is the time to organize your small-business finances, but where should you start? It can be difficult to organize your small business’s finances if you do not have a degree. Millions of entrepreneurs have already walked the path, and you can easily avoid most mistakes with a bit of knowledge. These small business tips will help you set up your business for success.
Mistake #1 Ignoring Comprehensive Business Plans
Your company should have a detailed Business Plan before it can reach its full potential. You may find it difficult to set and achieve goals for your business. Include the following at least in your business plan:
-
- Summary
- Description of the company
- Market Analysis
- Organisation and management structure
- Services and Products
- Marketing and sales strategy
- Financial projections, data and information
- Supporting documents
- Appendix
Mistake #2: Failing to choose a legal structure
Legitimating your new business with the government is another important step. This will not only protect you from liability, but also add credibility and professionalism. It could even lead to tax savings based on the entity type that you choose. Here are some options for you:
-
- Limited Liability Corporations (LLCs): One of the simplest business structures. LLCs are run by either a single owner or partnership. This structure is less complicated than C and S Corporations, but it still offers personal protection.
- C Corporation These larger companies are more complex and subject to double taxes. They are also run by an independent board of directors.
- S Corporation S Corporations have a slightly less complex structure than C Corporations. They are also not subject to double-taxation and allow for flexibility in ownership transfers.
- Nonprofits: Profits must be directed to a particular goal or cause, or used to pay for business expenses like overhead and payroll.
If you do not register your business you will be automatically recognized as a partnership or sole proprietorship. This entity is not recommended as it does not offer the same protection as the other options.
Mistake #3: Combining personal and business funds
Opening a business account should be one of your first tasks when you start a new company. Two reasons will make it easier for you to keep your business and personal finances separate. It will make it easier to track expenses when you’re making a budget, or filing taxes. It will also keep your personal finances in order by making sure you don’t lose money on your new business.
You will also need to provide your employer identification number (EIN), that you can get for free from IRS, as well as your official registration of your business entity with the state. You may need to show a business licence, so check the requirements in your state and city. You can then either visit a branch of the bank or apply online. Your account will be operational within one day.
Mistake #4: Failure to save for emergencies
We’ve learned that there is no such thing as a predictable future. Even if your business is in tip-top shape, external factors can cause ripple effects that could be detrimental to your business.
Create a business bank account with a checking account to cover your everyday expenses, and a separate savings account as a cushion for emergencies. In your first few years, contribute as much as you can — usually 20%-30% of profits — to ensure that you are able to enjoy peace of mind when you become established.
Mistake #5 – Neglecting important tax requirements
The tax obligations you have will depend on the type of legal entity and state where you operate. It’s important to consult with your accountant or read up on the requirements. Make sure to mark your calendar with important dates and deadlines.
-
- If you are hiring employees or running a business, get an EIN.
- Send an annual report to your state.
- Taxes on self-employment and income are due quarterly.
- You must file sales tax according to your state.
If you fail to comply with the tax regulations, it could lead to penalties, fines and even loss of recognition by the state as a legal business (otherwise known your Certificate of Good Status).
Mistake #6 – Spending too much too early
While this may be true in some circumstances, it is not always the case.
You should not spend so much on your business that you accumulate significant credit without a plan of repayment. Be sure to have a plan in place before investing in expensive equipment or purchasing excess inventory.
It’s for this reason, among others, that a budget is so crucial to a business.
Mistake #7: Failure to follow a budget
Budgets are an important part of good money management. We’re not the first ones to say this. Businesses need budgets to control spending, just like households and individuals. Turning a profit is difficult, if not impossible, without a budget.
Include both variable and fixed costs. Rent or software subscriptions are examples of fixed costs. Budgeting for variable costs is more difficult because they can fluctuate. For example, food prices in a restaurant. Calculate your spending over the last six months to get an idea of variable costs.
Mistake #8: Not Understanding Write-Offs
You can lower your tax liability by claiming certain expenses. Writing off Business Expenses is a common mistake made by entrepreneurs. They either think that any expense can be written off or they don’t fully understand and take advantage of legitimate write-offs.
There are many business expenses that can be deducted, such as office costs, marketing, childcare and education. However, not all of them qualify. These are some common expenses you cannot write off.
-
- Gifts for clients (except for the first $25).
- You can claim expenses for your commute to and away from work
- Even if the fines and penalties are business related, they can still be penalized.
- Clients’ entertainment expenses, including hotel suites and cars
Most other business expenses are deductible and reduce your income tax. If you’re ever unsure about qualifying expenses, consult your accountant.
The 9th mistake: Not using professional accounting services
Leaders who feel they must do everything themselves are unable to run a business. Does this sound familiar? Hiring a professional can be a great option when you want to make sure your passion project is done right.
Continued learning is the best way to maintain your level of financial literacy. Attending webinars, reading business books and taking courses will help you to achieve financial success.
Mistake #10: Failure to monitor marketing campaign results
Marketing is an important investment, especially for small businesses. If you don’t monitor your data and adjust your strategy accordingly, you could be wasting money on campaigns that do not deliver results.
It is not necessary to be an experienced marketing professional in order to understand the performance of your campaign. A solid ROI ratio of 5:1 is considered to be a good one, which means you get at least five times the amount you invest. Any performance less than 2:1 is not worth the time. Review performance once a month and make any necessary adjustments.
Mistake #11 – Skipping Your Salary
It is likely that you are passionate about your business. This passion will help it succeed. Many entrepreneurs put their company’s financial health above their own and neglect to pay a salary.
Owners of new businesses may feel the urge to squeeze every last penny to ensure financial stability. If you don’t pay yourself, it can lead to unnecessary financial stress and affect your ability to manage your business.
Never let your business be the reason you sacrifice your financial security. You may need to reconsider your business model if you cannot afford to pay employees and yourself fairly.
It is not easy to manage your money wisely, especially when you are a new business owner. Experience, diligence and attention to detail are required. There are professional and affordable financial services that can help you remove financial stress, so you can concentrate on what you do best – running your business.