Finances & Fundraising
Financial Management for Small Business Owners

Financial Management for Small Business Owners

Written by 
Pilot Team
June 3, 2019
Financial Management for Small Business Owners

You probably started your small business because you want to be your own boss, you are willing to take on risk, and you have the skills to succeed in a competitive market. Maybe you are an amazing cook who noticed that the food truck business has grown 6.8% per year over the last five years, and now does over $1 billion in annual revenue, and thought, “I can do that!” Or maybe you are a fitness junkie who realized that the personal training business is growing fast, and you wanted to get on board to have a more flexible schedule (and body)

Whatever your reason, if you are starting a small business, you likely have the drive to work long hours grinding out sales and you have the passion to persevere through the inevitable downtimes. A couple of things you probably don’t have? Your CPA or MBA. That can make it tricky to manage the financial side of your business. Thankfully, the basics of financial management are not hard to grasp.

Here’s what you need to know to keep your books in order and your business afloat as you pursue your dream.

Improve your bookkeeping, accelerate growth

Without organized books, you won’t get a full picture of how your business is performing financially. It’s critical to set up a good chart of accounts and to understand the basic financial statements so that you can stay organized and access the health of your business at a glance.

Chart of accounts

A chart of accounts is a list of every account for your business. It covers your assets, liabilities, equity, income, and expenses. By clearly organizing your financial information, your chart of accounts gives you the ability to open up the books and see at a glance all the data points you are tracking that are mission critical for your business.

Balance sheet

The balance sheet is a list of your equity, liabilities, and assets. It allows you to see your net worth, and it’s used to calculate whether you are solvent and liquid. An understanding of the balance sheet is critical for small business owners, since they always need to understand whether they can meet their debt obligations and if they have enough cash to pay their employees.

Income statement

Your income statement shows how profitable (or not) your business has been over a given period of time by comparing revenues to expenses. You can use your income statement to figure out which areas of your business bring in the most profit and should be receiving more of your focus, and which parts are dragging you down and need to be cast aside. It’s also critical for making revenue forecasts, which are necessary for figuring out basic things, like whether you can afford to take a business trip to meet a new client.

If you want to boost your revenue and cash flow, you can think about raising prices, reducing your expenses, or raising a line of credit.

Get bookkeeping help

There is no need to take on the challenge of bookkeeping alone. Pilot can help make bookkeeping more manageable for a busy small business owner. Connect with a financial management expert who will listen to exactly what you need, set up a plan, and implement the software necessary to execute it.

Set a budget to meet your goals

We are all familiar with the power of budgets when it comes to our personal finances. We track our expenses and use a budget to set constraints on our spending. That way, we ensure there is enough cash to pay the bills and save money for the future.

The same principle applies to small business financial management. If you have a firm grasp on what you are spending money on, and what your goals are, you can focus on finding ways to grow your business sustainably.

In order to make a budget, you need to understand your cash flow statement, which is your net income minus expenses over a given period. Your cash flow statement lets you know how much free cash you have to pay recurring expenses, taxes, and employees.

Your cash flow statement in conjunction with your budget also helps with forecasting. They provide insights into the resources you can use on hiring and acquiring new assets.

Raise money efficiently

Small businesses often need to raise money to get started or to keep their operation going, but they can get into trouble if they don’t approach financing in a smart way. By understanding what the basic financing options are, you’ll be in a good position to make the choice that is best for your unique needs.

Debt financing

Debt financing is the process of financing your small business through a loan, which must be paid back with interest. This includes short-term loans to provide some working capital and longer-term loans that can fund a business for years. For example, Wistia recently decided to take on $17M in debt in order to do a stock buyback and provide a profit-sharing program to their employees.

A good option for small businesses that want debt financing is to take out an SBA loan. These loans are specifically geared toward small business owners. The banks that offer SBA loans have a mandate to provide financing for small businesses, and they are incentivized to do so because the loans are backed by the US government.

The interest payments you make on debt is tax deductible, which makes debt financing an especially intriguing option for small business owners.

Finally, in order to get the lowest interest rate on your debt financing, work on building solid business credit. Small steps like opening a business credit card, establishing lines of credit with vendors, and paying your bills on time will all boost your creditworthiness.

Equity financing

Equity financing is when you raise money by garnering investments in your business from individuals or institutions. The most well-known version of equity financing is the venture capital model — an investor provides funds in exchange for an ownership stake in the business. If you are very confident that you will be able to generate high returns that will satisfy your investors, raising outside money can be a great option.

But for most small businesses, the equity is likely to come from the person who started the business. Two-thirds of small businesses are self-employed individuals. So, they have their own money on the line.

Take advantage of tax deductions

Given all the time and effort it takes to run a small business, it can be easy to let tax preparation fall to the wayside. But once you realize the huge impact that categorizing receipts and tracking expenses can have on your tax bill, you will probably make tax prep a priority.

Expenses to deduct

Taking a deduction is the process of subtracting an expense from your yearly tax bill. Luckily for small business owners, there are quite a few common expenses to deduct, including:

  • Utilities and supplies
  • Rent
  • Payroll
  • Professional services (e.g., lawyers, accountants, and consultants)
  • Benefits
  • Insurance
  • Vehicles
  • Donations

Pilot is a small business owner’s best friend

While financial management can be tricky, it’s not rocket science. Follow the basic principles laid out above and you’ll be well on your way to staying solvent so that you can focus on what you actually care about. And if you need a hand organizing and optimizing, Pilot is a great option. When the bookkeeping is handled by Pilot, all you have to worry about is checking in on the numbers and making informed decisions.

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