Seven Tips for Every Small Business Owner
Small business owners carry a lot of responsibilities on their shoulders. With their overwhelming workload, entrepreneurs sometimes make financial mistakes that result in wasting resources, hindering a startup’s success and hurting their finances as well. The key to smart financial management is to become knowledgeable about specific finance and accounting principles.
Here are seven practical tips for small business owners to improve the company’s finances:
1. Don’t Mix Business and Personal Expenses
As a small business owner, you tend to be super connected with your business and sometimes both feel like the same entity. However, as you mix up your personal and business accounting records, it’ll create a mess when it comes to filing taxes and calculating your company’s valuation. It will also create a burden for your personal accounts when your business is losing money.
First, start with opening up a separate business checking account and credit card for your business expenses. Make sure you consistently categorize your personal and business expenses correctly. Such a practice will not only remove personal liability when something happens to your business but also help build your business credit score.
Don’t forget to pay yourself, however. While you can be frugal and set your salary as low as possible at first, when the startup needs capital to grow, paying yourself is an excellent way to set aside money consistently and test your business’ profitability.
2. Save for Retirement
Many entrepreneurs plan to rely on their businesses to grow well into their retirement. However, things change and what works well now may underperform in the future. Therefore, have a safety net by contributing early into a SEP (Simplified Employee Pension) IRA or a solo 401k account, which provide tax benefits and are designed specifically for the self-employed.
You are usually allowed to contribute up to 25% or $55,000 (whichever comes first) to a SEP IRA or a solo 401k account. In case the business fails, you won’t have to worry too much. The little money you put aside now will grow tremendously by the time you retire.
3. Hire a Good Team of Experts
You can’t and shouldn’t handle every aspect of the business yourself. It could be very overwhelming and ineffective. You need to find several competent experts to assist your company, especially for the critical roles like an accountant, tax adviser, and lawyer.
Tax law for small businesses is very complicated. A knowledgeable tax advisor will help you understand applied obligations to avoid all the headaches. They can also save you money by staying on top of the latest regulation changes and ways to leverage tax advantages.
Employ somebody with experiences handling businesses like yours. Avoid giant firms that will not prioritize you over their larger clients. Choose a firm that fits your business and is readily accessible when needed!
4. Purchase Adequate Insurance
It’s sad but true – a majority of startups fail. Therefore, it’s good to safeguard your personal and business assets from disasters by getting insured. Depending on your assets, you’ll need a variety of insurance types.
For example, additional personal life and disability insurance will ensure adequate coverage in case you are disabled or lose your income. Or you can contribute your pretax income to a health saving account (HSA). This reduces your taxable income and lowers taxes while guaranteeing enough cash to cover your medical expenses once incurred. Overall, consult with an insurance expert to get advice on your options and the policies you may need.
5. Diversify Your Investments
You’ve probably heard enough about the importance of diversification in investing. While many small business owners invest all of their assets back into the business, this increases the level of risk.
Consider investing more outside of your industry and sector to protect your startup’s performance when the market changes and your sector goes down. Another important thing to follow is to avoid having excess cash in your business. In case you do, pull the cash out and invest in something new to make use of that capital most effectively.
6. Continually Make Projections and Plan
Small business owners must continuously keep track of all the expenses to stay on top of the cash flow. Establish a budget and stick to it, while being highly aware of where every dollar is going.
Entrepreneurs should be able to anticipate future obstacles to have clear financial projections and establish realistic financial goals. Since you never know for sure what will happen, it’s best to prepare for the worst-case scenario. For example, keep your regular job to maintain a consistent source of income or have an emergency savings account.
Last but not least, though it’s unthinkable now, you are recommended to prepare a succession plan or an exit strategy for your business. All in all, careful research and planning can decide the success of a startup.
Note: follow these tips to avoid additional overtime pay
7. Choose the Type of Your Company Wisely
It may sound simple enough to operate as a sole proprietorship when you start your business. However, it’s not the best option to protect your personal assets from business liabilities. Setting up an entity like a corporation or a limited liability company (LLC) will not only affect how the business is run and managed but also protect your personal finance in case of a lawsuit.
An LLC is most advantageous to protect your personal assets from being used to pay off your business’ debts. Regarding taxation, an LLC is taxed as a pass-through identity; thus profits and losses are reported on the individual tax returns for the entrepreneurs instead of the business, allowing deduction on personal tax returns.
Corporations are taxed as a separate legal entity, thus responsible for paying corporate tax on their profits and dividends. This causes “double taxation”. It can hurt the business filed as a corporation, but at the same time, there are federal deductions applied only to corporations that can offset other tax responsibilities. Also, a corporation’s legal status helps with attracting outside investors.
Therefore, depending on your personal wealth and vision for the business, you must choose wisely the type of company you register.
Note: Consult a tax pro and/or a lawyers specializing in business structure before making a decision – Michael
Building a new business is not an easy task. It requires expertise in numerous different areas. Your number one goal when starting a business is to maintain a positive bottom line, in other words, to make your business profitable. Return on investment doesn’t come right away, and you cannot afford to lose sight of your business and personal finances early in the game. These seven tips to help small business owners like yourself make smart decisions with your money that will pay off in the long run!