Small Business Finance: Managing Money as an Entrepreneur

The Entrepreneurial Financial Challenge

As an entrepreneur, you face unique challenges:

• Irregular income
• Tax complexity
• Business vs. personal separation
• Cash flow management
• No employer safety net

Mastering business finances is essential for survival and growth.

Business vs. Personal: The Critical Separation

Why Separation Matters

Legal protection:

• Mixing funds weakens liability protection
• Makes it easier for creditors to "pierce the corporate veil"
• Courts may hold you personally liable

Tax clarity:

• Clear business expenses for deductions
• Avoid IRS red flags from mixed funds
• Easier audits (if they happen)

Financial clarity:

• Know if business is truly profitable
• Make better decisions
• Track growth accurately

How to Separate

The discipline: All business income goes into business account. Business expenses paid from business account. You transfer money to personal account as owner compensation—that's your "income."

Understanding Business Cash Flow

Revenue ≠ Profit ≠ Cash

Key distinctions:

• Revenue: Total money coming in
• Profit: Revenue minus all expenses
• Cash: Money actually available now

Example:

• $10,000 revenue this month
• $6,000 expenses
• $4,000 profit
• But customer pays in 60 days...
• Cash available: -$6,000 (you paid expenses, haven't collected revenue)

The Cash Flow Cycle

Understand your timing:

1. When do you pay for supplies/inventory?
2. When do you deliver product/service?
3. When do you get paid?
4. Gap between #1 and #3 is your cash flow challenge

Strategies:

• Request deposits upfront
• Invoice promptly
• Shorten payment terms
• Negotiate longer payment terms with suppliers
• Maintain cash reserves for gaps

Basic Business Bookkeeping

What to Track

Income tracking:

• All revenue sources
• Date received
• Customer/client
• Product/service sold
• Payment method

Expense tracking:

• All business purchases
• Date paid
• Vendor
• Category (for taxes)
• Receipt stored

Bookkeeping Options

Cash vs. Accrual Accounting

Cash basis:

• Record income when received
• Record expenses when paid
• Simpler
• Required for most small businesses under $26M revenue

Accrual basis:

• Record income when earned (even if not yet paid)
• Record expenses when incurred
• More accurate picture
• Required for larger businesses

For most small businesses and side hustles: cash basis is fine and simpler.

Essential Financial Statements

Profit and Loss (P&L) / Income Statement

What it shows: Revenue minus expenses = profit (or loss)

Review monthly or quarterly:

• Is revenue growing?
• Which expenses are increasing?
• Are you actually profitable?
• Which products/services are most profitable?

Balance Sheet

What it shows: Assets = Liabilities + Equity

Key elements:

• Assets: What business owns (cash, equipment, inventory)
• Liabilities: What business owes (loans, accounts payable)
• Equity: Owner's stake (what's left)

Cash Flow Statement

What it shows: Where cash came from and went

Three sections:

• Operating activities (daily business)
• Investing activities (equipment, etc.)
• Financing activities (loans, owner investments)

Pricing Your Products/Services

Cost-Plus Pricing

Calculate your costs, add margin:

1. Direct costs (materials, labor)
2. Overhead allocation (rent, utilities, software)
3. Desired profit margin
4. = Price

Example:

• Materials: $20
• Labor (1 hour @ $30): $30
• Overhead allocation: $10
• Total cost: $60
• 40% margin: $24
• Price: $84

Value-Based Pricing

Price based on value to customer, not your costs:

• What's the outcome worth to them?
• What are alternatives priced at?
• What's the market willing to pay?

Often results in higher prices than cost-plus.

Hourly vs. Project Pricing

For services:

Managing Business Expenses

Fixed vs. Variable Costs

Fixed costs: Same regardless of sales

• Rent
• Software subscriptions
• Insurance
• Loan payments

Variable costs: Change with sales volume

• Materials/inventory
• Shipping
• Transaction fees
• Contract labor

Know your fixed costs—that's your minimum to cover each month.

Controlling Expenses

When to Invest vs. Save

Invest when:

• Clear ROI expectation
• Removes bottleneck for growth
• Reduces ongoing costs significantly
• Enables higher-value work

Save when:

• Uncertain ROI
• "Nice to have" vs. "need to have"
• Can bootstrap with existing resources
• Business stability uncertain

Setting Aside for Taxes

The Self-Employment Tax Reality

As an employee: Employer pays half of Social Security/Medicare (7.65%) Self-employed: You pay BOTH halves (15.3%) plus income tax

Example:

• $80,000 business profit
• Self-employment tax: ~$11,300
• Income tax (varies): ~$10,000+
• Total tax burden: $21,000+ (26%+)

Tax Savings System

Set aside with every deposit:

• Immediately transfer 25-30% to separate savings account
• Label it "Taxes—Do Not Touch"
• Only use for quarterly payments and year-end tax

Better: Pay quarterly estimates:

• Due April 15, June 15, Sept 15, Jan 15
• Avoids underpayment penalties
• Smoother cash flow

Emergency Fund for Business

Why Business Needs Its Own Reserve

Personal emergency fund: Covers your living expenses Business emergency fund: Covers business operations during slow periods

Without business reserves:

• One slow month can end the business
• Can't take advantage of opportunities
• Forced to make bad decisions from desperation

How Much?

Target: 3-6 months of fixed business expenses

For a business with $3,000/month fixed costs:

• Minimum reserve: $9,000
• Comfortable reserve: $18,000

Build gradually from profits.

Paying Yourself

How to Take Money Out

Depends on business structure:

Sole proprietor/Single-member LLC:

• Owner's draw (take money when available)
• No payroll taxes on draw (paid via self-employment tax)
• Simple

S-Corp:

• Must pay "reasonable salary" (W-2)
• Additional profits as distributions
• Can reduce self-employment tax
• More complex/expensive to administer

Partnership/Multi-member LLC:

• Guaranteed payments or distributions
• Based on partnership agreement

How Much to Pay Yourself

Minimum: Enough to cover personal expenses and taxes Maximum: What business can afford while maintaining reserves

Early stage: Pay yourself minimally, reinvest in growth Established: Pay yourself market rate for your role

The First-Gen Business Advantage

You have unique strengths:

• Hustle and work ethic
• Appreciation for opportunity
• Resilience from past challenges
• Fresh perspective, no "that's how it's done"

Watch for:

• Underpricing (imposter syndrome)
• Over-giving to family/community from business
• Not valuing your own time
• Accepting bad deals out of scarcity mindset

The Bottom Line

Business finances are fundamentally different from personal finances. Separate business and personal money completely. Understand that revenue isn't profit and profit isn't cash—cash flow management is critical. Set aside 25-30% of revenue for taxes immediately. Build both personal and business emergency funds. Pay yourself consistently, treating it like a real salary. Track income and expenses diligently, and review financial statements regularly. The businesses that survive aren't always the best at their craft—they're the ones that manage money well.