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How to Manage Your Business Finances as an Entrepreneur
When I first started my business, I had no idea what I was doing. All I knew was that I wanted to help women get their money right. But there’s so much more to a business than just the mission that you’re hoping to fulfill. There’s also the financial side of business. And I don’t just mean bringing in money, I also mean systematizing and managing the money that is coming in and going out. This is imperative if you want to create and build a business that will last. But don’t expect yourself to just know how to manage your business finances. You have to learn. Follow the steps below and you’ll be in good shape.
Register Your Business
Once you’ve decided that you seriously want to pursue running a business, you need to decide what kind of business it will be. It can be an LLC, a sole proprietorship, a corporation, etc. Once you’ve decided the type of business you want to run, you need to register it with the state government. Once you’ve done that, you can apply for an EIN from the IRS. You will need your EIN and proof of registration in order to open a business bank acount.
Open a Business Bank Account
Even if you’re the only person working for your business, it’s important to keep your business finances and personal finances separate. One of the best decisions I ever made as a brand new business owner was to open up a business bank account. This made it so much easier to track my income and business expenses so that I was very clear on how much I would have to pay in taxes later.
Save yourself a lot of headaches and open up a separate account as soon as you start doing business. There are big banks that offer business banking, like Capital One (which also have savings and credit card options), but there are also startups that don’t charge fees, like Azlo (they currently only offer checking). Depending on what you need, you can choose what’s right for you.
Track Your Income and Expenses
Just like with your personal budget, it’s important to be aware of how much is coming in and how much is going out. And luckily, technology is making it easier than ever to track both of those things. There are so many accounting platforms out there these days that are reasonably priced and easy to use. Wave is free, while platforms like FreshBooks, Xero, and Quickbooks Self-Employed have a monthly fee.
Subscribing to one of these platforms will allow you to see your business income and expenses all in one place. You can even link it to your bank account and/or credit card so that it can update automatically, which will save you time and stress.
Bonus: you can print out your profit and loss report at tax time to calculate how much you owe in taxes.
Don’t Overspend
When you first get started with your business, it’s easy to get carried away with branded items and exciting opportunities. It also feels easy to spend money when you know you can write off the expenses on your taxes. But the truth is, the more money you’re spending on your business, the less money there is for you to take home and pay yourself. Of course, you should invest in the things that will help improve and grow your business, but try to keep yourself in check. Make sure you can actually afford the things you’re going to spend money on and make sure they will be worth the expense.
Save for Taxes All Year
When you are self-employed, you don’t have a payroll department taking taxes out of your paycheck for you. This is a not-so-fun task that you have to do yourself. My advice would be to automatically set 30% of your income aside as soon as you get it. Create a savings account that you nickname “taxes” and don’t touch it for anything else.
If you know that you won’t remember to take this step, or if it’s just not something you want to handle yourself, there are companies out there that will do it for you. For example, you can set up an account with Painless 1099 and they will automatically set tax money aside whenever you get paid.
Pay Quarterly Taxes
You will also need to pay estimated quarterly taxes as a freelancer. When you have an employer, it seems like you only have to do your taxes annually, but the truth is, your employer is paying your quarterly taxes for you. When you’re self-employed, you have to do that yourself or else you’ll get penalized by the IRS.
It’s not super straight forward how much money you’ll actually owe each quarter, so talking to an accountant can be helpful. Quickbooks Self-Employed also calculates your estimated quarterly taxes owed to the federal government. This doesn’t include state taxes, so that’s something you’d have to calculate on your won.
Save for Emergencies
Emergency funds are not just for your personal life. Your business needs one too. This is especially true if you have overhead like payroll. You want to make sure you’ll be able to pay your bills and your employees if you go through a slow month or lose a big client.
Get clear on what your overhead costs are and make sure you have a few months worth of those costs saved up at all times. Set up an emergency fund to ensure that you can always pay your business bills, even if you have a lean month. This can be just a simple savings account associated with your business bank account.
Hire a Tax Accountant
As your tax situation gets more complicated, the time may come that you should hire a tax expert to file your taxes for you.
Yes, this costs money, but it might actually save you money in the long run. An expert knows exactly what you need to include when preparing your tax returns, and can get you as many write-offs as possible. Plus, you can write off the cost of filing your taxes, as it counts as a business expense!
My life changed a lot in 2018. I went full-time with my business, I owned a home, I got married, and I ran an Airbnb out of my basement. I didn’t feel confident that I would be able to prepare my taxes as well as an expert, so I hired one.
It’s an excellent investment in peace of mind.
Consider Hiring a Bookkeeper
It’s important to be honest and aware of what your strengths and weaknesses are in your business. If you find that you’re struggling to stay on top of your business expenses, it may be worth the cost to outsource the work by hiring a bookkeeper.
You may not be able to hire a bookkeeper right from the beginning of your entrepreneur journey. I personally haven’t hired one for myself yet, and I’ve been in business for over 3 years! But if you get to a place where you can afford a bookkeeper and it will help improve your business management, go for it!
Good luck!