budget and work out your annual operating budget in order to figure out what needs to get paid on a yearly basis.

Pinpoint a budget for the expenditure, and start setting aside the money each month so that you’ve got enough to pay for it when the time comes.

Emergencies are harder to plan for, but equally as important. You can start small by having a buffer fund for a month or two of your normal expenditures, and raising it up to six months and beyond as you establish your business.

Strategy #6: Keep Tabs on Your Cash Flow

It’s important to stay on top of your cash flow. Many first-time business owners make the mistake of spending more than they are receiving, and then they’re left scrambling to come up with the money to pay their bills.

Instead, keep a close eye on your cash flow. Know how much money is coming in and going out each month, along with your accounts receivables.

It’s easy to lose track of what your clients owe you when you’re in the thick of business. Yes, you may have closed a big account, but until that money has been paid to you, your cash flow might still be in the red.

By keeping on top of your business accounting and tracking, you won’t have to scramble for payment when things become due. If tracking is getting too unwieldy, you can get outside help or invest in some tools like customer relationship management tools or invoice management software.

Strategy #7: Seek Professional Assistance

When in doubt, ask. Starting a small business for the first time is exciting but also filled with potential potholes. If you need help, there’s no shame in enlisting the aid of a professional—whether it’s an accountant to help with your taxes or a lawyer to review your business contracts.

While it may cost you some money upfront, getting expert assistance can save you time and headaches (not to mention money) down the road. They can help you avoid common mistakes, and steer you in the right direction when it comes to money management for your small business.

Make sure you pick the right professional for the job. Don’t be afraid to ask questions about their previous work and past clients. If they’ve worked with clients in the same position and industry as you, it’s more likely they’ll have more insights specific to your needs.

Once you’ve found the right professional help, take some time to review your business finances with them. This will give you a better understanding of your current financial situation and where there may be room for improvement. After all, knowledge is power when it comes to money management!

Strategy #8: Plan for Plan B

No matter how promising or well-planned your business is, it’s always possible that your business won’t make it in the long run. Many things can happen, such as significant market shifts, environmental changes, and big financial changes that may affect you or your business.

This is why it’s important to have a clear separation of your business and personal funds. Even if your new business doesn’t pan out, you should still be able to pivot to something else if you’ve been able to set aside something for yourself outside the business.

Ask yourself, if the business fails, what next? What will you do? How will you support yourself? Having a solid plan B can give you the peace of mind and confidence to take bigger risks in your business, knowing that you have a safety net to catch you if things go wrong.

Include in your Plan B the amount of funds you’ll need to pivot to a different source of income. You can slowly build up this fund over time as a personal emergency fund. This will help you cover expenses while you take some time off to regroup.

Frequently Asked Questions

How much money should you put into a small business?

While it can depend on many factors (like industry, your business goals, etc), the usual practice is for businesses to maintain a three-to-six-month cash reserve of operating expenditures. A good business plan, business budget, and break even analysis can help you pinpoint this number. Set this amount aside in your separate business account and maintain it as you grow your business.

How do you control and secure the money of your business?

Aside from keeping your personal and business funds separate, some important financial controls for your new small business would be paying attention to your bank statements, paying attention to staff overtime and payroll, track petty cash and cash registers, and request itemzed invoices from vendors and partners.

How much should a small business save?

Building up a cash reserve for your business is important, but it can be a challenge in the early days. To start building it up, try setting aside 10% of your profit every month until you have your target buffer achieved. Even if you can’t yet afford 10%, you can slowly move up from 5% to 10% over time.

How do small businesses organise their finances?

New small businesses have a lot of choice when it comes to organising and managing business finances. Aside from separating business and personal accounts, using accounting or invoicing software and other valuable apps can help you stay on top of finances. Set aside time on a regular basis to go through accounts to make sure everything is as it should be.

Final Thoughts

When you’re first starting out, there’s a lot to learn about running a small business—including how to manage your finances. This may be one of the more important habits you should build as you grow your new business.

Remember that if your new business doesn’t work out, it’s not the end of the world if you follow the tips we shared above. You can start a new business or pivot to something else, with the knowledge that the financial habits you already built will help you in your new venture.

Set yourself (and your business) up for success from the get-go with these solid money management strategies.