Being an entrepreneur doesn’t come easy, although it comes with great rewards. A serious business owner must put in serious efforts and time to achieve their goals. Talking about efforts, a business owner oversees almost every aspect of the business, including the finances.
The powerhouse of any business is the finances. Hence, it is important for any business owner that wants to get results to handle this crucial aspect excellently. Business finances is a whole new level of finance. Hence, even experience with personal finance will not be enough.
In this piece, we will be discussing the basics of finances for small businesses, while mentioning some helpful tips that can keep your business finances on track.
1. Decide on a business entity
Most life decisions require courage, including starting a business. However, that is not all; you also need to choose your type of business entity, especially from a tax and legal perspective. The popular business entities include:
– Sole proprietorship
– Partnership
– Corporation
For instance, if you are a freelancer or you run a one-person business, your entity would ideally sole proprietorship. It becomes a partnership when two or more owners are involved. A corporation has several owners called shareholders. Each of these options come with different tax and legal implications. So, make your findings and see which best describes and fits your business.
2. Don’t rely on a single account for all your finances
For a small business owner that starts as a sole proprietor, it is most likely that you use your personal account for your finances. However, with time, the business will get bigger, and the finances more complex, necessitating the need to differentiate between personal and business finances. This would be the time to open a business checking and savings account as well as a business credit card (optional).
This streamlines your finances and gives you a clearer perspective of your income and expenditure. The clearer numbers will also help you to prepare well for taxes.
3. Do not take income for revenue – they are different
Most small business owners get hyped when they start making more sales because they see that they are making much money. However, this only means a high revenue, which doesn’t always translate to high income.
Revenue is simply the total amount of income you make from selling your goods and services or from any other operation related to your business. On the other hand, income is the total earning or profit made by your business. While your revenue should not be overlooked, you must also pay attention to your income. A business’ income is the net income or the profit that business makes over time.
So, what revenue depicts is the entire sales and money gotten from the sales, whereas income shows the net profit after all expenses have been deducted. Understanding the difference between both is important. For example, you could have a high revenue but low income if the expenses are much. The bottom line is the income, and it is the yardstick for checking how well your business is doing.
4. Be clear about your tax situation
Business tax doesn’t work like your personal tax. For instance, a solo business owner, freelancer, or anyone into sole proprietorship will likely pay taxes every quarter. A self-employment tax of 15.3% is payable on top of any other taxes you are due for. Deducting your business expenses will affect how much you are supposed to pay as taxes.
Another factor that determines the tax situation of a business is the business identity. For instance, the tax situation in a corporation is entirely different from what is obtainable in a sole proprietorship. Make your findings and see how and where your business entity affects your taxes. Likewise, ensure that you make provisions for unpaid taxes (if any). A comprehensive record of your business expenses will make deductions easy and subsequently reduce your tax liability.
Get different savings to account for your taxes. QuickBooks and other accounting programs will also make things easier. If you can afford it, hire the services of a professional accountant to be in safe hands.
5. Do not undercharge
Undercharging is a business that affects your bottom line (income) adversely. Undercharging means lower revenue. It is even worse when you remove taxes, expenses, insurance, and retirement savings. Hence, it is important that you take all of these factors into consideration before deciding on price points for your business.
Running a business deprives you of some special benefits, including personal time and sick time, among others. Hence, you should charge in a way that allows you to save for your future. Consider the future; you deserve adequate compensation for all the benefits you have deprived yourself of. So, do not settle for anything lesser than the right prices.
Final words
Starting a business from scratch and guiding it to success doesn’t come easy. However, you can get the financial aspect right if you apply the five tips discussed above. Remember that the finances of any business is pivotal to its success, or failure.
