Small Business Finance Guide for Beginners

Mary Clare Novak
Mary Clare Novak  |  August 15, 2019

Alright. You started your small business and everything seems to be going pretty well.

You have a solid customer base, you’re bringing in a decent amount of money, and you’re even having a little bit of fun with it. Now comes the not so fun part.

Accounting and finance.

While this might be the forte of some small business owners (if that is you, consider yourself lucky), it can be tricky for some who have no experience in the area. Don’t be scared. We have put together a guide to small business finance for small business owners just getting started with keeping the books.

Let’s dive in! Unless you want to skip forward, in which case you can use the links below to jump ahead to whichever section you need the most help with.

Small business finance guide

In this small business finance guide, we’ll go over everything from accounting terms, to funding your business, to physically keeping the books.

Accounting terms

The wonderful world of finance includes a lot of words and phrases that can pile up and become confusing. Before we go any further, let’s simplify some accounting terms so we can keep them all straight going forward.

Asset: anything your business owns
Capital: asset used by a business, resulting in wealth
Liability: anything your business owes
Accounts payable: expenses incurred but not yet paid off
Accounts receivable: revenue made but not yet collected
Revenue: money a business makes by selling a product or offering a service
Expenses: costs associated with doing business
Cost of goods sold (COGS): direct cost of producing goods and services
Gross profit: revenue minus COGS
Net profit: gross profit minus all other expenses
Gross margin: gross profit divided by revenue
Net margin: net income divided by revenue
Cash flow: money moving in and out of an organization
Inventory: products available to be sold and the materials used to sell them
Valuation: present value of an asset or business
Depreciation: cost of an asset’s declining value
Break-even point: when the total cost is equal to the total revenue
Liquidity: how easy it is to turn an asset into cash
Overhead: ongoing expenses of operating a business
Accounting period: the amount of time a company’s financial statement covers
Cash flow statement: a financial statement that accounts for money going in and out of a business
Balance sheet: a financial statement that accounts for assets, liabilities, and shareholder’s equity
Income statement: a financial statement that shows how a business reaches its net income

If at any point you get a little lost in terms of words and phrases used in this small business finance guide, refer back to this list. Everything else will be defined in its own section.

Small business funding options

There might come a time in your journey to own, establish, and grow a small business where you will need some help. Financial help, that is. According to the Wells Fargo Small Business Index, the average small business owner needs $10,000 in startup capital to get their company off the ground.

Luckily, you have business funding options:

Personal savings

There’s a saying if you want something to be done correctly, you have to do it yourself.

If you have the ability to fund your business with your own personal savings, go for it. This gives you complete control of your business while also showing outside parties you care enough to put so much into your venture.

Friends or family

The next best thing would be friends and family. Chances are they do not have enough money to completely fund your business, but it might be enough to get things going.

Crowdfunding

Crowdfunding is when you receive a small amount of money but from a large group of people. Simply put, a lot of individuals will contribute a small amount. This is mostly done online as you can reach more people while also giving your business exposure.

Angel investors

Angel investors are wealthy individuals that will help fund a business in exchange for equity. Not only can they help financially, but they can also offer guidance and advice. If you can prove the profitability of your business and don’t mind giving up a little equity, this might be the best option for you.

Private equity

Private equity is when an investor buys shares in a private company, restructures it to make it profitable, and then exits when it becomes public or is acquired by another business.

Venture capital

Venture capital is a form of private equity financing where investors fund businesses that show signs of long term growth and potential for a great return. In exchange for the money, the business owner will give the investor equity.

Because venture capital is a form of private equity, the two can often be confused with one another. Venture capital and private equity differ in terms of the types of businesses being funded, the degree of equity given to the investor, and the amount of money invested.

private equity and venture capital

Bank loans

Bank loans are a popular option for small business owners. You can get money fast and you don’t have to give up any ownership in your business.

There are a lot of options that can best fit a particular business, however, you need to build and establish business credit to qualify for most loans. Also, you will need to pay back the money no matter how well, or poorly, your business does.

Related: Learn how to get a small business loan.

Grants

Grants are non-repayable funds given to a business. A great idea, but only accessible to certain businesses. A majority of these grants come from the Small Business Administration in accordance with other organizations to improve economies by ensuring they include small businesses.

Bootstrapping

Bootstrapping is an interesting tactic because it doesn’t include any outside funding. With this type of business funding, the business starts with personal funds, gains a customer base, and then uses the revenue from customers to further fuel the business.

Getting your hands on the money is one thing, but spending it wisely is another. Check out these budgeting tips to help you expect the unexpected.

Small business bookkeeping

Now that you have the funding you need and the right tips for planning your spending, it’s time to get organized. This is where small business bookkeeping comes in.

The three main financial statements your business needs to keep updated are the income statement, balance sheet, and cash flow statement. If those terms scare you, you can always consider using bookkeeping services to handle all of your business' finances for you. 

Find the highest-rated Bookkeeping Service Providers ...

Income statement

An income statement shows the revenue and expenses your business incurred during an accounting period. It basically lays out and categorizes how much you made and how much you spent.

Here is the basic equation for an income statement:

income statement equation

So you take your revenue, subtract your expenses, and the end result is your business’ net income, also known as its profitability.

Balance sheet

A balance sheet shows the assets, liabilities, and shareholder’s equity of a business. Essentially, how much it owns, how much it owes, and how much has been invested by shareholders.

Here is the basic equation for a balance sheet:

balance sheet equation

When everything is accounted for, both sides of the equation will equal each other.

Cash flow statement

A cash flow statement shows how much money is moving in and out of the business. There isn’t a designated equation for the cash flow statement. To update it, simply add cash inflows and subtract outflows.

The end result of the cash flow statement will show how well they pay off their debts and if their operations are properly funded.

Small business taxes

Doing taxes is inevitable for any small business owner. Each of the types of business ownership has its own requirements in terms of small business taxes.

Sole proprietorship:
Profit and losses go on personal income tax return
Fill out Schedule C or Schedule C-EZ
Fill out 1040
File self-employment taxes
Pay quarterly estimated taxes
Partnership:
Profit and losses go on personal income tax return
File self-employment taxes
File form 1065
File Schedule K-1
Pay quarterly estimated taxes
Corporations:
C corp: double taxation
S corp: file profit and losses on personal income tax return
C corp: file Form 1120
S corp: file form 1120S
Pay quarterly estimated taxes
Limited liability companies:
File profit and losses on personal income tax return
File Form 1065
Pay quarterly estimated taxes

When preparing for tax day, which might be quarterly for your small business, here is a list of things you will need to be fully prepared:

Tax return from the previous year
Payroll documents
Credit card statements
Bank statements
Partnership agreements
Depreciation schedules
Accounting documents

Tip: Keep an eye out for these expenses that can be written off when doing your taxes!

small business tax deductions

Understanding the requirements for doing your taxes is a necessary step in owning a small business, and getting some sweet money back is just a bonus.

On your way

With this small business finance guide, I hope you find yourself well equipped on your way to mastering the finance side of business ownership.

Want some more information on the direction of small businesses in 2019? Check out our resource on small business statistics.

Mary Clare Novak
Author

Mary Clare Novak

Mary Clare Novak is a Content Marketing Associate at G2 in Chicago. A recent graduate, she is happy to be back working in her favorite city. In her free time, you can find her doing a crossword puzzle, listening to cover bands, or eating fish tacos.