Managing business finances is crucial to keeping your company running smoothly. Neglecting to handle your finances properly could mean running out of cash, having difficulty getting loans and making business mistakes that create more problems or even cost you out of pocket. To reduce risks and increase your likelihood for success, consider these five primary tips to help you manage your small business finances and keep your company afloat.
Keep your business and personal accounts separate
This cannot be stressed enough. Mixing business and personal funds through one account makes it difficult to see how much money your business actually has, not to mention how it will be a disaster come tax time. Create a business checking account and use it for all business expenses, large and small and keep it separate from your personal account. You shouldn’t have any business transactions flowing through your personal accounts nor should you have any personal transactions flowing through your business accounts. By creating a dedicated account for company money, you will make it much easier to manage cash flow and keep track of your company’s financial condition.
Minimize overhead expenses
Before you commit to large business expenses, be sure you have the funding to support those costs. One way to stay in control of finances as a new company is to avoid expenses that bring large, fixed overheads to your business. This can look like expenses such as office space, office equipment and supplies, and even new hires. When you add significant fixed costs, you increase the minimum amount of revenue required to break even. Consider the cost efficiency of sharing working space with another company or continuing to run the business from your home. Postpone full-time new hires and opt for freelancers or contract workers until you’re in a stronger financial position.
Choose manageable debt options
In the pursuit of acquiring funding for your new business, consider applying for small business loans or other forms of debt to provide the financial boost that will allow your business to grow. Keep in mind, different loans and types of business capital come with different obligations and hidden costs.
Small business loans vary in terms of interest rates and repayment terms offered. Look for a loan or a credit line that offers a low interest rate and a repayment timeline that fits your budget and business plan.
Reserve money for taxes
Every month, you or your accountant should calculate your earnings before interest and taxes (EBIT). This is going to be more-so your revenue for the month, not so much operating expenses. Multiply EBIT by 25% to 30% and transfer that amount into your business savings account.
This figure should sufficiently cover state and local income taxes, as well as self-employment taxes. Though, your amount may vary, so be sure to touch base with your tax advisor. By planning ahead and reserving these funds on a monthly basis, you ensure that you’ll already have the cash on hand to make those quarterly tax payments without added stress.
Pay yourself a salary
Many small business owners pay themselves last or even forgo a paycheck of their own entirely to conserve finances and put more back into growing the business. However, paying yourself from the beginning has its advantages you can’t afford to skip out on, even if it’s just a few hundred dollars a month.
This helps you pay your personal expenses and build your savings which would be critical in case your business doesn’t work out. How you pay yourself in your business depends on your business structure, so be sure to consult with a professional or do some research into taking a salary versus a draw.
Closing thoughts
As a new business owner, consider teaming up with an accounting professional to further reduce risks and keep your business smooth sailing. Working with a qualified agent can make managing your business finances much easier and less stressful for you. They can help you design a customized business plan, choose a business entity type, manage accounts payable and apply for business loans. Keep in mind, you don’t necessarily need to hire a full-time accountant in the beginning. If you need to keep costs to a minimum, consider outsourcing specific tasks to someone who can spend a little bit of time each month evaluating your bookkeeping and offering strategic advice. As your business grows, you can always expand services needed to get help with payroll, inventory, cash flow management and more.
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