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4 tips for managing your business finances

Managing your finances as an entrepreneur is more straightforward than you think. Discover 4 simple strategies to keep your business finances on the level.

September 23, 2019 by Taylor Barbieri

It’s the end of the month. You’ve just sat down with a mug of your favorite brew to review your business’ income and expenses for this month.

But what was supposed to be a 15-to-30 minute review has turned into an hours-long ordeal where you have 15 tabs open on your browser, invoices splashed across your desk, and little idea of where your business finances fell in the last month.

There’s a better way to manage your finances than scrolling between your various accounts and payment processors to try to make sense of the numbers.

In fact, there are four better ways to manage your business finances, from familiarizing yourself with small business tax rules to setting a budget.

What makes these methods so noteworthy is that they are easy-to-implement and effective for both novice and seasoned creators alike.

So without further ado, let’s take a look at how you can better manage your business’ financials.

How to manage your small business’ finances

Four of the most effective ways to manage your small business finances include:

  1. Researching tax laws in your country, state, and city
  2. Using an accounting program or working with an accountant
  3. Separating your personal and business finances
  4. Creating a business budget

The first may sound intimidating, but take heart -- it’s simpler than it seems -- and it’s the foundation of managing your finances.

Method #1: Research business taxes in your country and state

Small business taxes vary significantly from country-to-country, state-to-state, and even county-to-county.

Because of that, you’ll want to do as much business tax research as possible when your business is still in its infancy.

Otherwise, you run the risk of having to pay a surprise tax bill or hefty fines and fees that take hard-earned money out of your pocket.

For example, writer and editor, Lindsey Peacock, originally saved $3,000 for her self-employment taxes but ended up owing around $6,000 for that year. Because she didn’t have the cash on hand to pay her tax bill, she had to take out a personal loan to cover it.

You could save yourself from ending up in the same position with just a few hours of research. Skip the research, on the other hand, though, and there’s a good chance of being hit with an unexpected penalty come tax season.

If you’re a U.S.-based entrepreneur, the Internal Revenue Service’s website is a good place to start for information about self-employment taxes and regulations, specifically their small business self-employed tax center and their tax information for businesses page.

Quaderno is worth checking out for additional guidance on sales tax, VAT tax, and goods and services tax (GST), whereas Avalara and TaxJar are helpful for understanding sales and use taxes.

If you’re a Canada-based entrepreneur, Canada.ca’s small business and self-employed income page is a thorough launching point for your tax research, while Europa.eu’s business tax page is helpful for those in the European Union.

As for the state, city, and county taxes, simply use Google to search for  “state/city/county name + income tax” (or a similar variant) to learn what other taxes you may be responsible for.

The good news is that while there are small differences, most of the taxes you have to tango with are similar regardless of country or state.

For example, if you live in the United States, you’ll need to pay the 15.3% self-employment tax  -- 12.4% for social security and 2.9% for Medicare -- if you earned over $400.

You’ll also need to pay federal income tax, which ranges between 10% to 37%, and state income tax if you live in one of the 41 states that collect income tax.

Additionally, chances are you’ll need to pay sales tax or use tax for each business item you purchase and/or sell.

Lastly, you may be responsible for a “business tax” or other extraneous tax on top of the income taxes you already pay.

San Francisco, for instance, charges a business registration tax for self-employed individuals who have done business in the city for at least seven days out of the year.

Look, business taxes can get rather complicated even for those running small side-hustles.

One of the savviest things to do for your business is to familiarize yourself with applicable tax laws and regulations, such as self-employment tax, income tax, and sales and use taxes, so you won’t receive fines or penalties.

But, if all of this talk about taxes has your head spinning, you don’t have to work on understanding and adhering to these laws on your own -- accounting programs and accountants can help.

Method #2: Use a small business accounting software program or accountant

If you earn less than $10,000 from your business, your finances are probably simple enough to just use a small business accounting software like FreshBooks or QuickBooks.

Earn more than that, and you’d probably be better of using both an accounting program and working with an accountant or bookkeeper.

True, small business accounting programs can help you to manage your cash flow, automate payments, estimate taxes, and et cetera.

However, accountants can offer advice tailored to your unique situation, which may help your business to both save and earn more in the long-run.

Nuventure CPA LLC, for instance, works with digital nomads, full-time RVers, and location independent-businesses -- business and lifestyle niches that are growing in popularity yet are still relatively uncharted.

Aside from tax advice, accounts can help you keep abreast of new tax laws, loopholes, or uncommon deductions that tax programs may not know you qualify for.

Writer Zina Kumok found it much easier to file as a self-employed individual by working with an accountant than by using TurboTax. Her accountant also pointed out some little-known deductions she qualified for so she could get a larger tax return.

Similarly, this entrepreneur said that by working with an accountant, she was able to take advantage of over $3,000 in deductions she otherwise wouldn’t have known about.

Plus, accountants can do way more than help your annual tax returns.

Accountants can help you estimate your quarterly taxes more accurately so you won’t have to worry about over or under-paying your taxes. In turn, this helps you keep more of your money to invest back into your company.

An accountant can also help you to prioritize and budget your business expenses so you can pay yourself a regular and reasonable salary, and save for retirement.

That’s more important than you might think. Only 8% of self-employed individuals contributed to an IRA or another employer retirement plan in 2014, whereas 42% of employees did.

By working with an accountant, you may be able to find money in your budget to put into a retirement plan, as well as figure out what retirement account makes the most sense for your business and lifestyle.

Lastly, accountants can work with you to manage your finances so you can avoid doing anything illegal and indirectly reduce your chances of getting audited by the IRS.

36% of self-employed individuals have admitted to not paying their taxes for a variety of reasons, ranging from their losses being greater than their profits to believing they didn’t earn enough to pay taxes.

Regardless of whether you think you need to pay taxes or not, it’s best to consult with an accountant to determine if you do indeed owe taxes so you won’t be hit with late fees or penalties.

If nothing else, an accountant can work with you to maintain organized financial records, submit accurate tax returns, and even represent you in case you get audited by the IRS.

36% of self-employed workers have been audited by the IRS, with around one-third of those returns having errors.

Call me cautious, but it seems much more sensible to spend an hour or two going over your business’ tax situation with an accountant than to undergo the stress -- and potential fines -- of an IRS audit.

Fortunately, it’s also a lot easier and faster to get through those sessions with your accountant if you employ our third method and keep your personal and business finances separate.

Method #3: Separate your personal and business finances

It’s crucial you get a separate bank account for your business -- and possibly a separate credit card -- as early as possible.

There are a few practical, legal, and financial benefits of separating your business and personal finances.

Firstly, it makes managing your business’ finances so much simpler when everything is processed through its own distinct bank account or credit card.

Illustrator Magoz used his personal account for personal and business expenses when he was first self-employed and found that it made the accounting aspect of his business more complicated and hard to track.

Secondly, having a business bank account and credit card may help you access more financing to grow your business.

This is a particularly important benefit when you consider 31% of small business owners said they were unable to grow or expand their business operations because of trouble with capital availability.

By using a business credit card, you can begin developing your business’ credit score, or a measure of your creditworthiness as a company.

Having a high business credit score may help you to receive lower insurance premiums, better terms when working with vendors, or getting lines of credit or better payment terms from vendors.

Even if you don’t have a business credit card, you’ll still want your business expenses separate as it may affect your ability to receive funding and loans in the future.

70% of small businesses that didn’t have a business checking out were turned down for a business loan in the past two years. Don’t let yours become one of them.

Keeping your personal and business finances separate can also help you to avoid a potential lawsuit.

Mingling personal and business assets or funds are two of the criteria for determining if the corporate veil has been pierced.

Piercing the corporate veil is a legal term for when a business’ shareholders or directors are responsible for a company’s debts and actions.

Under most business structures and in many situations, a business owner is not liable for a business’ debts or actions.

However, running your business inappropriately -- including mixing your personal and business finances -- can often justify piercing the corporate veil and holding the business’ owners and shareholders responsible instead.

But just how severe can the consequences of piercing the corporate veil be?

An Iowa business owner was held personally responsible for paying over $410,000 in a breach-of-contract lawsuit.

This was because the business owner mixed his personal and business finances, kept poorly tracked books, and did not follow corporate formalities, among other things.

As a result, the court agreed the corporate veil could be pierced, and the business owner would be held responsible for the expenses.

But aside from lowering your chances of a lawsuit, there’s one final reason to keep your finances distinct: you may end up owing back-taxes or fines if the IRS determines that your business was actually a hobby.

The IRS offers nine criteria to distinguish hobbies and business, which in turns affect what and how much you can deduct, among other financial matters.

Of those criteria, maintaining complete and accurate books and records and running your business in a “businesslike” manner are among the many points used to determine whether you’re operating a business or hobby.

To avoid additional fees, fines, and back-taxes, you’ll want to keep accurate books in the case the IRS audits you or argues that your business is actually a hobby.

As for how to keep those books in order, look no further than our last -- and most crucial -- financial management strategy.

Method #4: Set a small business budget

You need a business budget.

Sure, 61% of small businesses didn’t create an official, formally documented budget, but that’s a big no-no if you’re serious about improving your business’ financial health.

You see, a budget is more than just a spreadsheet where you track how much can spend each month.

Budgets are also a helpful tool for understanding where your business’ earnings are going and what you should cut or invest in to grow your business further.

So what should you calculate when you create your budget?

You should include all of your monthly, quarterly, or annual expenses, such as a subscription to your email service provider or storefront host. You should include recurring expenses like taxes and PayPal transaction fees, too.

As a digital product creator, these financial breakdowns for selling digital products can give you an estimate of what expenses to account for when it comes to creating, hosting, and selling your digital products:

Your budget should also include some wiggle room for unexpected expenses, like a surprise fee or a new business tool you think will elevate your business’ performance.

Lastly, although 30.07% of business owners didn’t pay themselves a salary, you should try to eke out at least a small monthly payment for yourself.

Though a salary may seem like an unnecessary expense in the early stages of your business, paying yourself a salary can often be the motivation and reward you need to push through trying times in your business.

A formally written-down budget can give you a picture of your past spending so you can build up a financial reserve or emergency fund for your business to carry you through slow periods.

According to research from the Small Business Administration (SBA), 78.6% of new small businesses survived for one year, with around half surviving for five or more years.

Though there are plenty of reasons why businesses flourish or flounder, being financially savvy was likely a contributing factor in those businesses that stayed afloat for several years.

In fact, according to recent research from CB Insights, 29% of startups failed because they ran out of money.

So with a little planning and restraint, you can put your business on a path to financial stability and possibly lower your business’ chances of shutting down.

Setting a formal budget can also help you to be more selective when determining what the essential small business tools you need are. It’s great for separating out the business tasks you can outsource, too.

Of course, adhering to a budget is, occasionally, a downer.

39% of advertisers felt a limited budget was the biggest roadblock when growing their businesses, but roadblocks go two ways. While it might limit what you can do, it also limits the potential financial damage if a project doesn’t have the ROI you want.

Budgets can also help you determine what you can realistically spend on a tool and what you should save up for or bootstrap instead.

For example, this entrepreneur said he underestimated the cost of PPC Amazon for his Amazon FBA business, with the total cost (around $5,000) significantly cutting into his profits.

Had he budgeted for the fluctuating costs of PPC ads, he may have been more conservative with ad spending or used less expensive promotional methods.

To that end, a budget doesn’t always have to constrict your spending -- it can help you make smarter business purchases, too. Distinguishing between what you want for your business and what you need for it is a lot easier with a formal budget to guide you.

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If you’re looking to manage your business finances better, there’s no better or simpler way than to set a small business budget. It may feel like a formality when you’re still working on a shoestring, but it’s the difference between growing that shoestring or snapping it.

Grow your business through savvy money management

I know -- managing your business’ income and expenses isn’t exactly a good time.

But managing your business’ finances doesn’t mean hours spent with spreadsheets and calculators. Instead, you’ll probably need to invest just a few hours upfront, and an hour or two each month if you use the four tips outlined today.

In order, those tips are:

  1. Researching tax laws unique to your country, state, and city
  2. Using an accounting program and consulting with an account for tailored tax advice
  3. Separating your individual and business finances so you can more easily track your business’ spending
  4. Setting a budget so you’ll spend more smartly on tools and services for your business

As a fifth bonus tip, you should also consider using all-in-one tools, like Podia, that are more time-efficient and affordable than using and paying for each service independently.

Sign up for Podia to see just how much time, effort, and money you can save on running your digital storefront, and reinvest your new-found time and money into making your business even better.