Running a small business is no easy feat, especially in today’s turbulent economy. Yet millions of people dream of ditching their day job to start their own business. Of course it takes more than a dream to make your business a success. In addition to time, dedication, and a good deal of elbow grease, you need to avoid the common money mistakes that force so many small business owners to shut their doors.
Learn Basic Accounting
You may be the best chef, florist, lawyer, or hair stylist in town, but if you don’t take the time to learn the basics of accounting you may not be in business for very long. No business can stay afloat if they don’t manage their money and resources wisely, and in order to do that you need to understand the fundamental financial principles of your business.
What are your costs? Which expenses are fixed and which are variable? What kind of profit margins do you have? How much does it cost to acquire a customer? How many products do you have to sell to turn a profit? If you don’t know the answers to these questions you’re setting yourself up for disaster. Even if you hire professionals to help you with the money side of things, you need to take an active interest in the bookkeeping and accounting. Remember, it’s your dream at stake.
Track Expenses Carefully
In addition to understanding the basic accounting of your company, you need to track your expenses vigilantly. If you know exactly how much you’re spending each month you can look for trends. You may be spending more on one category than you realized and reducing or reallocating those funds to something else may help boost your profits.
You can track your spending manually using accounting software like Quickbooks, or use a small business credit card such as the Ink Cash Business Card which automatically categorizes your spending in a neat report for you. An added bonus to using the business credit card is that you can earn cash back rewards which can help your bottom line.
Keep Business and Personal Expenses Separate
It can be tempting to let your personal and business expenses blend, especially when you’re just starting out and cash flow is poor. But intermingling business and personal expenses can get you in trouble and lead to accounting, tax, and liability headaches. You should maintain separate bank accounts and only use each account for its specified purpose. If you don’t, you could be held personally liable for expenses incurred by the business and that could ruin you financially.
Prepare for the Tax Man
When you’re an employee you simply have your taxes deducted from each paycheck. But as a business owner there is a lot more work for you to do. You’ll need to put money aside out of your earnings to cover your tax bill, and you may have to pay quarterly based on an estimate of your earnings. You’ll also have to pay self-employment tax which includes Medicare and Social Security. Even if you don’t hire a full time accountant, it is usually wise to consult an expert to help you set your business up correctly and set you on the right path.
Mike Collins is obsessed with building new streams of income and achieving financial freedom so he can live life to the fullest with his wife and 3 amazing children. Read more about his adventures at WealthyTurtle.com.