How to Setup Your Business Finances for New Business Owners

This article outlines practical steps for setting up and maintaining your business finances, focusing on essential tasks. Each section offers clear guidance to help you manage your business finances confidently.

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1. Establish a Separate Business Bank Account

Separate your personal finances from business transactions. Open a business bank account to ensure that your personal spending does not affect your business’s financial standing and vice versa. This is particularly crucial for Limited Liability Companies (LLCs), where separating financial activities is a legal requirement. For opening a business account, consult with banks that offer business banking services and compare their fees, benefits, and online banking features.

How to do it:

  • Research: Start by researching banks that offer business accounts. Compare their fee structures, benefits, and online banking tools.
  • Choose a Bank: Select a bank that meets your business needs and offers competitive fees.
  • Gather Documents: Prepare necessary documents such as your EIN (Employer Identification Number), and personal identification. You can apply for an EIN for free by visiting the IRS.gov. An EIN is required to open a business bank account.
  • Open the Account: Visit the bank in person or open the account online, depending on the bank’s facilities.

2. Implement a Filing System

The most important thing here is that you find something that works for you. Choose between paper and digital systems, or integrate both. Use filing cabinets for physical documents and digital tools like Google Drive for electronic records or spreadsheets. Essential documents to organize include accounting records, contracts, bank statements, employee records, and tax documents. Make sure these are easily accessible and securely stored, you will refer to these documents often.

How to do it:

  • Decide on the Format: Based on your business operations, choose between a digital, paper, or hybrid filing system.
  • Organize Documents: Categorize documents into groups (e.g., financial records, employee records, contracts) and decide on a storage method for each category.
  • Set Up Storage: For physical documents, use filing cabinets and cloud storage solutions like Google Drive for digital files.
  • Maintain Regularly: Schedule monthly or quarterly reviews of your filing system to update and dispose of outdated documents.

3. Choose the Right Accounting Software

Selecting an appropriate accounting software can streamline financial management and save time. Evaluate accounting software features, such as ease of use, integration capabilities, and mobile access. Free trials or discounts are often available, allowing you to test software before committing.

How to do it:

  • Identify Needs: Determine what functionalities you need most (e.g., invoicing, payroll, reporting).
  • Research Options: Look into popular accounting software like QuickBooks, FreshBooks, and Wave. Compare their features and pricing.
  • Test with Trials: Take advantage of free trials to see which software fits your workflow.
  • Implement Software: Purchase the chosen software and set it up by inputting your business’s financial details.

NOTE: We do NOT receive commissions from any of the companies included in this information set.

4. Improve Your Business Credit Score

Consistently making on-time payments and keeping your credit utilization low is key to improving your score. Regularly review your credit report to ensure accuracy and address any discrepancies. This section outlines practical steps to build and maintain a healthy credit profile.

How to do it:

  • Understand Your Credit Report: Regularly review your business credit report from major credit bureaus to understand what factors are affecting your score.
  • Manage Debt Efficiently: Keep your credit utilization low and make sure to pay all your creditors on time. Avoid taking on more debt than your business can handle.
  • Establish Credit Accounts: Set up credit accounts with suppliers or vendors that report to credit bureaus. Consistent, on-time payments will help build your credit history.
  • Monitor Your Credit: Set up monitoring services to alert you to changes in your credit report, helping you address issues promptly before they impact your score.

5. Budgeting and Financial Forecasting

Budgeting and financial forecasting are key to controlling cash flow and planning for future events. A budget helps manage spending, and forecasting helps you prepare for future financial needs. We’ve devoted an entire article to building a small business budget.

How to do it:

  • Create a Budget: List all expected income sources and expenses. Use this to manage cash flow and avoid overspending.
  • Forecast Financials: Project your income and expenses for upcoming periods, adjusting for growth plans or periods of downtime.
  • Review Regularly: Update your budget and forecasts based on actual performance and conditions.

6. Tax Planning and Compliance

Tax planning and compliance are essential to avoid legal issues and optimize financial outcomes. Understanding and adhering to tax obligations can save your business significant money and protect against liability. We’ve created dedicated resources for each business type, including pertinent tax resources for each business type.

How to do it:

  • Learn Tax Requirements: Understand the taxes applicable to your business structure and industry.
  • Consult Professionals: Engage a tax advisor to optimize your tax strategy and compliance.
  • Set Reminders: Keep track of tax deadlines and prepare in advance to meet them.

7. Emergency Funds & Internal Controls

An emergency fund provides a safety net against unexpected events and helps manage financial risks intelligently. Implementing internal controls, such as designating a trusted individual to handle financial transactions, is essential for protecting your business’s assets. By assigning specific financial responsibilities to designated staff, you create a system of checks and balances that maintains the integrity of your financial processes.

How to do it:

  • Establish an Emergency Fund: Set aside funds to cover unexpected expenses or financial downturns.
  • Implement Risk Strategies: Develop strategies to mitigate financial risks, such as diversifying income streams and enforcing payment terms.
  • Define Financial Responsibilities: Clearly outline who handles money, how it is handled, and who monitors these activities.
  • Conduct Regular Audits: Periodically review your financial processes and controls to ensure they are effective and being followed.

8. Continual Education and Financial Literacy

Continual education in financial management and improving financial literacy are imperative for making informed decisions that affect your business’s bottom line. Staying updated on financial practices and regulations can significantly enhance your business operations.

How to do it:

  • Stay Informed: Keep up with new financial regulations and economic trends relevant to your business.
  • Invest in Learning: Participate in financial workshops, seminars, or courses focused on small business financial management.

Now, It’s Your Turn

Applying strategies such as creating a business bank account, using technology, and following regulations will give you control over your business finances. Consistently reviewing and updating these strategies is vital for ongoing success. This guide provides essential steps for managing your business finances. Implementing these steps will protect your financial health and aid in making strategic decisions.

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