In order to build wealth with your business, it’s important to get a firm handle on your company finances. Whether you are starting a new business or have been in operation for some time, you need to get a firm handle on your finances.
As a business owner, it is easy to get bogged down in the daily business of your company. But you don’t want to let your profits suffer.
Here, we will discuss crucial tips for running a business, how to create a business budget, and common mistakes to avoid. Keep on reading to learn more.
Tips to manage business finances
Here are a few tips you can use to manage your funds better as a business owner.
1. Open a business bank account
You need to completely separate your personal finances from your company finances as soon as possible to avoid issues like IRS complications, financial tracking errors, and business forecasting inaccuracies.
This requires opening a personal account with the company. If you want to take money out of the business for personal use, apply for a salary (e.g. weekly, biweekly, monthly) so withdrawals can be tracked properly.
2. Review your business structure
Most businesses start out as sole proprietorships, but as you grow and become successful, you may want to consider incorporating your business as an LLC (Limited Liability Company). You should also consider an S-Corporation or a C-Corporation if these entities better meet your needs.
This enables you to easily separate business and personal funds in the event of a lawsuit. For example, if a customer sues you. These business structures can give you a certain level of coverage for your personal property. They may also have certain tax benefits.
3. Get organized
If you want to get rich by your business, you must be organized. This means creating systems to monitor your business finances. In particular, you should track transactions, financial statements, accounts, and more.
There are numerous business finance apps that you can use to establish a budget. Some examples are Waveapps and Quickbooks. Being (and remaining!) organized will significantly reduce your workload.
4. Get an accountant
A business accountant can suggest some valuable insights on your company finances. He or she can also help you submit your business tax filings, a complex task.
One point to note is that if you outsource accounting tasks, you still have to stay involved with your company’s financial records. Make sure to schedule regular meetings so you can discuss the current state of your finances with your financial accountant.
5. Create a business emergency account
A business emergency account is to your business what a personal emergency account is to your life. It may provide you with backup or buffer in the case of unplanned business situations.
For example, paying employees during a slow season, replacing a broken delivery order, or purchasing necessary but unexpected items.
6. Create an account to save for taxes
If you’re running a business, then you’ll probably have to pay taxes. Rather than letting your tax bill surprise you at the end of the year, begin preparing early.
Set up a special savings account specifically for your taxes. This is the place where you set aside a certain portion of your income (~30%) toward your end-of-year tax bill. You can pay your taxes quarterly.
7. Create a business budget
Your company’s budget helps you run your company efficiently and maintain control of your finances. It is crucial for preparing financial goals and creating profitability.
Budgeting lets you see your income and expenses (budgeted and actuals), giving you a very clear picture of how your company operates financially.
8. Pay yourself a salary from your business the right way
Before paying yourself a salary, make sure that your company does not go under. This means ensuring that your operating expenses are paid before your tax obligations are paid in full.
Make sure your monthly business expenses are included in your business budget. For the most part, most of your monthly expenses, such as rent, web hosting, and salaries, are fixed each month. But when it comes to your variable costs, you will have to make estimates based on what you know is coming up.
After paying your bills, you may withdraw what you have left from your business earnings in that given month and divide it into percentages.
Ideally, you should have at least six months of business expenses in this account to serve as a cushion in a time of business difficulty.
You should have plans to make gifts to yourself (and employees) as a holiday bonus every year.
That way you do not have to worry too much about how to come up with large tax funds.
Put this amount back into your business to cover operating expenses, new projects, marketing, branding, and other needs to keep your company growing.
The 5% figure provided here is a guideline. Consider how well your business is doing to determine when and how much to pay yourself.
Don’t forget about setting aside money for retirement when you start your career. There are many independent occupational retirement plan choices and various personal savings schemes.
9. Get insurance
Having business insurance is vital. From errors and omissions insurance to property insurance, it is crucial to protect your enterprise from the costs of customer suits or property loss or damage.
It’s a good idea to meet with an insurance broker to discuss your business requirements and get advice on the best type of insurance you should have. Being covered is better than being sorry.
10. Avoid credit card debt
Just because you can get a business credit card doesn’t mean you should put your business into debt.
Plan your budget out carefully, and pay off any credit card debts in full each month if you use a credit card for company expenses.
Creating a business budget
Creating a business budget does not have to be that difficult.
As a small business owner, the biggest things you want to track are your income and your expenses. Then determine each month whether your expenses exceed your income based on your actuals and why.
These are the same costs every month and do not fluctuate from month to month.
These are the costs of shipments that vary from month to month depending on the factors listed above. Costs for raw materials, shipping costs, and more also factor into these calculations. It is acceptable to estimate your variable costs based on what you think they will be.
You should also list all the ways you can earn money and the amount you expect to earn each month. Once you’ve written down your expenses and expected income, your budget is set. It is essential to include room to manage your actuals according to your budget for that month.
It’s a good idea to put this entire feat together so you know your business’s financial health. The great news is, it will cost you nothing to do this on your own.
It also contains a number of paid cloud accounting tools that can aid your company as it grows. And of course, my automated Excel spreadsheet program is at your disposal as well!
How often do I need to create and track my business budget?
If you or someone you know encounters any discrepancies or reasons for budget overages or shortages, be sure to note them.
Your budget can help you plan for what you will see in terms of your income and your expenses. In this sense, it is a practical means of doing short-term financial planning.
What if you create a business budget for the next three months? You have a 3-month budget projection for your company at this point in terms of your anticipated income and expenses.
Financial mistakes to avoid as a business owner
Now is the time to focus on building a fiscally prudent enterprise. Now, let’s take a look at some typical errors first-time entrepreneurs make. Hopefully, learning about these risks will prevent you from becoming a victim.
I highlight the mistakes below, which could easily be avoided with sound decision-making and planning. Avoiding them could save you thousands. Here we go!
Mistake #1: Overestimating how quickly you’ll earn a profit
A lot of entrepreneurs think they will open their businesses within a few weeks, but this is rarely the case.
It takes time to construct a stable and profitable business. Make sure that you incorporate that in your plans. Especially if you make plans concerning your payments, especially if you create them around paying your bills.
While it is understandable that you may be eager to quit your job shortly after beginning as a volunteer, you should first conduct a cost-benefit analysis before making any hasty decisions. First, try generating a break-even analysis to see when you can expect to begin making a profit (assuming all goes well).
Mistake #2: Mixing personal and business funds
Mixing your personal and personal finances is a huge no-no. For one thing, it is a payroll tax nightmare! Business tax deductions cannot be made from your earnings or loss.
Not only that, You don’t know how much money your business is making or losing. Therefore, you have no idea how well your company is doing financially.
Also, if you were ever to apply for a business loan, you would have to show your company’s financial statements over time. If your finances are personal and business are mixed, you would have no way to show this.
Mistake #3: Not staying on top of bookkeeping
Bookkeeping is time-consuming and frustrating. I get it. However, a lot of business owners lose money by neglecting their bookkeeping. As a business owner, this is something that you must do.
And reviewing your expenses frequently will make it simpler. Schedule one or two hours every week or every other week to go over your expenses and monitor your invoices. There are plenty of tools that you can use to make the process easier, or you can build your own simple spreadsheet.
Mistake #4: Not planning for taxes
As a business owner, it’s important you prepare for taxes. If you own a successful company, you must save funds to cover the taxes that you owe the government.
If you are not already successful, you may be eligible for a tax deduction depending on your business expenditures. Either way, you should make sure you are prepared for tax payments. Your accountant can help you plan for your tax savings.
Mistake #5: Not hiring a good accountant
Speaking of that, a good accountant is certainly useful for your company. Not only can they help you file your taxes, but they can even provide valuable tax guidance that could save you a great deal of money and help you stay current on the latest developments in tax law.
They can also help you manage your payroll, prepare annual financial statements and documentation to obtain financing, and much more.
Perhaps most importantly, your accountant will help in the event you ever get audited. Having an accountant is important for your company’s finances.
Mistake #6: Not hiring a good lawyer
A competent lawyer who manages small business issues is crucial in your company. Your lawyer can help you register your business and ensure it is properly structured.
They can help you review all of your contracts and associated legal documents such as vendor and customer contracts, partnership agreements, or trademarks. And if you were to get into any disputes with vendors or customers, they can provide you with legal advice and represent you in court if necessary.
Both your accountant and lawyer will save you a considerable amount of time and give you the peace of mind to know things are done correctly.
Mistake #7: Not establishing a business emergency fund
Your company’s emergency reserve fund should be able to accommodate your operating expenses and keep you operating for up to 3 to 6 months without incurring more debt.
There are people trying to persuade you to take out a loan for your own business in case of an emergency. But I am of the belief that if you are successfully running a business, you should create your own financial cushion for your company during emergencies and use it as your business grows.
Mistake #8: Not having business insurance
Business insurance is indispensable. Without business insurance, many business owners make a big mistake. And this can impact your company’s finances. Suppose your computer were stolen, or your retail store were vandalized and you have no insurance.
You are responsible for all costs associated with the replacement. Be sure to contact an insurance agent so that your company can be fitted with suitable insurance coverage.
Mistake #9: Getting into business debt without a plan
Often times, businessmen get into debt by taking out business loans or credit cards from relatives or banks. These could be from friends or relatives or a bank. Many burdened individuals do not have a strategy for how these funds will be used in their business or how they will pay off this debt.
They lose track of the money that they are given by providing frivolous items they do not really need.
Before you consider any business funding that involves obtaining debt, you have to carefully plan how the funds will be apportioned. Then, develop a plan to pay back the debt as rapidly as possible.
Leverage these essential tips for your business finances!
By following these steps and avoiding these money errors, you will be setting a strong foundation for your business finances and, in turn, your long-term success.
At the end of the day, outside of the passion you have for your business, I am sure you want to make (and keep!) your money!