5 Things To Do To Manage Your Finances for Small Business
Starting a business can be rewarding but also difficult. Business owners can see their passion come to life but also put in the time and effort, that no one else sees. If you run a business, you’re a master juggler and wear a lot of hats.
One thing that can make starting a business or managing a business tough is finances. As if personal finance wasn’t hard enough to deal with, business finance is a whole other animal. We’re going to break down the basics of what you need to know about finances for small business. Here are five things you should do to manage finances for small business.
1. Choose a business entity
Deciding to start a business can take guts. But it’s more than just courage that you need to start a business. From a tax and legal perspective, you want to choose what type of business entity you are. For example, typically there are three types of business entities:
If you’re a freelancer or solo business owner a sole proprietorship can be a good option. A partnership typically has two or more owners and a corporation is owned by shareholders. You will want to research these options to understand the tax and legal implications and choose a business entity that works for you.
2. Separate your accounts
Many business owners start as a sole proprietor, where the individual works as the business. Think of freelancers or small business owners who do everything themselves. When you just start out, you might still be using your personal accounts with your finances.
But sooner rather than later, you want to separate your personal finances and business finances. To do that, open up a business checking and savings account and consider getting a business credit card.
Why? Because when tax time comes you will want to easily know your actual numbers. Not your numbers that are muddled in with your personal money.
You want to know exactly how much you are bringing in and how much you are spending with your business. If you don’t have separate accounts, it’s difficult to do that.
3. Know income vs. revenue
When you first start a business and get sales going, it can be so rewarding. You can think, “I’m making so much money!”. But what you really have is a high revenue, not necessarily a high income.
According to Investopedia, “Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations.”
Revenue isn’t the only number you should look at. Income is important to look at as well. Investopedia describes income as “a company's total earnings or profit. When investors and analysts speak of a company's income, they're actually referring to net income or the profit for the company.”
In other words, revenue looks at all the sales and money coming in but income looks at the bigger picture, which reflects your net profit after expenses.
It’s important to know the difference between these numbers as your business can have high revenue but also high expenses. Looking at the actual take home income is key to looking realistically at the health of your business.
4. Understand your tax situation
Taxes for business owners is a different ballgame. For example, if you’re a freelancer or sole proprietor it’s likely you will need to pay quarterly taxes. You will pay self-employment tax which is 15.3% on top of any other taxes you owe. Your business expenses can be deducted which will affect how much you owe in taxes.
Your tax situation will also vary depending on your business entity. For example, corporations will have a different tax situation than a sole proprietor.
It’s important to know how your business entity will affect your taxes and set aside additional funds for any taxes you may owe. On top of that, you’ll want to keep detailed records of your business expenses so you can deduct them to lower your tax liability.
Consider setting up a separate savings account for taxes and getting an accounting program like QuickBooks to help you. Hiring an accountant can also be a good move to make sure you’re prepared for what’s ahead.
5. Charge accordingly
Whether you’re a product or service-based business, whatever you charge is not what you take home. You end up paying for taxes, business expenses, insurance, and retirement on your own. You also don’t have special benefits like sick time or personal time.
So when you consider price points for your business, it’s crucial to consider all of these factors. Running a business is tough, but if you can’t save for your future or afford to get sick, it will be even more difficult.
When you’re considering pricing, look at the big picture and how much you’re really fronting on your own now. Consider all of the benefits you lost and need to cover on your own, so you can try to price everything accordingly.
Starting and managing a business is tough. The financial aspect of it can make it even tougher, but keeping these five factors in mind, you can do a better job keeping your finances for small business in shape.