For small business owners, especially those just starting out, it’s often difficult to understand the difference between personal and business financial planning. After all, the money you earn goes to the same place and is controlled by the same person (you). Why should it be treated any differently as a small business owner? While it’s often easier to avoid the hassle of making serious changes to your saving and spending habits, however, the reality is that becoming a business owner can and should dramatically change your relationships with money.
Prior to becoming self-employed, the money that landed in your bank account was yours, and how you managed it or spent it was your own business. As a business owner, however, you need to think about how to manage business finances a little differently. While some of the old personal finance advice still applies—like the importance of saving, budgeting, paying down debts, and investing—managing finances for a small business also requires some new strategies. Here are some tips that can help you better understand how to manage small business finances.
Personal Finance vs. Business Finance
For small business owners — and especially independent, gig, and freelance workers — it’s often easier to blend personal finance and business finance than it is to manage them separately. Having a dedicated small business bank account, however, can make life as a small business owner much easier, especially when it comes to taxes.
Small business owners enjoy a range of tax benefits that don’t apply to individuals. For example, business owners have the opportunity to write off certain business expenses against their income. That means that if you earn $60,000 as a business owner in a given year and spend $10,000 on supplies and other business expenses, you will only be taxed based on an income of $50,000. Those benefits, however, only apply if you’ve kept track of your business expenses. One of the simplest ways of keeping business spending distinct from your personal finances is with a dedicated small business bank account.
Furthermore, what makes business income unique is that, unfortunately, the money you earn isn’t all yours to keep. Unlike salaried employees, taxes on small business income don’t automatically come out of your paycheck. They are instead charged annually or quarterly. It’s therefore the responsibility of the small business owner to put enough cash aside to cover their tax bills, including both income and sales taxes.
Opening up a small business account makes it easier to avoid spending the money you should be putting aside for taxes and is the best way to keep track of small business finances. That’s because it allows small business owners to only transfer the portion of their earnings that they will ultimately keep into their personal accounts. Keeping your personal finance and business finance separate is always the best way to ensure you’re taking advantage of tax benefits without getting stuck with an unmanageable tax bill at the end of the year.
Always Keep a Rainy Day Fund
Having some money put aside for tax purposes is a good start, but it’s also important for small business owners to keep a rainy day fund. As a small business owner, your monthly income is rarely consistent. A slowdown in business, sick days, vacations, clients who pay too slowly, or unexpected personal needs can always derail your earnings and leave you in a difficult financial position. That is why it’s especially important for small business owners to keep a nest egg available to help them through unexpected financial challenges.
Unfortunately, most people aren’t prepared to manage a surprise expense. According to a recent study by Bankrate, only 39% of Americans would be able to cover an unexpected expense of $1,000 or more. That is why experts recommend putting aside three to six months’ worth of living expenses in case of a rainy day. Furthermore, those managing finances for a small business might also need to save a little extra to keep the business afloat in case of emergency. The sudden and widespread disruption as a result of COVID-19 serves as a strong reminder of how quickly your financial picture can change, and why it’s always good to be prepared for a pandemic-sized disruption.
Use Apps for Managing Small Business Finances
Only a few years ago, small business owners and independent workers were pretty much on their own when it came to managing their finances. Not only did they need to master the products or services they sold, but they also needed to have a strong understanding of accounting and financial management.
These days, however, there are a wide variety of tools that make the job of managing finances for a small business simple, ranging from apps that can help you manage your money to personal finance books and podcasts that can teach best practices.
Some of the most common apps for managing small business finances include bookkeeping services like Quickbooks, Freshbooks, and Wave Accounting; expense management services like Expensify and MileIQ; and billing platforms like Bill.com and Square.
Take Advantage of Financial Products for Business Owners
Becoming a small business owner, even an independent gig worker or freelancer, opens you up to a whole new category of products and services that can contribute to your financial success. As you transition from an employee to becoming self-employed, explore new tools, products, services, and financial opportunities.
There is a wide range of loans and other financial products that are specifically reserved for those managing finances for a small business. As you make the transition towards entrepreneurship, it’s important to survey the landscape. Develop a strong understanding of what’s available to help you with your small business finances!