Navigate the Financial Side of Running a Business
As an entrepreneur, managing your money can be challenging. It’s essential to understand the basics of finance and develop good financial habits to set yourself up for success. In this guide, we’ll explore some general money management tips for first-time entrepreneurs that can help you navigate the financial side of running a business.
Create a budget
The first step in managing your money as an entrepreneur is to create a budget. An effective budget helps you keep track of your finances by breaking down revenue and anticipated expenses. Start by estimating your monthly income and listing all your business expenses. This includes everything from rent, utilities, and supplies to salaries and marketing expenses.
Once you have a list of your expenses, categorize them into fixed and variable expenses. Fixed expenses are those that stay the same every month, such as rent and salaries. Variable expenses are those that can change from month to month, such as marketing expenses.
With a budget in place, you can keep track of your spending and make informed financial decisions. “Budgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers,” says finance consultant Rosemary Carlson in an article for TheBalance.
Separate business and personal finances
One of the biggest mistakes first-time entrepreneurs make is mixing their personal and business finances. This can lead to confusion, inaccurate financial records, and tax issues. “During an IRS audit, they’ll carefully examine every expense to ensure it relates to your business,” explains John Rampton, founder and CEO of Due. “If you have a dedicated business account, keeping detailed records of business expenses and how you paid for them will simplify this process.”
When starting a business, it’s important to open a separate bank account for your business and use it solely for business transactions. This will make it easier to track your income and expenses, as well as calculate your taxes. Another benefit of separating your finances is that it can help you build your business credit score. By keeping your personal and business finances separate, you can establish a credit history for your business and improve your chances of securing funding in the future.
Keep track of cash flow
Cash flow — the money that comes in and goes out of your business — is the lifeblood of any entrepreneurial operation. To manage it effectively, create a cash flow statement that shows your monthly cash inflows and outflows. This statement should include all the money that comes into your business, such as sales revenue, investments, and loans. It should also include all the money that goes out of your business, such as expenses and payments to suppliers. “In estimating your cash flow needs for your startup, include your personal living expenses that will need to come out of the business. The less you need to take from your business for personal costs, the more you can devote to your business during the crucial startup time,” advises business law and tax expert Jean Murray in an article for TheBalance.
Plan for taxes
As a business owner, you’ll be responsible for paying taxes on your income. To avoid surprises come tax season, it’s essential to plan for taxes throughout the year. This starts by understanding the tax requirements for your business type and industry. “The business structure you choose when starting a business will determine what taxes you’ll pay and how you pay them,” says the U.S. government.
Consult with a tax professional if you need help determining what taxes you need to pay and when. Once you know what taxes you need to pay, set aside a portion of your income each month to cover your tax liability. You can also make estimated tax payments throughout the year to avoid penalties and interest charges.
Managing your money as an entrepreneur, especially a first-time entrepreneur, can be challenging — but with these tips, you’ll be better equipped to handle the financial side of running a business. To set yourself up for success, visit your local financial institution and ask to talk to a financial advisor who can help you handle the fine details.
