When it comes to managing your small business, you need to make sure your financial ducks are in a row.
Staying on top of your state of financial affairs will give you confidence in your business as it continues to grow. One of the biggest mistakes of new small business owners is not managing and analyzing expenses and income. This can lead to unexpected debt and poor financial decisions later down the line.
According to Business Insider, 82% of small businesses fail due to cash flow problems. That’s a big statistic, and it’s a wake-up call to start paying closer attention to your finances. Not sure where to start? This guide will walk you through the first steps so you don’t fall victim to common mistakes.
1. Know the Terms
If you don’t know how to read financial statements, you’ll be left in the dark about your own business. You don’t need a degree in Business Administration or Accounting to learn the basics, and once you master those, you’ll be on solid ground.
Here are a few basic terms to get you started:
- Gross Revenue. This is your total revenue or the sum of all the money you receive from customers before expenses.
- Expenses. These are the things you have to pay before you can collect profit. They can include rent, materials, taxes, etc.
- Net Profit. This is your revenue minus your expenses. You want this number to be positive to show your business is profitable.
2. Separate Your Finances
Depending on the size of your business, you might have mixed business and personal account. This is an easy way to get yourself into a bad situation quickly. You should not only think of your business money as separate from your personal money, but you should have a way to clearly distinguish between them.
All you need is a federal tax ID number to get a business credit card. You can also open a savings account specifically for your business where you can transfer money for taxes and other expenses. Use this account and your credit card only for business expenses, and keep your own money out of the picture.
3. Know Your Costs (And Lower Them)
Small businesses need to know how to manage their costs. Since they likely don’t have an excess of capital and investments to fall back on, knowing where your money is going is key. There are two types of costs in the business world: fixed and variable. Fixed costs aren’t changeable no matter how much income you’re seeing. For instance, your rent space or taxes.
Variable costs are more flexible than fixed costs. These are things you have control over. For instance, you could choose cloud-based software for word processing and graphic design, thus keeping costs lower without sacrificing quality. There are many ways to keep variable costs down no matter your industry.
4. Accounting Software
Since small businesses likely don’t have the need (or budget) for a full-time in-house accountant, software is able to bridge these gaps. Even if you’re skilled in calculating your own finances, it’s best to have software to fall back on just in case you miss something. With this software, you can keep track of expenses, manage invoices, and calculate tax expenses all in one place.
Accounting software can even help you make smarter, faster business decisions. If you have a web design business, for example, Freshbooks already has preset web design invoices you can use with a few clicks of your mouse. This means less time spent tracking down clients or customers, and more time actually getting paid.
Finally, you’ll need to stay on top of your taxes. A lot of small businesses find taxes to be intimidating, but it doesn’t have to be scary. As long as you educate yourself about federal, state, and local tax requirements, you’ll save yourself a lot of headaches in the future.
It’s always worth talking with a tax expert before filing on your own for your small business, but you can get started with a few easy steps. First, you need your Federal Tax Identification Number (EIN). This is how the IRS will keep track of your business taxes. It’s like a social security number for your business only. Check this IRS guide to see if your business needs an EIN.
Aside from federal taxes, you’ll also need to look into your state requirements. Many states in the USA require income and employment taxes as well. This could include unemployment insurance and even workers’ compensation, so review your state’s guidelines. Launching your own small business is a big step, but an exciting one. Are your finances in order? If not, make sure to act on these tips above. As long as you want to keep your business above water, you need to stay in control of your finances.