When you’re a budding entrepreneur, leaving the doldrums of the 9 to 5 to start out on your own is super exciting!
But that wide-eyed excitement can be quickly overshadowed by the weight of owning and running a business by yourself. And one of the scariest responsibilities is getting a grip on your finances, especially if you’re not a numbers person.
To help lighten your financial burden, here’s some financial best practices to keep in mind when running your small business.
Internet. Cell phone. Gas. New laptop. The list of expenses that blur the line between personal and business goes on and on. And it’s hard not to lump your business expenses in with your personal ones, especially when working from home.
It’s essential to keep the two separate. And your future self will thank you come tax time. Here’s why:
So what steps can you take to separate your business and personal finances? Start by setting up a business bank account and getting a business credit card. And be disciplined on what you charge to them.
If you really want to hold yourself accountable on how much your business is spending day-to-day, you need a budget.
Start with this simple equation: Budget = Income – Expenses
And voilà, you’ve built a simple budget to stick to.
But how much should you allocate to each area of your budget? The answer: It depends. Every business is different. For example, some small business owners may spend a lot on rent, based on the city they operate out of. On the other hand, those that operate solely online are more likely to spend their budget on online marketing tactics.
Here’s a few percentages to help get you started:
It’s okay if your actual numbers aren’t spot on. Even established businesses see variances. But the process will make you more thoughtful about how you’re spending your revenues and what you can do to improve year after year. With more experience, your budgets will be more accurate.
Your goal as a business owner is to maintain a positive cash flow, which means you’re earning more than you’re spending. But if you don’t know how much cash is flowing in and out of your business, then you don’t know if you can cover your day-to-day operating costs.
That’s a problem.
So how can you keep track of your cash flow? It starts by keeping tabs on your income and expenses. If you’re spending more than you’re earning each month, then your business is in the red. You’ll need to decrease expenses or increase income to bring your business back into black.
If you’re still recording your income in Excel spreadsheets or stuffing expense receipts in file folders, you’re doing your business a disservice.
Consider upgrading to cloud-based accounting software like FreshBooks. Not only does it simplify tracking, but it pays for itself when you consider the time saved from automating invoices, following up on past-due accounts, and attaching receipts with the click of your smart phone’s camera. Plus, you’ll have access to at-a-glance reports, making it easy to see how your business is really doing.
As a business owner, you have lots of hats to wear; some you’ll probably like more than others. And if you’re a one-person show, you’re wearing ALL the hats.
But if you waste your time doing tasks that you don’t enjoy or aren’t good at, you’re actually hurting your business.
For example, what do you do when it comes time to collect and your client is unresponsive? You follow-up. Then you follow-up again, and again. This process not only takes time but uses up your mental energy. Time and energy that could be spent landing a new client or finishing a new project.
This is where outsourcing and automation come in… The tasks you don’t want to do are taken care of in the background, while you focus on more important things to keep your business moving forward.
Here are some common examples of what tasks to automate or outsource:
As the saying goes: When it rains it pours.
And in light of recent events, it’s never been more apparent to establish a raining day fund. It’ll help your business stay afloat when times are tough or when clients “forget” to pay up.
The hardest part of an emergency fund is actually putting the money aside, and not touching it. After all, there are so many things you could spend that money on in the meantime.
Start small so you don’t get overwhelmed. Begin to build your raining day fun by depositing a small percentage of your earnings each month into a savings account. Over time, as you get better at budgeting, put more aside. Keep it in cash, so it’s liquid, making it more accessible when you need it.
How much should you save? Try to set aside at least 3 months of expenses. But continue to work your way up to 6 months of expenses saved, if you can.
You’ll sleep easier knowing that your business can pay its debts, even if you’re not earning income.
Running a business isn’t easy, but it’s incredibly rewarding. When you’re organized and disciplined, especially when it comes to your finances, you’ll have a better idea about how your business is really doing.
And once you know how your business is performing, you can make real improvements that’ll help you grow.