Managing your finances as a small business owner will require many processes that must be followed closely. For example, separating your personal and business bank accounts will ensure that you have a way to track your company’s income and expenses.
Keeping a record of your company’s income and expenses will also help you budget for operational expenses. Luckily, there are plenty of free or low-cost accounting programs to choose from.
Payroll
Payroll is a lot more than simply giving your employees money in exchange for work. It involves paying taxes, matching hours worked to time cards or other records and complying with state and federal laws. Small businesses may handle payroll themselves or outsource it to bookkeepers, accountants or specialist payroll providers. Whatever route you take, getting it right the first time is crucial for both your employees and the tax authorities.
Step 1: Get an EIN (Employer Identification Number)
An EIN is a unique identifier for your business used for tax purposes. You’ll need one to start hiring staff and processing payroll. It’s also important for opening bank accounts and registering your company to do business in your state or locality. Generally, you can apply for an EIN online, though some states have different requirements.
Step 2: Determine pay frequency
The frequency of your payroll — whether weekly, biweekly or monthly — will depend on your business needs and whether there are any local regulations. You’ll also want to consider your budget and cash flow when making this decision.
Step 3: Calculate payroll taxes
You’ll need to know the employee wage base, tax withholding amounts and taxable benefits for each employee. You’ll also need to calculate your employer-paid taxes, such as FICA, Medicare and FUTA. This is typically done with software or by consulting a tax guide.
Step 4: Transfer funds to a payroll savings account
Once you’ve withheld the correct taxes and contributions from each paycheck, it’s time to put those funds aside for safekeeping. Ideally, you’ll set up an expense and liability account in your chart of accounts for these payments. This makes it easy to view the total cost of payroll as you manage your finances.
Step 5: Create pay stubs
Provide your employees with copies of their pay stubs to help them track their earnings and understand where their money is going. This is a good practice regardless of whether you use direct deposit or paper checks. It’s also helpful for catching errors and maintaining accurate accounting records.
Taxes
Whether you’re an experienced business owner or just starting out, you need to understand how to manage your taxes and what steps you need to take to keep up with them. This can save you time and money in the long run.
The most important first step is to separate your business finances from your personal ones. Not only is this good practice, but it also protects your personal assets in case you find yourself in legal trouble with the IRS.
Another essential first step is to set up a good recordkeeping system. This can be difficult in the beginning, but it will make tax season less stressful and ensure that you file your taxes correctly. It’s also important to know which expenses you can deduct and the different options available for different types of businesses. If you’re not sure what options are available, consult with a tax professional.
Once you have a recordkeeping system in place, it’s important to remember to pay your quarterly estimated taxes and keep up with them throughout the year. If you don’t, the IRS can impose a penalty on you that’s based on how long your overdue taxes remain unpaid. This can add up fast, so it’s critical to stay on top of your payments.
A common mistake small businesses make is not filing their tax returns on time or failing to pay the full amount of their liabilities. This can result in interest and penalties that are added on to your original tax liability. It’s best to file as soon as possible, even if you can’t pay your entire tax bill, to avoid late penalties.
It’s also a good idea to have separate business bank accounts and credit cards to avoid commingling personal and business funds, Blake says. This will help you keep track of your business income and expenses, and it can look more professional to potential customers and clients. It can also increase accountability and trust among employees. You can even hire a bookkeeper to handle this task for you so you don’t have to worry about it.
Bank Accounts
Aside from keeping track of tax deductions and filing deadlines, small business owners need a place to keep their money. This includes having multiple bank accounts that are designed to meet the unique needs of their business. The type of banking account a small business owner chooses can affect everything from how much interest the account earns to whether or not it has fees. While some accounts might be cheaper than others, it’s important to consider the complete picture when shopping around for a new home for your business’s money. If you follow directions on how to get more traffic to your online store, then you can expect that you will have better earnings.
A small business checking account is an essential part of any successful small business. Look for an account with a competitive interest rate and few or no fees to get the most bang for your buck. Also, look for a bank that offers mobile and online banking for convenience. Having a few accounts is ideal for most small businesses, especially for those that have fluctuating monthly income. Separating funds within a primary account for payroll, taxes, and operating expenses can help make it easier to manage cash flow and understand where your money is going.
Small business credit cards can be a valuable tool for many small business owners, as they give businesses the ability to charge more than just cash or checks. They also help business owners track expenditures, which can be helpful for tax preparation. Some banks can offer small business owners a competitive deal on credit card processing, as well as other payment services.
Another option for a small business is to invest in a savings or CD account. While it’s not a quick way to grow your funds, it’s a great way to protect yourself against potential business failure. For example, if you’re paying yourself a salary from your business’s earnings, it’s a good idea to put some of those dollars into a savings account to cover living expenses in case the company fails. It’s a small price to pay for peace of mind and financial security. In addition, many banks offer treasury management and cash flow strategies that can help improve your business’s overall profitability.
Cash Flow
Cash flow is the amount of money that comes into and goes out of your business. It’s a critical number that shows whether or not you are making more than you are spending. A healthy cash flow allows you to pay bills, invest in new business opportunities and grow. To manage your cash flow, you must keep track of a variety of figures, including sales, inventory, accounts receivable and payables.
The goal for any small business should be to have consistent positive cash flow-more money coming in than going out. However, this isn’t always easy. Many small businesses fail due to cash flow problems. This is especially true for start-ups that have little or no money in the bank and must rely on credit to buy equipment and supplies. To improve your cash flow, you need to take a hard look at the numbers and make changes where necessary.
For example, if you’re not receiving enough money from sales, you may need to lower your prices or stop offering certain products and services. Or you might want to consider a new marketing strategy that will attract more customers. You can also reduce your expenses by eliminating unnecessary costs and keeping a tight grip on spending.
In addition, you should review your financial statements on a regular basis to spot problems and resolve them as quickly as possible. You should also keep your personal and business bank accounts separate. This will prevent you from accidentally mixing business and personal finances, which can lead to costly mistakes.
Finally, you should use a tool such as a cash flow projection to help predict future cash inflows and outflows. This tool can be very helpful if you’re trying to decide whether or not to apply for a loan or other financing. The projection will show you how much your company is expected to earn, minus any outstanding invoices and other payments you’re expected to make. If the projection looks good, you’ll have a better chance of convincing banks or other lenders that your business is a smart investment.
