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It is a good decision to start a small business. However, for business owners, it is twice harder to control their finances, than for people who do not own a business. They have to control not only their personal finances but the finances of their company as well.
The tips below will help you keep an eye on your personal finances while you are managing your business.
1. Open a Retirement Fund
No matter what is your position, you have to be ready for retirement. The solution is setting up a retirement fund. You will have to put considerable sums regularly, but these savings will lower your tax bill and grow tax-deferred until the time to use them comes.
Small business can take advantage of the various business plans: a SIMPLE IRA, a SEP-IRA, a SIMPLE 401(k) and a Solo 401(k). All of them, except for SEP-IRAs, are created for sole partnerships, proprietorships, corporations or LLCs.
Before selecting one of them, read the conditions of each and check how they can help you reach your retirement goal.
2. Diversify Your Investments
Diversification is one of the main tenets when it comes to investing. It is important because small business owners often reinvest all their personal capital in the business.
The investment will help your business develop, however, it is better not put all your assets into your business. Two-thirds of businesses survive 2 years, half will survive 5 years and only one-third will be there in 10 years.
You can give yourself some breathing room by alternative investments, side business, allocating funds to other types of businesses, etc.
3. Borrow Wisely
In March 2016, 23% funding requests were approved by big banks. Institutional lenders (including life insurance companies and savings banks) approved 62,8%. Small banks approved 48.7%, credit unions approved 42% of requests. The highest percent of approvals belongs to the alternative lenders — 60.7%.
According to NSBA survey, 27% of businesses could not get financing. So the best way of borrowing is to turn to alternative lenders to have a bigger chance of having your request approved.
4. Do not Let Discrimination Hinder Your Business
According to the SBA research, in 2015 57% of the approved requests were made by white-owned businesses and 29% — by minority-owned businesses. 71% of the approved requests were made by males and 29% by the females.
A survey conducted by the California Reinvestment Coalition in September 2017 shows, that more than half of respondents think that small business owners will be discriminated on the base of sex, race, age, marital status or national origin.
One of the ways to avoid discrimination based on sex is to use funding for women-owned businesses.
5. Create an Emergency Fund for Off-season Period
Everyone should save for rainy days. It concerns small business owners as well. Throughout the year you are likely to have irregular earnings.
It is essential for every business owners (especially for the owners of seasonal businesses) to have a “nest egg” for those months without profit.
Don’t forget about the personal expenses like housing, insurance, food, utilities, and helping your dependents.
6. Separate Your Business and Personal Finances
Every business owner is extremely devoted to their business. This is one of the primary reasons why small businesses account for 99.7% of all business in the US.
You should be devoted to gain success. But do not mix business and personal finances. Such separation will help you:
deduct business without any problem;
make your business more credible and legitimate;
remove personal liability in case your business fails;
avoid burdening your personal accounts.
7. Ask for a Professional Tax Advice
When tax season comes, it is a good idea to consult a good accountant.
The way you fill business taxes depends on the business entity. The current U.S. tax law is quite hard to understand. It can be complex to get it right for busy business owners.
Bottom Line
These were seven tips for small business owners. You will have to spend some time to separate your business and personal expenses. Nonetheless, every entrepreneur should be smart with money from the very beginning.
