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Fundamentals of Cash Flow Management for Small Businesses
It’s simultaneously exciting and scary. On the happy side, you are your own boss doing things the way you want to and answering only to yourself. You don’t have to be punctual at the office, and the frustrating co-workers are gone. You set the rules and do what you want.
On the flip side, however, you are now walking a tightrope with no safety net, with no regular income. Keeping a budget is tricky when there isn’t a routine paycheck. Without some preparation, regardless of what you earn, you may end up having a hard time paying the bills every month.
Taxes First: When you were employed, your employer efficiently paid your taxes for you, and you could spend all of the check you received on payday. Once you became an entrepreneur, you lost that little perk, and a lot of people new to self-employment stumble hard on this boulder. The problem is that once you start getting “paychecks,” they seem much bigger than they are in reality. But when no one withholds your FICA, Social Security, or other taxes, it’s too tempting to spend everything you earn, with the devil to pay in April.
Ask your accountant how much of your gross income to save for taxes. You’ll usually be paying in advance a quarterly estimated income tax if you work for yourself, and this will be based on last year’s earnings. That means you should be certain that you’ve put the money aside so you don’t get fined by the IRS. Your quarterly taxes come due on the 15th of April, June, September, and January.
By far, the simplest way to take care of your taxes is to maintain a savings account earmarked just for taxes. Every time you receive a payment, deposit a percentage (as determined by you and your accountant) into your “save for taxes” account. When the quarter return comes due, you just write your check, mail it off, and be glad you don’t have to worry about it.
Business Budget Planning
As is the case with your household, you require a budget for your business. You really should have a handle on what you anticipate to earn each month, as well as what you think you will spend each month. Be sure to plan ahead for unusual or one-time expenses such as furnishings, new equipment, and business travel.
Here are some of the expenses you can expect:
- You must pay taxes, as previously noted
- Paying to host accounts
- Renewing domains
- Paying Managers of mailing lists
- Paying dues for memberships in mastermind groups and business education forums
- Paying for outsourced work such as web design and writing
- Lawyers and accountants charge high fees
- Utilities associated with your business, such as Internet connection and cell phone that must be paid for
Pay attention to the fact that we said “business account.” It’s critical to separate your personal funds from your business funds if you want to promote a healthy business cash flow. This can be a simple arrangement: set up a business checking account where you deposit all your revenue; take out tax funds and put them into a savings account for taxes, and take out the money you need for yourself (your paycheck) to put in your personal account.
This doesn’t just assist your cash flow. If you form an LLC or a corporation, you will have to make a clear boundary between your business finances and your personal finances. If you blend them together, you can sacrifice the liability protection that you were looking for by forming a business entity to start with.
Small business owners would often prefer to keep their heads in the sand when it comes to cash flow, but if your business is going to thrive and grow, it’s critical that you manage it like a pro. You won’t have to be concerned over whether your business can cover your bills if you work from a budget and are conscientious about saving out funds to meet taxes and to be prepared for the occasional slow month.