Running your own business is rewarding, but it can also be overwhelming. There are dozens of administrative tasks to keep tabs on besides your day-to-day work. I’ve been there, and I’ve felt that nagging feeling that I am letting something important slip through the cracks.
That’s why I wanted to put together these tips to help you stay on top of your finances while growing a successful business.
1. Plan for Current Business Needs
First, let’s talk about the importance of a business plan. How does an idea develop into a fully functioning business? It takes vision, work, and a good plan. To reach any destination, you need a good map. For entrepreneurs, we call this map a business plan.
Some essentials of a business plan include:
- Researching competing products
- Determining what sets your company or product apart
- Conducting research into your market and client base
- Estimating your costs and profit margin
- Creating a marketing plan
- Strategizing around how to pay yourself, your taxes, and other expenses
While there is a lot we could cover on the topic of business planning, for today we are going to focus on 3 important financial elements.
Calculating tax rates can be tricky for small business owners. In addition to paying taxes on their income, many small business owners need to pay a 15% self-employment tax—which covers Social Security and Medicare taxes.
Because of this, I recommend that most business owners set aside 25% to 30% of their net income for taxes. Your net income is how much you make after you factor in all your expenses, so it’s your income minus any business expenses.
For example, if you earned $10,000 one month but spent $500 on new equipment, $250 on marketing, and $1,000 attending an educational conference, you would set aside 25% to 30% of $8,250 (your income minus all those expenses), not $10,000.
How much will it cost to keep your business running? This should be something you evaluate and update regularly.
From marketing and production costs to rent and employee salaries, the expenses your business needs to keep functioning will be unique. Carefully think through any tools, equipment, and resources you need for your business. Once you’ve determined the estimated time and expense you will need to put in to your business, triple it!
No matter how carefully you plan, life happens and unexpected expenses will occur. Make sure you have enough wiggle room in your budget to handle the complications that will come your way.
Setting up a succession plan includes planning for changes in your company and developing future leaders. Although succession planning doesn’t directly relate to finances, it can impact your financial planning and liability.
Think about and plan for how your business will continue to function if a key owner, partner, or employee leaves. Document processes and keep records so that if changes do occur, you still have the information you need to keep your business running smoothly.
2. Plan for Future Business Needs
Though there is a lot of uncertainty that comes with starting a business, begin with a long-term mindset by planning for the future success and growth of your company. Here are a few financial tips that will help you start on the right foot.
Set Up a Safety Net
Protect yourself and your investments as a business owner. Once your company begins generating revenue, set aside enough money to cover 2 to 12 months of expenses. Markets can change quickly. Having an emergency fund set aside will ensure you can keep your business running if an unexpected dip occurs or if you need a buffer to figure out new solutions.
In addition, diversify your investments as well as your markets. Having a diverse portfolio will protect you from sudden drops in any revenue source.
Plan for Retirement
Business owners have additional flexibility when it comes to their retirement contributions. Instead of being tied to a fixed percentage, you can adjust your retirement contributions to help lower your tax bill or bracket.
As you near the end of the year, talk to an accountant or a financial advisor to maximize your retirement contributions and tax savings. You can always reach out to our team for guidance about what is best for your specific situation. We would love to help.
3. Prioritize & Delegate
Small business owners are go-getters. But while we would love to do it all, we have to recognize that doing it all isn’t good for our sanity or our business.
Be smart about how you use your time. A survey by Sage showed that businesses around the world spend an average of 120 working days per year on administrative tasks, which impacts productivity and profitability. For small businesses, that number can climb even higher.
The takeaway is that the more time you spend figuring out books the less time you have to focus on growing your business. Find ways to lessen that burden so you can focus on what makes the biggest impact.
As a business owner, you will find there are a million and one things you can focus on in a day. Use your business plan to set a few realistic goals each month or each year. Then, use those goals to set your priorities.
Once you know your priorities, figure out what you can delegate or outsource. Find trusted partners or companies that can help you maximize your time.
4. Maximize Your Tax Benefits
There are several perks that come with owning your own business, including tax deductions. Take advantage of these benefits and understand how these deductions can impact your expenses in the long run.
You might be wondering, “How much will a tax deduction really save me on my taxes?” It’s important to weigh the costs of a business expense versus the actual tax savings to decide if that purchase is worth your money.
Luckily, we have a simple formula that can help you see the value of these deductions:
Business Expense x Tax Rate = Money You Save on Taxes
If you don’t know your tax rate, using 25% to 30% will give you a close estimate.
Some common tax deductions include:
- Business Travel
- Business Meals
- Retirement Contributions
- Employee Expenses or Contract Labor
- Website and Software
- Marketing and Advertising
- Home Office or Rent
- Internet, Phone, and Other Bills
For more details, check out our guide, “17 Tax Benefits to Take Advantage of as a Small Business Owner.”
5. Review Often
Once your plans and goals are in place, review them often. I’d suggest keeping a printout of your goals someplace you can see them as you work.
When you start to feel overwhelmed, look at your goals and focus on what you can do today that will get you closer to accomplishing those goals. That will help you tackle what matters most.
In addition to reviewing your plans, review your financial reports often. Get familiar with these reports and learn what they mean and how to read them. These will help you budget, make projections, secure loans or funding, and build a foundation for financial success!
If you still have questions regarding your business finances, taxes, or accounting, reach out to our team at Mazuma USA. We help small businesses save time, money, and stress managing their bookkeeping and taxes, and we would love to help you!
Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.