Begin a small enterprise? Welcome to Monetary Administration 101.

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Starting a Small Business? Welcome to Financial Management 101.

December 10, 2020 8 min read

The opinions expressed by the entrepreneur’s contributors are their own.

This article was written by Mitchell Terpstra, a member of Entrepreneur NEXT supported by the Assemble Content team. Entrepreneur NEXT powered by Assemble is a freelance matching platform leading the future of work. If you’re struggling to find, review, and hire the right freelancers for your business, Entrepreneur NEXT can help you hire the freelancers you need, exactly when you need them. From business to marketing, sales, design, finance to technology, we have the top 3 percent of freelance professionals 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 service, but how do you deal with finances and other business fundamentals?

According to a US bank study, more than eight out of ten new companies fail because of poor cash flow management. Don’t let your new business fall victim to this chance. From accounting strategies to funding options, here’s what you need to know to build your business for success.

Understand cash flows.

Cash flow is the lifeblood of every company. Essentially, cash flow is any money that gets into or out of your company’s hands during a certain period of time. The incoming money is known as positive cash flow. Running out of money, negative cash flow. Obviously, a company’s goal is to generate more positive than negative cash flows.

For many businesses just starting out, the early stages of operations can be defined by high negative cash flow as you invest in equipment, inventory, or marketing all the time while trying to build your customer base. The risk of not understanding your cash flow – and, consequently, why so many new businesses fail – is that you will have to spend more money regardless of whether you have to pay rent, utilities, vendors, bets, etc. than you will enter into, at hand or access to other resources, e.g. B. overdraft protection or a short-term loan for small businesses.

Especially for businesses with a lot of seasonality, understanding how your cash flow changes over the course of the year will help your business get the most out of the strong sales season and better weather the weak sales seasons. Another reason you can benefit from careful bookkeeping.

Keep the books.

Having a tight grip on all aspects of your company’s cash flow is critical to the continued success of your business for a variety of reasons. You should establish an airtight method for logging incoming and outgoing money.

Having your company’s key numbers on hand is helpful for all kinds of business matters including tracking unpaid payments, planning expenses, reducing wasteful spending, identifying your most profitable goods or services, securing investments or business loans, and many other important tasks.

Keeping the books or bookkeeping is simply the process of recording all of the financial transactions related to your business and you need to decide whether you are up to the task or would benefit from the help of a professional.

The biggest problem entrepreneurs have in common today is finding, reviewing, hiring, and maintaining expertise.

For many small and medium-sized businesses, a cloud-based accounting service like QuickBooks is a cost-effective service that simplifies bookkeeping. As your business grows, in addition to using a cloud-based accounting service, you may want to consult a certified accountant.

With QuickBooks software, you can keep track of your company’s inventory, sales, invoices, bill payments, employee wages, loan repayments, and more. And since they’re part of the Intuit suite of software products, you can easily transfer relevant numbers to another product, TurboTax, when tax time comes.

QuickBooks isn’t the only option, however, and other accounting software services may be better for your business. Further options are …

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

  • Sage may be a better fit for you if your business needs sophisticated inventory tracking capabilities.

  • Zoho has a particularly good mobile interface if you are used to using a smartphone for a lot of your business activities.

  • Wave may be more cost effective with its free services. Another benefit is that many of these programs can automatically generate reports such as cash flow forecasts at the push of a button.

Many offer a free 30-day trial to give you an idea of ​​whether they are right for your business.

Don’t forget taxes.

Does Using an Accounting Software Service Eliminate the Need for a Professional Accountant? No way, especially if you have a unique or complex tax situation.

While your accounting software may integrate well with tax preparation software, documenting all of your business figures and securely speeding up your tax preparation in one place, tax codes change frequently and only a certified CPA can advise you on the most beneficial filing. Going through a CPA limits your liability. You can use this online directory to start a search for a certified CPA who is a good fit for your company.

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

As a small business owner, your business is likely to be classified as a sole proprietorship, limited and limited liability company, limited liability corporation (LLC), or S corporation. All of these categories are considered “transit companies” for federal tax purposes and are required to pay income tax at the owner’s personal income tax rate. If you expect to owe more than $ 1,000 in income tax in a year, pay those as estimated taxes on the IRS schedule to avoid penalties and interest.

If you have employees, you are also responsible for payroll taxes, which include Social Security and Medicare taxes, federal unemployment tax (FUTA), and their income tax.

While technically the last one is paid by employees and withheld from their wages, you are the one who has to make sure it gets through to the US government.

Finally, you should be aware that …

  • Sales tax – is determined at the state level. However, this can be tricky if you are in e-commerce as sales tax is sometimes determined by the location of the buyer and sometimes the location of the seller.

  • Excise tax – also known as “vice-tax” – is a special sales tax at the federal level for certain items such as alcohol, cigarettes, heavy trucks, etc.

  • Property tax – also set at the state level for commercial property owners.

  • State Income Tax – if you live in a state that requires it.

  • All other local taxes that are only applicable in your municipality.

Know your financing options.

At some point, you may need to invest outside money in your business to cover a short term cash flow problem or invest in future growth. At this point, it’s good to know what funding options are available. Here are the most common types of financing for small businesses.

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

Small Business Grants: Even better than a small business loan is a small business grant because there is no need to repay the grant. The catch is that you have to look for scholarships that are currently accepting proposals, make sure you meet all the criteria, complete the application and win against other applicants seeking the same funding. Many nonprofits have full-time grantees for this express assignment.

Crowdfunding: As an unconventional source of funding that is becoming increasingly popular, crowdfunding generally requests small donations from as many people as possible via websites such as Kickstarter, Indiegogo or GoFundMe. Typically, a company that seeks crowdfunding will offer something in return for a donation, whether it is for future company merchandise or exclusive member benefits. Many new companies take this pre-launch route to get their business up and running.

Venture Capital: If you think your small business has high growth potential, you may be able to get venture capital from professional investors. Funding can be substantial, much more than a typical small business grant, and is often expert advice from investors, although they will usually want an interest in the business in return, which may include an assignment of part of the decision. Make power.

Taking responsibility for your company’s finances shouldn’t be a problem, and it should be much more than just keeping the lights on. With the financial data, you should feel empowered to make strategic decisions for long-term business success.

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