Justin Goodbread CFP®, CEPA, CVGA, at WealthSource Partners, LLC, is a financial educator, wealth manager, author and speaker.
Being a small-business owner is one of the most difficult and stressful jobs in the world. Everywhere you turn, there’s another fire to put out or a crisis to be averted. Although there are always elements beyond your control, you can alleviate much of the stress of business ownership by managing the areas within your control. One of these areas is finance.
In this article, I’m going to look at five easy ways entrepreneurs can get a handle on their finances and mitigate the potential for financial disaster.
1. Separate personal and business finances.
Mixing personal finances with business is one of the most common mistakes I see among business owners. It’s tempting to use a single bank account for everything, but this can quickly lead to chaos, financial confusion and even legal trouble.
You see, commingling your personal and business finances could lead to “piercing the corporate veil,” leaving you personally liable for your company’s debts and liabilities. With the federal government making a greater investment in IRS enforcement, keeping your books straight is all the more important. So what can you do to protect yourself as a small-business owner?
Establish a separate business bank account and credit card. This division makes tracking expenses, calculating taxes and maintaining clear financial records simple. It also safeguards your personal assets from any potential business liabilities. Trust me; it’s a smart move.
2. Create a comprehensive business budget.
I often say, “If you aim at nothing, you’ll hit it every time.” This is especially true with your finances. Without a clear direction for your business’s finances, it’s nearly impossible to hit your targets. Although budgets often get a bad rap, they’re vital to your organization’s success. It’s your road map to setting realistic revenue and expense expectations. Fortunately, creating a comprehensive business budget doesn’t have to be complicated.
Begin by listing each of your income sources and breaking down your expenses. Don’t forget to include both the fixed costs (rent, utilities, salaries) and the variable costs (marketing, office supplies, maintenance). However, your budget should also account for those unexpected expenses, savings for future investments and an emergency fund for those rainy days.
Once you’ve created a workable budget, don’t forget to review and update it regularly. This will enable you to stay on track and reflect changes in your business operations and financial goals.
3. Monitor cash flow religiously.
Cash flow is the lifeblood of our small business. It’s the money flowing in and out of our company daily. Fumbling with cash flow management is one of the main culprits behind small-business failures. In fact, Business Insider reports that 82% of small-business failures are directly attributed to poor cash flow management. Therefore, keeping a close eye on your cash flow is essential.
Here’s how you can make sure your cash flow stays healthy:
• Invoice promptly and follow up on overdue payments.
• Negotiate favorable payment terms with suppliers.
• Cut unnecessary (nonstrategic) expenses.
• Build up a cash reserve for those unforeseen emergencies.
• Consider a line of credit or short-term loans to cover seasonal fluctuations.
4. Consider investing in professional financial guidance.
Look, you may be an expert in your field, but when it comes to financial expertise, we can all use someone with expertise to guide us and hold us accountable. This is the reason that I (a financial advisor) hired a financial advisor.
You see, seeking professional guidance from accountants, financial advisors or consultants can be a game-changer for your business. These professionals can help you make informed decisions, minimize tax liabilities and spot opportunities for cost savings.
Therefore, don’t shy away from investing in accounting software or hiring a reliable bookkeeper to keep your financial records in order. It’s like having a co-pilot to navigate the financial skies with you, reducing errors and providing valuable insights into your business’s financial health.
5. Talk with your trusted professionals to plan strategically.
Taxes are one of the few constants in life. Most of us wish they weren’t. However, with a bit of strategic planning, you can legally minimize your tax burden. Understanding the tax code and taking advantage of deductions and credits that are available to you can make a big difference to your bottom line.
Your tax professional can help you develop a plan for your unique situation. Here’s a peek into what has worked for me:
• Keep comprehensive records of all business expenses.
• Consider taking advantage of tax-advantaged retirement accounts for yourself and your employees. In 2023, you can contribute up to $22,500 to your 401(k) and $6,500 to your IRA. Plus, if you’re 50 or older, you can make “catch-up” contributions of $7,500 and $1,000, respectively.
• Explore small-business tax credits, such as the research and development tax credit.
Remember that in addition to income taxes, you’ve got to prepare for sales tax, payroll tax and any other applicable taxes for your specific industry and location.
Friends, managing your finances effectively is a key to success in the small-business world. By following these simple tips, you can navigate the financial challenges and opportunities that come your way with confidence. These tips can help you build a solid financial foundation and set your business on the path to long-term success.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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