How To Set Up Your Business Finances [SY1B Series: 3 of 6]

7 min read · 8 months ago


Welcome to the third installment of a six-article series on starting your first business (SY1B). In this series, we cover a range of important topics that will help you get your first business up and running:

  1. How To Choose Your Business Name
  2. How To Handle Legal Business Formation
  3. How To Set Up Your Business Finances [You are here.]
  4. How To Develop Your Business Operations
  5. How To Build Your Workforce
  6. How To Market Your Business

After choosing your business name and selecting the right business entity type, the next challenge is setting up your business finances. Many entrepreneurs and small business owners make the mistake of taking a lax approach to this area of their business, which often winds up being detrimental to their success. A staggering 82% of failed businesses can attribute their downfall to cash flow problems.

Business failure doesn’t happen overnight. When you don’t lay a strong financial foundation for your business, there are plenty of other issues that present themselves along the way:

  • Receiving payments from customers late (or not at all)
  • Paying vendors late
  • Failing to meet business goals
  • Being unsure of the actual financial state of your company

Ensuring your business finances are in order is critical to your long-term success. If you’re worried that you’re not a “numbers person,” don’t worry. There are plenty of tools and professionals that can help. Check out the steps below to get started on your financial journey.


8 Steps To Get Your Business on the Right Financial Path

1. Open a business bank account.

Your personal bank account is the focal point of your finances. You get your paychecks direct deposited there. You use your debit card to pay for various products and services. You take cash out of your account using an ATM.

The same concept applies to your business—in the form of a business bank account. Opening a small business bank account is your first financial step. It gives you a place to store money and make transactions on behalf of your business and enables you to separate your personal and business finances.

If you recall from the previous installment of the SY1B series, you have several business entity options available for protecting you from personal liability. However, if you don’t draw a clear line between which assets—in this case, financial ones—are for your business and which ones aren’t, you may put your personal finances at risk when filing for bankruptcy or facing a lawsuit.

You can open a business bank account just like you would a personal one, though the fee structure may differ. You’ll, of course, have to have your business registered already. Shop around for an account with a reputable bank, preferably with a great promotional offer. For example, you can often find banks that will give you an opening bonus of $200 or more if you maintain a certain balance for the first 60 days following your first deposit.


2. Apply for a business credit card.

A business credit card is much like a personal credit card, only the card is in the business’ name. You can use the card to help pay for everything from cleaning supplies to industrial equipment—whatever you need for your business operations. Often, getting started with your business can take a lot of upfront capital, and a business credit card can help float your costs until you’re profitable.

Once you’ve established your business, you may have the opportunity to apply for a card using the business’ credit; however, you’ll have to apply using your personal credit profile since you’re just starting out. Note that many business credit cards only report to commercial credit bureaus, not consumer credit bureaus—unless you become seriously delinquent.

To make the most of your credit pull, look for business credit cards with valuable promotional offers. For example, if you anticipate needing to carry a balance for several months, try to find cards that offer 0% APR for a year or more so you can avoid purchase interest. If you plan on traveling a lot for your business, seek out cards with great travel perks.



3. Open a merchant account to accept credit cards.

Are you planning on accepting credit cards from your customers? If not, you should consider doing so, as it’s the most used payment method in the U.S.—39% of point-of-sale payments are made with credit cards.

To accept credit cards, you’ll need a special type of bank account called a merchant account. When customers use their credit card to pay you, the funds get deposited into the merchant account where they reside until transferred into your business bank account according to a predetermined schedule.

Numerous vendors offer merchant accounts, each with its own requirements and fees. Most banks offer this type of account as well, so you can open a merchant account with the same bank where you opened your small business bank account. Either way, there is typically an application process involved, and being a new business can make it more challenging to be approved. Alternatively, if you are approved, you may face higher fees. But you can always renegotiate these fees once your business is more established.

4. Track your business expenses.

It’s not enough to simply worry about revenue. You’ll need to track sales and expenses throughout the life of your business. That means keeping all your receipts, so you have a clear paper trail, whether it’s for meals and entertainment, business travel, or vehicle-related expenses. (Speaking of vehicles, remember to keep track of business mileage so you can deduct it come tax time.)

It’s important to track expenses because you need to keep your business assets separate from your personal ones—receipts provide evidence of this. While you may opt to keep physical receipts, going digital can make the process smoother. You don’t have to worry about losing or damaging receipts. Plus, if you employ a revenue and expense tracker in a program like Excel or Google Sheets, you can look at all your finances in one place.



5. Set up an accounting system.

The word “accounting” may make you grit your teeth, but it’s a necessary part of a business. Luckily, there’s accounting software to help make the process easier. You can stay with a spreadsheet program as noted above, or go with a more robust program that’s specifically made for small business accounting.

Keep in mind that you’ll need to decide on an accounting method you want to use for your business:

  • Cash method. Here you recognize revenue and expenses at the time they are received or paid. Most small business owners use this method because it’s easier to understand and shows cash flow clearly. However, there is less long-term clarity and a limit on predictive value.
  • Accrual method. Here you recognize revenue and expenses when the transaction occurs, even if cash isn’t exchanged between parties. This method is a bit more complex because you have to track receivables and payables, but it can reduce your tax burden.

Note that your accounting software will work with whichever accounting method you choose, but you’ll have to use that method consistently.


6. Hire a small business accountant or bookkeeper.

If you find the accounting process overwhelming, you can always hire a small business CPA (certified public accountant) or bookkeeper. While a bookkeeper will be cheaper, a CPA will have a formal accounting education. The fee difference is worthwhile if you need more than just day-to-day bookkeeping functions. CPAs can help you plan and reach your financial goals by offering expert advice; they can also legally prepare audited financial statements.

Even if you choose to go the DIY route and handle your own accounting, a bookkeeper can help fill in gaps when you’re just too busy. Besides, you can always reach out to a CPA for advice on an as-needed basis.



7. Understand your tax obligations.

Filing small business taxes for the first time can be a headache. What forms do you use? What can you write off? Several questions need answers to ensure you file your taxes correctly.

One of the biggest tax concerns is whether you file on your personal tax return or as a separate entity. If you recall from the previous installment of this series, several business entities require their own tax filing (e.g., corporations and some LLCs).

Another concern is estimated tax payments. As an employee, your company takes taxes out of your check for you. However, that’s not the case as a business owner. You retain full income, but you have to pay estimated quarterly taxes if you owe more than $1,000 in taxes for the year. These taxes are due on four predetermined days of the year, as required by the IRS’s tax schedule. Keep this in mind so you have enough money to make these payments on time; otherwise, you could face a penalty come tax time.


8. Apply for a small business loan or grant (if needed).

Sometimes your cash flow and access to business credit aren’t enough to reach your goals. You may be operating fine, but growth may be outside your reach without additional capital. For example, you may need a large sum of money to buy a new piece of equipment that can triple your production output.

Enter small business loans and grants. These financial options are useful for securing additional capital for your small business, though they have some key distinctions:

  • Small business loans provide capital on a temporary basis. Typically offered by financial institutions like banks or credit unions, these loans require repayment over time (plus interest).
  • Small business grants provide money that doesn’t need to be repaid. Grants are typically given by private organizations or federal, state, or local governments. The caveat here is that you must meet specific criteria to qualify, and you must use the money for reasons specified by the grant provider.

Creating a strong financial foundation for your business isn’t an impossible task. Just take it step by step. And remember to take advantage of financial professionals and tools available to you. For example, when it comes to tracking revenue and expenses, you can use Yahoo Business Maker Finance Tracker. This tool gives you pre-made templates for both Google Sheets and Excel so you can easily capture and view revenue, expenses, profit/loss, cash flow, accounts payable/receivable, and more. Get started today.