Tweet
By ARA Content
So you've decided to throw caution to the wind and start your own business. Or maybe you have a part-time hobby that has been tempting you to trade in your cubicle and timesheet for a business card that reads "CEO and Founder?" If you've taken the first step to self-employment (or consider it every time your boss hands out another last-minute deadline), does the fear of not knowing the nuts and bolts of operating a business keep you up at night?
You're not alone. Many Americans avoid taking the big plunge because of the fear that their ignorance of business accounting and financial management will get them in trouble.
"People tend to manage their business finances the same way they manage their personal finances," says Randy Schuldt, a vice president with IHateFinancialPlanning.com. "Unfortunately, many small business owners hate financial planning and tend to underestimate or ignore this critical aspect of operating a business." Schuldt says that by adopting some basic financial planning tips from the beginning, they can avoid many money management mistakes. The key, he says, is planning.
So is there a simple way to get smart fast? Whether you're still sitting in your corporate cubicle or have taken the leap into self-employment, Schuldt and other experts with IHateFinancialPlanning.com, a new Web site geared to the millions of Americans who hate financial planning, have come up with some tips to help take the mystery out of small business finances. Schuldt suggests:
<b>Have a Plan and Stick to it</b>. According to the US Small Business Administration (SBA), fewer than half of new businesses are in operation after five years. So what's the key to whether your business will thrive or fail? Financial professionals agree that having a business plan is absolutely essential.
A business plan contains the financial goals of a business and details how the business intends to meet those goals. If you're a one-person shop, you may be able to get by on a simple mission statement and earnings goal. If you're looking for outside help (in the form of a business loan or investors) you'll definitely need a detailed business plan. Contact the SBA at www.sba.gov, if you need help assembling a workable plan.
<b>Separate Business and Personal Finances</b>. If you're one of the 75 percent of Americans that hate financial planning, managing two sets of financials may seem tedious, unnecessary and overwhelming. After all, it's your money and your debt, so why add extra paperwork and bank accounts?
Tax planners and accountants warn against combining personal and business finances because it complicates tax deductions and potential reimbursements. When you're small, it's easy to do: business lunches are charged on personal credit cards or you may borrow money from your business account to take the family out for a nice dinner. According to a national survey of small business finances, 39 percent of small firms used personal credit cards for business purposes (Source: 1993 National Survey of Small Business Finances, co-funded by the SBA and the Federal Reserve Board).
<b>Establish Rock Solid Bookkeeping Procedures</b>. If you're a one-person business, whether you mow lawns for a living or run your own store, you may not be too concerned with potential would-be lenders. However, as your business expands, incorporates, hires more employees and generates significant revenue, the need to start acting like a big company will become more important. Financial institutions, more specifically loan officers, will look for a track record of on-time bill payments, clean books and common accounting practices.
"As a small business owner, it's critical to find someone to reliably and consistently manage your books from the beginning," says Rich Henderson, CEO of Minneapolis-based Enventis, a growing network services firm. "To finance equipment, you may need to establish a line of credit which requires accurate records and proactive management of your business finances."
<b>Make Your Quarterlies</b>. If you're self-employed, you may be eligible for certain tax breaks. But, you can only claim these breaks if you keep thorough and accurate records. Not only does accurate record keeping help you to run an efficient business, the habit of filing receipts also comes in handy when the Internal Revenue Service (IRS) requests proof of your deductions. For example, mark your calendar and start planning for April 15, June 15, September 15 and January 15. For the self-employed, the IRS asks business owners to project their annual income and pay 90 percent of estimated taxes over four quarters. Late payments rack up penalties and interest from the due date, so it's important to make payments on time.
<b>Don't be Afraid to Ask for Help</b>. Begin to think of professional advisors such as bankers, accountants and lawyers as your silent partners. Consult them early and often to keep you and your business on track. It's important from the outset to assemble a crack team of advisors who can provide sound advice. "Many individuals believe it will cost them too much money to hire a professional advisor," says Joe Pires, who holds a Certified Financial Planner (CFP) designation with Florida-based National Accounting and Management Services (NAMS). "To the contrary, a financial professional can show you how to optimize your situation and stop overlooking money-saving strategies."
<b>Contribute to a Retirement Plan</b>. Pires encourages small business owners to reduce their taxes and put away money in a retirement plan. The Keogh and SEP IRA are available to the self-employed. A Keogh plan currently allows a maximum contribution of $30,000 or 25 percent of annual income, whichever is less. The SEP IRA is a Simplified Employee Pension Plan that currently allows you to contribute up to 15 percent of your income or $25,500, whichever is less. Both choices require minimal administrative effort and can help you benefit from tax-advantaged savings.
<b>Become a Tax Expert</b>. There's no need to overtax yourself. Being informed can help you take advantage of tax savings, pre-tax retirement contributions and deductions. The IRS may allow you to take a home office deduction for the portion of your home used for business, including a share of your utilities, repairs and cleaning fees. In addition, if you have children, why not put them to work for you? Stuffing envelopes, making copies and filing client folders are all tasks that you could hire a trusted child to complete. The IRS allows you to add your kids to your payroll without owing Social Security or Medicare taxes. To learn more about tax deductions, visit IHateFinancialPlanning.com or the IRS at www.irs.gov.
Don't Stop Saving. It's easy for a new business owner to get caught up in the throes of building a business. Often, that's when business owners depart from consistently saving and investing, and in many cases start a pattern of spending to "reward" themselves. Even if you can only invest $25 a month, keep up that habit of saving.
*********************
So you've decided to throw caution to the wind and start your own business. Or maybe you have a part-time hobby that has been tempting you to trade in your cubicle and timesheet for a business card that reads "CEO and Founder?" If you've taken the first step to self-employment (or consider it every time your boss hands out another last-minute deadline), does the fear of not knowing the nuts and bolts of operating a business keep you up at night?
You're not alone. Many Americans avoid taking the big plunge because of the fear that their ignorance of business accounting and financial management will get them in trouble.
"People tend to manage their business finances the same way they manage their personal finances," says Randy Schuldt, a vice president with IHateFinancialPlanning.com. "Unfortunately, many small business owners hate financial planning and tend to underestimate or ignore this critical aspect of operating a business." Schuldt says that by adopting some basic financial planning tips from the beginning, they can avoid many money management mistakes. The key, he says, is planning.
So is there a simple way to get smart fast? Whether you're still sitting in your corporate cubicle or have taken the leap into self-employment, Schuldt and other experts with IHateFinancialPlanning.com, a new Web site geared to the millions of Americans who hate financial planning, have come up with some tips to help take the mystery out of small business finances. Schuldt suggests:
<b>Have a Plan and Stick to it</b>. According to the US Small Business Administration (SBA), fewer than half of new businesses are in operation after five years. So what's the key to whether your business will thrive or fail? Financial professionals agree that having a business plan is absolutely essential.
A business plan contains the financial goals of a business and details how the business intends to meet those goals. If you're a one-person shop, you may be able to get by on a simple mission statement and earnings goal. If you're looking for outside help (in the form of a business loan or investors) you'll definitely need a detailed business plan. Contact the SBA at www.sba.gov, if you need help assembling a workable plan.
<b>Separate Business and Personal Finances</b>. If you're one of the 75 percent of Americans that hate financial planning, managing two sets of financials may seem tedious, unnecessary and overwhelming. After all, it's your money and your debt, so why add extra paperwork and bank accounts?
Tax planners and accountants warn against combining personal and business finances because it complicates tax deductions and potential reimbursements. When you're small, it's easy to do: business lunches are charged on personal credit cards or you may borrow money from your business account to take the family out for a nice dinner. According to a national survey of small business finances, 39 percent of small firms used personal credit cards for business purposes (Source: 1993 National Survey of Small Business Finances, co-funded by the SBA and the Federal Reserve Board).
<b>Establish Rock Solid Bookkeeping Procedures</b>. If you're a one-person business, whether you mow lawns for a living or run your own store, you may not be too concerned with potential would-be lenders. However, as your business expands, incorporates, hires more employees and generates significant revenue, the need to start acting like a big company will become more important. Financial institutions, more specifically loan officers, will look for a track record of on-time bill payments, clean books and common accounting practices.
"As a small business owner, it's critical to find someone to reliably and consistently manage your books from the beginning," says Rich Henderson, CEO of Minneapolis-based Enventis, a growing network services firm. "To finance equipment, you may need to establish a line of credit which requires accurate records and proactive management of your business finances."
<b>Make Your Quarterlies</b>. If you're self-employed, you may be eligible for certain tax breaks. But, you can only claim these breaks if you keep thorough and accurate records. Not only does accurate record keeping help you to run an efficient business, the habit of filing receipts also comes in handy when the Internal Revenue Service (IRS) requests proof of your deductions. For example, mark your calendar and start planning for April 15, June 15, September 15 and January 15. For the self-employed, the IRS asks business owners to project their annual income and pay 90 percent of estimated taxes over four quarters. Late payments rack up penalties and interest from the due date, so it's important to make payments on time.
<b>Don't be Afraid to Ask for Help</b>. Begin to think of professional advisors such as bankers, accountants and lawyers as your silent partners. Consult them early and often to keep you and your business on track. It's important from the outset to assemble a crack team of advisors who can provide sound advice. "Many individuals believe it will cost them too much money to hire a professional advisor," says Joe Pires, who holds a Certified Financial Planner (CFP) designation with Florida-based National Accounting and Management Services (NAMS). "To the contrary, a financial professional can show you how to optimize your situation and stop overlooking money-saving strategies."
<b>Contribute to a Retirement Plan</b>. Pires encourages small business owners to reduce their taxes and put away money in a retirement plan. The Keogh and SEP IRA are available to the self-employed. A Keogh plan currently allows a maximum contribution of $30,000 or 25 percent of annual income, whichever is less. The SEP IRA is a Simplified Employee Pension Plan that currently allows you to contribute up to 15 percent of your income or $25,500, whichever is less. Both choices require minimal administrative effort and can help you benefit from tax-advantaged savings.
<b>Become a Tax Expert</b>. There's no need to overtax yourself. Being informed can help you take advantage of tax savings, pre-tax retirement contributions and deductions. The IRS may allow you to take a home office deduction for the portion of your home used for business, including a share of your utilities, repairs and cleaning fees. In addition, if you have children, why not put them to work for you? Stuffing envelopes, making copies and filing client folders are all tasks that you could hire a trusted child to complete. The IRS allows you to add your kids to your payroll without owing Social Security or Medicare taxes. To learn more about tax deductions, visit IHateFinancialPlanning.com or the IRS at www.irs.gov.
Don't Stop Saving. It's easy for a new business owner to get caught up in the throes of building a business. Often, that's when business owners depart from consistently saving and investing, and in many cases start a pattern of spending to "reward" themselves. Even if you can only invest $25 a month, keep up that habit of saving.
*********************
Comment