Learning how to handle company finances is a challenge for most business owners, but we can assure you that you aren’t alone. As we speak, there are over 32.5 million small businesses in the US, all of which have had to overcome these obstacles.
If you’re finding difficulty with your startup or small business finances, it’s just one of the many obstacles you’ll face as a business owner. Luckily, with the right financial tips, you can set your business up for long-term success. Just follow these steps!
1. Choose the Right Business Structure
Whether you’ve started your business or not, choosing the right business structure for your needs can help improve your financial power significantly. The four main options to choose from are:
- Sole proprietorship
- Limited liability company (LLC)
The vast majority of businesses are sole proprietorships, as they offer the business owner the most control over their business operations. However, partnerships make sense for those going into business with others who still want a similar structure.
Limited liability companies make sense when you want to protect your personal assets (car, house, etc.). If your business is already profitable and you don’t want to run these risks, then an LLC may be your best option.
Lastly, corporations are the most complex of these structures, but the easiest to find funding for. If your business needs funding quickly, opening up for public investments can be a great way to promote growth. However, you will relinquish a lot of control, as a board of directors will be appointed.
2. Write Out a Budget
We are 42% more likely to accomplish the goals that we write down. As a small business or startup, these budgets will likely change frequently, so don’t think it’s something you can forget about after drafting a business plan. As a business owner, you have to work within your means.
Depending on how long you’ve been in business, revisit your budget every 3 to 12 months and adjust your budget based on existing revenue and reserves. In the early days, a significant portion of your income should be allocated for growth. This could be more than 50%, depending on what you can afford.
Daily business operations can get expensive, so it’s always best to save an extra 10% to 20% for reserves within your budget. This is for unexpected expenses, and any leftover income should be held for when you need it. Loans and credit lines are always handy, but having extra cash is even better.
Every business is entirely different, so there is no one-size-fits-all approach. However, most businesses could benefit from trying the personal finance approach of 50/30/20. Aim to put 50% of your budget into “needs”, 30% into “wants” (think growth), and 20% for investments or savings.
Of course, few businesses will be able to fit this exact outline throughout the fiscal year, but it’s a good general blueprint to aim for. If you’re mixing business and personal expenses, then include them into this budget. You need food, shelter, utilities, and more to live, you have plenty of “wants” that you spend money on, and you should still try to put money into your savings or investments.
3. Develop a Tracking System
Sure, saving your receipts in a filing cabinet will work, but what if there’s a fire? What if they’re stolen? Also, do you really want to go through all of those receipts every year?
There are hundreds of different apps you can use to track receipts, invoices, business mileage, income, and so much more. Some of them can track your location and add things up for you automatically, and some just need you to press a few buttons once a week. Either way, find something that works for you and stick to it.
Snapping pictures of receipts, screenshotting invoices, and more will help you keep a digital record of expenses. If you don’t have these recorded, you may overpay or make a serious mistake on your taxes next year.
4. Figure Out Self-Employment Taxes
Let’s go over a few options for paying your personal taxes as a small business owner. If you decide to mix business and personal income/expenses together, then you will only owe one tax bill at the end of the year or quarter. This will be a tax rate on profits you earn (revenue minus expenses).
In that case, paying quarterly often makes sense, as you won’t have to save up every year for one large tax bill. However, that’s up to your preferences. To make it easier, we’d recommend separating your business and personal payment methods so you can have an easier time determining business and personal expenses at tax time.
Other than paying quarterly or annually for your entire income, what are your other options? If you already have a payroll processing system, consider giving yourself a salary. This way, you will pay your personal taxes every week or two throughout the year, and potentially earn a refund on that.
Then, you will only need to pay taxes on any leftover profits in the company expenses. If you’ve managed to separate business and personal expenses, then this won’t be a problem at all. Many business owners find this easier, so it’s something to consider!
5. Learn Industry-Specific Deductions
The tax code in the US is known to be one of the most complicated, and for businesses, that often means missing important deductions. There are plenty of deductions that apply to businesses of certain sizes, in certain municipalities, with certain employees, and in certain industries. Chances are, your business fits into some of these categories!
You don’t want to overpay on your tax bill, so learn about any deductions that may apply to your business and how to maximize their benefits.
On top of that, use general deductions as much as you can to maximize your savings. Donating to charity and saving for retirement are both great ways to save on taxes, so see what works out in your favor!
6. Don’t Forget Debt
Do your best to limit debt as much as possible. Debt can be your best friend or your worst enemy as a business owner, and that choice is entirely yours. Always try to pay invoices on time, as these are the easiest to forget about.
Beyond that, try to limit your debt to as few sources as possible. This means using one business credit card and limiting your installment loans to as few as possible. Keeping things simple will make it easier to track.
This way, you’ll be able to open one account or one statement to see how much you owe. Do your best to pay off revolving debt (credit cards) as much as possible, as they tend to have the highest interest rates. Keeping a $10,000 balance on your credit card could easily add up to owing an additional $2,000 or more after a year, so do your best to make more than the minimum payments every month.
When taking out a new loan or credit line, always ask yourself how this will benefit the company. Taking out debt can turn a company profitable, so always ensure that any debt you take will pay for itself in the long term. Also, you never know when you’ll need another loan, so it’s best to maintain good business credit!
7. Loans > Equity
While this may sound like a contradiction to our last tip, it isn’t. Businesses will need extra capital from time to time, and that’s to be expected. However, generally speaking, we’d recommend taking out a business loan or extending an existing one.
With a low-interest rate and predetermined payment schedule, you will have a steady, predictable payment scheme. With investors, you will not only need to pay them back more in the future if your business grows, but you will also relinquish some control of your business.
If investors own a significant portion of your business’ equity (especially over 50%), then they can make decisions or pressure you to make decisions that aren’t in the company’s best interest. Most often, these problems arise when it comes to long-term planning, as investors often prefer short-term gains. If you can avoid shelling out too much equity, we recommend it.
However, you still want to limit the amount of debt you take out, which brings us to our next point.
8. Invest in Marketing (Correctly)
For most industries, small businesses should invest between 7% and 8% of revenue toward marketing. Again, that’s revenue, not profit.
Here’s the thing, we all know that paid ads are effective, but they’re also expensive. If you use a PPC ad campaign with an average conversion rate (around 2%) and the ad costs $2 per click, you’ll need to earn $100 from every converted customer just to break even.
For that reason, we recommend developing more organic marketing strategies as early as possible. Social media, SEO, and email campaigns can be extremely effective and offer high ROIs, but they take time to develop.
We strongly recommend using paid ads to generate short-term revenue, but no business wants to become too dependent on them forever. Once you build a strong email marketing list, social media following, and website, you won’t have to spend as much on ads. Keep working toward these goals, even when it feels pointless!
If we could recommend one investment, especially to newer businesses, it’s to invest in a strong website. Your website acts as the center of your entire digital marketing strategy, so spare no expense. It’s a one-time purchase with long-lasting benefits.
9. Always Plan Ahead
If you take away anything from these tips, remember that financial management is not a “one and done” deal. It’s an ongoing process that requires long-term thinking.
Developing the right mindsets is half of the battle in business ownership. One of these mindsets is to always be thinking about the next step, like in a game of chess. Just because you took a rook doesn’t mean they aren’t coming for your queen.
What we mean is that you may have a surplus, you may turn a profit, or things may simply be going well. However, if you miss the forest for the trees, then these good times won’t last forever. Always think long-term, consider the unintended consequences of your decisions, and plan ahead for them.
Also, remember to prepare for unexpected expenses, which will inevitably come. There will always be unexpected challenges, whether you run a small cleaning business or a multinational corporation. Having the financial power and the resources to overcome these challenges is always important.
10. Get Financial Help
Few small businesses can afford to hire an accountant or bookkeeper, but few small business owners have the time to do it themselves. Unfortunately, there’s no substitute for professional accounting services.
Fortunately, we live in a world where these services are more accessible and affordable than ever. You just need to find the right resources. Once you choose the right accounting help, like with these services, you can rest assured that your financial tracking, analysis, and forecasting will be taken care of.
Generally speaking, outsourcing your bookkeeping or accounting services is the best option. You’re essentially pooling your resources with other companies to pay for the team, making the package just as comprehensive as an in-house team for only a fraction of the cost!
Use These Financial Tips Wisely
Now that you have some financial tips in your back pocket, use them to your advantage moving forward. Business finances may be challenging, but once you develop the right habits, it becomes second nature.
Start working on your money management skills today and stay up to date with our latest business tips for more financial advice!