While there a number of factors that can determine the success of a business, financial management is arguably one of the most important factors. Remember, if you aren't able to keep your finances in order, how can you expect to create a budget, pay bills or handle cash flow?
The only problem is that not all entrepreneurs are able to manage their finances -- which isn't a knock since not all of us familiar with areas like accounting. If that's the case, then you need to review the following five tips to assist you in managing your finances.
1. LLC or S Corporation?
When starting a new business you will have to make a decision on which kind of incorporation you'll use for your business. Two of the more popular choices are the limited liability company (LLC) and the S Corporation.
This decision will have a major impact on how you manage your finances since it determines how you will pay for income taxes, Social Security and Medicare taxes. But, which should you chose?
SBA.gov notes that an LLC "never pays taxes; instead, the owner's share of business income, deductions, credits and other tax items pass through and are reported on the owner's tax return." Furthermore, since LLCs are also subject to self employment taxes. This means that they are responsible to "pay self-employment tax on their share of net earnings from the business."
If you select an S Corporation, you'll receive a salary. Because of this, you do not have to be concerned with self-employment taxes -- which means that you won't be paying as much for employment taxes.
The reason this is so important is because if you're operating a small business, you could be spending an unnecessary amount for income taxes.
2. Learn How to Read a Financial Statement
A financial statement does something extremely important; it shows "where a company's money came from, where it went, and where it is now." SEC.gov states that there are four parts to a financial statement.
- Balance Sheets: This provides information regarding company's assets, liabilities and shareholders' equity.
- Income Statements: This shows how much revenue has been during a certain period of time, which is usually during one year.
- Cash Flow Statements: This statement analyzes operating activities, investing activities, and financing activities.
- Statements of Shareholder's Equity
If you're able to read the financial statement you'll be able to effectively manage your finances.
3. Create a Cash Reserve
One of the cons of being an entrepreneur is that you don't have a consistent income. On top of this, there's a very good possibility that you won't make any money for an extended period of time. This is why you need to have some money aside for emergencies as well as 100 percent out of debt. Here are a few tips to get out of debt by the end of the year. The last thing that you want is to worry about is having debts due and no money to pay them with.
NOLO.com suggests that set aside 5 percent of your paycheck so that it will help pay for expenses for one year. You could also monitor how much money you spend each month to help determine how much to set aside in your cash reserve -- and where to trim if you need to cut costs.
Remember, you want to keep these funds somewhere accessible, such as a savings account or money market account.
While this may sound counterproductive, diversifying funds is a great way to increase growth or provide a little extra breathing room during a rough patch. For example, what if your original market dries up? You may have to consider other ways of increasing revenue by introducing new services or products. In other situations you may have to pivot.
By placing funds into a side business or investments you will be able to pull in a little extra money or have emergency funds.
5. Get a Little Help
As an entrepreneur, you've got a full plate. Why not make things easier by using some powerful tools to help manage your money. Whether it's creating invoices, establishing a budget or deciphering taxes, you can use tools like Mint, FreshBooks, QuickBooks or Expensify to help you tackle financial obstacles.
And, if all else fails, you can always seek the advice from a financial advisor or consultant if you have any tax or accounting concerns.