Starting a Small Business? Welcome to Financial Management 101.

December 10, 2020 8 min read

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This article was written by Mitchell Terpstra, a member of the Entrepreneur NEXT powered by Assemble content team. Entrepreneur NEXT powered by Assemble is a freelance-matching platform leading the future of work. If you’re struggling to find, vet, and hire the right freelancers for your business, Entrepreneur NEXT will help you hire the freelancers you need, exactly when you need them. From business to marketing, sales, design, finance, and technology, we have the top 3 percent of freelance experts ready to work for you. 

Starting a small business is a big adventure — and involves a big learning curve. You have an exciting new product or innovative service, but how are with you managing finances and other business basics?

According to a U.S. bank study, more than eight out of 10 new businesses fail because of poor cash-flow management. Don’t let your new business fall prey to that likelihood. From bookkeeping strategies to financing options, here’s what you need to know to set your business up for success.

Understand cash flows.

Cash flow is the lifeblood of any business. In essence, cash flow is any money coming in or going out of your business’s hands during a certain time period. Money coming in is known as positive cash flow; money going out, negative cash flow. Obviously, the goal of any business is to have more positive than negative cash flow.

For many businesses just getting started, the early stages of operation may be defined by lots of negative cash flow, as you make investments in equipment, inventory or marketing all the while trying to build your customer base. The risk in not understanding your cash flow — and, consequently, why so many new businesses fail — is running into a situation where you have more money going out, whether to pay rent, utilities, vendors, wagers or so on, than you have coming in, on hand or access to by other means, such as via bank overdraft protection or a short-term small business loan. 

Particularly for businesses that experience a lot of seasonality, understanding how your cash flow varies throughout the year will help your business make the most of the strong-sales seasons and better able to weather the weak-sales seasons. Just another reason you’ll stand to benefit from meticulous bookkeeping.

Keep the books.

Getting a firm grasp on all aspects of your business’s cash flow is critical to its ongoing success for a myriad of reasons, and you should establish an airtight method for logging money coming in versus money going out. 

Having your business’s key numbers at your fingertips will be helpful for all manner of business matters, including keeping track of unpaid payments, scheduling expenditures, cutting wasteful spending, identifying your most profitable goods or services, helping secure investments or business loans, and many other important tasks.

Keeping the books, or accounting, is simply the process of recording all the financial transactions pertaining to your business, and you’ll need to decide whether you’re up to the task or would benefit from a professional’s assistance.

The number one problem shared among entrepreneurs today is finding, vetting, hiring, and retaining expertise. 

For many small- to mid-size companies, a cloud-based accounting service like QuickBooks is a cost-effective service that makes bookkeeping easy. As your business grows, you may want to consult with a certified accountant in addition to using a cloud-based accounting service.

QuickBooks’ software allows you to track your business’s inventory, sales, invoices, bill payments, employees’ wages, loan repayments and so much more. And, because they’re part of the Intuit suite of software products, you can easily roll relevant numbers over to another one of their products, TurboTax, come tax time.

But QuickBooks isn’t the only option, and other bookkeeping software services may be a better fit for your business. Other options include… 

• FreshBooks may be more user-friendly if you’re a sole proprietor or a very small business. 

• Sage may suit you better if your business requires sophisticated inventory-tracking capabilities.

• Zoho has an especially good mobile interface if you’re accustomed to using a smartphone for a lot of your business activities.

• Wave may be more cost-friendly with its array of free services. Another advantage is that many of these programs can auto-generate reports like cash-flow projections at the click of a button.

Many offer a free 30-day trial to give you a sense if they’re right for your business.

Don’t forget about taxes.

Does using an accounting software service eliminate the need for a professional accountant? Definitely not, especially if you have a unique or complex tax situation. 

While your accounting software may integrate nicely with tax-prep software and having all your business figures documented and in one place will surely expedite preparing your taxes, tax codes change frequently and only a certified CPA can advise you on the most advantageous filing. Plus, going through a CPA limits your liability. You can start a search for a certified CPA that’s a good fit for your business using this online directory.

Speaking of taxes, what kind of taxes should you be prepared to pay?

As a small business owner, your business is likely categorized as a Sole Proprietorship, Partnership (Limited and Limited Liability), Limited Liability Corporation (LLC) or S-Corporation. All of those categories are considered “pass-through entities” for federal tax purposes and must pay an income tax for the owner’s personal income tax rate. If you’re expecting to owe more than $1,000 in income tax in a year, then you should pay these as estimated taxes according to the IRS’s timetable in order to avoid penalties and interest.

Additionally, if you have employees, you’ll be responsible for employment taxes, which includes Social Security and Medicare taxes, Federal Unemployment Tax (FUTA), and their income tax.

While technically that last one is paid by employees and withheld from their wages, you’re the one who needs to see that it gets to the U.S. government.

Finally, you should be aware of…

• Sales tax—determined at the state level, though this one can be tricky if you’re engaged in e-commerce, as sometimes the sales tax is determined by location of buyer and sometimes determined by location of the seller.

• Excise tax—aka a “vice tax,” this is a special federal-level sales tax on certain items like alcohol, cigarettes, heavy-duty trucks, etc.

• Property tax—also determined at the state level, for those owning commercial property.

• State income tax—if you live in a state that requires this.

• Any other local taxes unique to your municipality.

Know your financing options.

At some point you may need to inject outside cash into your business, whether to cover a short-term cash flow problem or to invest for future growth. At that point, it’s good to know the range of financing options available. Here are the most common types of financing for small businesses.

Bank loans: This is one of the most traditional financing options for small businesses. With good credit, your business should be able to choose from a variety loan types, terms and repayment options from a wide variety of lenders. In extreme cases, where money is needed immediately, such as to cover payroll or emergency expenses, short-term business loan options may be available, though the risk will be greater.

Small-Business Grants: Even better than a small business loan is a small business grant, since a grant doesn’t need to be paid back. The catch is you’ll have to research grants currently accepting proposals, make sure you meet all the criteria, complete the application, and win against other applicants seeking that same funding. Many non-profits have full-time grant writers for this express task.

Crowdfunding: An unconventional source of financing that’s gaining in popularity, crowdfunding basically asks for small-scale donations from as many people as possible through websites like Kickstarter, Indiegogo, or GoFundMe. Typically, a business seeking crowdfunding offers something in return for a donation, whether it’s future merchandise from the company or exclusive membership perks. Many new business ventures go this route pre-launch to help get their company up and running. 

Venture Capital: If you think your small business has high-growth potential, then you may be able to seek out venture capital from professional investors. The funding can be significant, much more than a typical small business grant, and may often come with expert guidance from the investors, though they’ll typically want a stake in the company in return, which may also involve ceding some of the decision-making power.

Taking charge of your business’s finances shouldn’t be a headache, and it should be about a whole lot more than just keeping the lights on. With the financial data at your fingertips, you should feel empowered to make strategic decisions for long-term business success.

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