Sales and marketing, marketing, market research, product development, and customer service. These are just some of the areas that entrepreneurs have to manage in their small business. It’s no wonder they often feel overwhelmed. 

And then there’s the most critical task for small business owners: managing small business finances. Ultimately, a business owner must manage cash flow well, and make a profit to be successful. But unless they have a background in accounting or finance, managing money in the business can be intimidating or even paralyzing.

Fortunately, there are a variety of tools and strategies entrepreneurs can use to effectively manage their finances and reduce overwhelm. Here’s how to leverage them. 

Why Do Small Business Owners Become Overwhelmed by Finances

“Small business owners often become overwhelmed by finances due to several factors,” says Karen McCall, founder of MoneyGrit. “First, there is a resistance to facing the numbers. Many entrepreneurs fear uncovering issues that need to be addressed or lack the knowledge to handle financial matters effectively. This resistance arises from a combination of fear and uncertainty. 

“Additionally, self-sabotage plays a role, as some business owners don’t feel deserving of financial success and unconsciously undermine their own efforts. Perfectionism further contributes to overwhelm, as entrepreneurs may believe they must handle finances perfectly or not at all.” 

If you don’t have a good grasp of where your business stands financially, you’re going to likely feel overwhelmed. McCall calls that feeling “money fog,” and it’s very common, especially in small and growing businesses. Keep in mind the majority of small businesses in the U.S. do not have a chief financial officer (CFO) and instead rely on the owner’s financial acumen, perhaps with the help of a small business accounting professional. 

No one is coming to the rescue of the small business owner trapped in a money fog. It’s up to the business owner to find and use the resources they need to find their way out. 

Importance of Businesses Building Good Basic Financial Habits

Good financial habits lead to better business decisions. At any given time, you’ll have a specific amount of money you’ll need to use wisely in your business. When you have a clear picture of where you want your business to go, and you’re in the habit of tracking and planning toward those goals, it’s easier to make smarter decisions. 

“To combat financial overwhelm, it is essential for business owners to build good basic financial habits,” says McCall. “By creating monthly spending and earning plans, they can set clear goals and align their financial activities accordingly.”

“Tracking income and expenses against these plans provides a tangible way to evaluate progress and make adjustments. It is also important to address underlying beliefs and mindset around money, overcoming feelings of unworthiness and self-sabotage. By consciously connecting with all aspects of their money and becoming fully aware of their financial situation, business owners increase their chances of achieving their goals,” she insists. 

Here’s the good news. When you have good financial systems in place, it becomes much easier to make financial decisions you’ll feel good about. And if you uncover problems, such as overspending in one area of your business, or under investing in another, you can start to address them, hopefully before the business is in serious trouble. 

Choose a Financial Management System and Stick To It

Whether it’s starting a new fitness routine or getting in the habit of checking your day-to-day progress toward your financial goals, creating new habits will take some work but the payoff can be financially and personally rewarding. You’ll feel more in control and, if you implement changes based on what you’ve learned, you can move from a place of overspending to one where you’re investing in growth opportunities. 

Choose Accounting Software You Can Understand

Every business needs some type of accounting or bookkeeping system. If nothing else, having information about income and expenses organized and up-to-date can help you file taxes on time, and with accuracy. With up-to-date bookkeeping you can also produce essential financial statements such as a profit and loss statement, balance sheet, cash flow statement, or accounts receivable aging report. 

Your accounting system can also help you monitor the financial health of your business. There are accounting programs for virtually any type or size of business, including popular choices like Freshbooks, Quickbooks, Xero and more. Find the right accounting software for your business. 

One tip: while accounting software is helpful and essential, it tracks current and past financial health of the business. Most aren’t focused on forward-looking planning. A business plan, and spending plan or budget is also essential. 

“Most entrepreneurs use bookkeeping systems with rear-view mirror accounting. They look at everything after the fact,” warns McCall. “You need to plan your monthly spending and earnings, then track your spending and earning against your plan as you go through the month.” 

Choose a Business Checking Account That’s Right for You

Business owners and freelancers who mix business and personal income and expenses in the same bank account often find it challenging to really understand what’s coming into and going out of their business. 

Use a dedicated business bank account as the “command center” for your business finances. Revenue from the business should go into that account, and expenses should go out of it. 

Don’t use personal funds for business expenses or business funds to pay personal expenses. If you want to take money from the business as the owner, pay yourself an owner’s draw and/or salary, and then use your personal money to pay personal expenses. 

There are lots of options for low or no fee business checking, and many business checking accounts have features designed for different types of businesses, including freelance or ecommerce businesses, or even startups, for example. 

Creating a Savings Buffer

As an entrepreneur, you’re going to have to deal with the unexpected. A customer may pay late, or never at all. An employee or contractor may disappear, leaving you in the lurch on an important project. Or a key supplier may raise prices or exit the market, forcing your business to scramble for a replacement. Equipment breaks. Competitors spring up. Natural disasters wipe out a businesses’ physical location.

The list of changes your business can face is endless. 

Even when business is booming, cash flow can be uneven. Expenditures may be required before revenue from sales comes in, creating cash flow problems. 

And every business owner needs to make sure they have funds set aside for periodic expenses like payroll and income taxes, insurance premiums, and other essential expenses. (Falling behind on tax obligations to your state or to the IRS can quickly sink a business.)

Having a financial cushion makes it easier to deal with the unexpected, as well as normal cash flow fluctuations. A savings account is like an insurance policy. It gives you a safety net to fall back on during periods of unexpected downturns or when confronted with unforeseen expenses.

How much to keep in your savings account will depend on a number of factors, including how much profit the business generates, the volatility of your industry, and how much capital you need to have on hand versus using it to grow your business. Start where you can in building your savings buffer. 

Consider pairing a savings account with a line of credit, the most popular type of small business loan. With a line of credit, you’ll get approved to borrow up to a certain amount, and then access funds when needed. 

You can choose which to tap first: savings or a line of credit. (The interest on the LOC will be an important determining factor.) One can be tapped for short-term needs and the other can serve as a backup when the need for funds is greater than expected. 

Can a Business Charge Card or Credit Card Help?

If you’re using personal credit cards in your business, switch to a business credit card. It’s important to separate your business and personal finances both from an accounting standpoint so you can take advantage of tax deductions, as well as to help you keep a clear understanding of your business financial health. 

Business credit cards often offer excellent rewards, but interest rates can be high so avoid carrying a balance if at all possible. Consider a business credit card with a 0% intro APR for short-term financing. 

If you can’t qualify for a business credit card, a business debit card can be an option for making business purchases and tracking expenses. 

Invest in Financial Education

Research has found that financial literacy is key to small business success. “In a business world characterized by dynamism and uncertainty, entrepreneurs are confronted with a multitude of challenges daily, but most of them can be overcome or effectively solved with the help of financial literacy,” Thomas Hammer and Patrick Siegfried write in their research report, Implications of Financial Literacy on Entrepreneurship. 

Unless you already have a strong background in finances, running the financial side of your business will likely be a steep learning curve. It’s crucial to invest in your own financial education and familiarize yourself with the fundamentals of financial planning for your business. 

Here are some excellent resources that can help: 

SCORE and Small Business Development Centers provide small business financial education and assistance. Even better, their services are free or very low cost. Get business mentoring and take advantage of the courses they offer by getting in touch with local SBA resource partners here. 

Visit Nav’s Youtube channel for free education on a variety of financial topics including how to build business credit and how to build a good business credit score. Learn about critical topics for starting and running a business with Nav Insights. 

Automate as Much as Possible

Automation can help simplify and streamline time-consuming repetitive tasks so you can focus activities that help move your business forward. Depending on your business, these tools and apps can include: 

• Payroll software to make running payroll easier and help you file accurate payroll taxes. 
• Accounting software to keep your bookkeeping up to date and make filing business tax returns easier. It can also help you quickly create useful financial reports. 
• Merchant services to make it easy for customers to pay for purchases, and to gain valuable insights into purchase behavior. 
• Business checking can provide a central source for your business revenue and expenditures. Business checking with cash flow tools can provide additional insights at a glance. 
• Invoicing systems to make sure you get paid promptly. This may be a feature of your business checking account or your accounting software. 
• Business credit cards for tracking expenses and then providing expense data to feed into your accounting software.  

At the same time, you don’t want to automate to the point that you lose track of what’s happening in your business. It’s crucial you review your business finances on a regular basis to understand what’s working and what you need to improve. 

How Can Nav Help Businesses Feel More in Control of Their Finances

Nav can help you get personalized insights into your financial health. By connecting to your financial health you can understand where your business stands today, what your options are, and how to move your business forward. Learn how to establish business credit, monitor it, and find lenders based on your business data. Get started now.