Many small business owners struggle to manage their organization’s finances. Rather, they focus on their business’s core operations while placing accounting and other administrative tasks on the back burner. Unfortunately, this often leads small business owners down the path for failure by adopting the following personal finance rules, however, small business owners can better manage their business’s finances and increase their chances of success.
#1) Create an Emergency Fund:
Even if they never use it, small business owners should create an emergency fund. It’s impossible to predict the future. Even if a small business is currently turning a profit, factors like market changes, industry regulations or consumer demand can quickly place a business in the financial red zone. By creating an emergency fund, small business owners will have peace of mind knowing that they stay afloat during times of hardship.
#2) Choose Debt Wisely:
There’s nothing wrong with borrowing money, but small business owners should choose their debt wisely. High-interest loans, for instance, can hurt a business’s profits. In addition to paying the principle, the borrower must also pay interest. A small business owner should only take a loan or debt if he or she can comfortably pay it back according to the lender’s terms.
#3) Keep Excellent Financial Records:
Small business owners should keep excellent financial records for bookkeeping and tax purposes. If a small business owner doesn’t know exactly how much money his or her business spends and earns, they won’t be able to optimize their operations for higher profits. Whether it’s performed in-house or outsourced to a professional accountant, proper bookkeeping is essential to the success of all small businesses.
#4) Plan for Taxes:
Waiting until April to review taxes for the year prior is never a good idea. As a small business grows, it will earn more income and, subsequently, be required to pay more taxes. To avoid the sticker shock of an expensive tax bill, small business owners should plan for taxes in advance. This means setting aside the necessary funds — usually about 35 percent of income — for their taxes. In most cases, small business owners must make quarterly estimated payments to the Internal Revenue Service (IRS) based on the projected income for the year, and failure to make these payments will result in a penalty.
#5) Plan for Retirement:
Retirement isn’t something that most small business owners think about when initially launching their business. As most financial experts know, however, the sooner you begin planning for retirement, the better. Even if a small business owner doesn’t have employees, he or she can still set up a retirement plan using a Simplified Employee Pension (SEP).
The same rules used for personal financing can also apply to small businesses. By incorporating the rules mentioned here into your small business’s operations, you’ll build a more stable foundation that allows your business to expand without the traditional growing pains experienced by so many others.
Yorkville Advisors, LLC is a privately owned and operated hedge fund sponsor that was founded in 2001.