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Financial Tools for Your First Year in Business
Help preparing your small business finances in the first year
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Many entrepreneurs launch their businesses because they’re excited about an idea. But in order to stay in business, it’s important to get the potentially less exciting financial stuff right from the beginning. Not to worry if you don’t know everything as soon as you open doors, though. “Most of my clients tend to be six-, seven-, or eight-figure businesses [that have] been in business a very long time,” explained Tricia Taitt in a recent webinar. “And the challenge is that the financial part of their business is usually the weakest part of the business.” The outsourced CFO and 2020 Tory Burch Foundation Fellow talked to our community about laying a solid financial foundation in your company’s first year, laying groundwork for longevity.
Separate your business.
One of the most important things you can do for your business is to treat it as a business. That means filing paperwork with your state to have your business classified as either an LLC or corporation. Choosing one of these entities protects your personal assets in case of litigation or debt collection and determines how your business will be taxed differently from your personal income. “Setting up a separate business entity also helps you establish credibility out there in the marketplace,” explained Taitt. “If you want to be known as a founder and a CEO, you want to make sure that your business is set up that way.” Consider working with a small business attorney or CPA to choose the right legal entity.
It’s also important to separate your money early on, even if you’re the only one working for your business. “This may seem like a very sort of rudimentary kind of recommendation. But I’ve seen it many times before, because we think, especially if we’re sole proprietors, that the money is all coming in. It was all ours anyway, at the end of the day.” Not quite. Taitt recommends having business checking and savings accounts, as well as a business credit card. Your income goes into the business checking ,and the savings account will be where you set aside 20 to 30% of earnings for paying quarterly taxes. A business credit card will help you establish a history and score with business credit monitoring service Dun & Bradstreet, which will be critical as you apply for things like business loans later.
Another key reason to separate your money? You’ll be able to simply turn over the statements from these accounts to a CPA or bookkeeper for review, rather than trying to parse your personal accounts.
Decide how to pay and be paid.
With the rise of new fintech platforms and cryptocurrencies, the question of payment is getting more complicated. Taitt recommends that if you are going to use electronic payment systems like PayPal or Venmo, be sure you’re doing so from the business versions of these tools to avoid problems at tax time (and remember, the business versions of these products will charge a transaction fee, much like a credit card would).
As your business grows, you may need help from contractors. Collect a W-9 from them before they do any work for you. “Getting it before you make the first payment will save you so much headache during tax time because then you don’t have to go chasing them for information in order to give them 1099,” said Taitt.
Ready to hire employees? Register with the federal and state government to get an employer registration number. Hiring an employee means paying more than just their salary; be sure your business can take on payroll taxes, disability insurance, worker’s comp and other considerations that come with growing your team. Consider speaking to an employment lawyer, human resources professional or even your payroll service provider for advice.
A note on hiring and paying your team: don’t confuse a contractor as an employee or the reverse. “I have seen a six-figure tax bill from a client who misclassified employees and they owed back payroll taxes, penalties and interest. It is the one thing that you do not want to mess with when it comes to managing your business.” Review the IRS guidelines to determine who is an employee and who is a contractor.
Keep your records straight.
Founders can manage keeping the records in spreadsheets in the very early stages of their businesses. But eventually, they’ll have to graduate to a dedicated program. Accounting software like Quickbooks and Freshbooks make it easy to send out invoices and track who hasn’t paid them. Product-based businesses will need to register with the state so they can collect sales tax on sales and then remit those taxes to the necessary state agencies on a quarterly basis; Quickbooks can help entrepreneurs manage that as well.
As flexible as these programs are, they’re not designed for just anyone to use. “I would highly recommend that you have someone that knows accounting, set up your accounting systems first and train you on it a little bit before you try to start to take it over yourself,” said Taitt.
Get the support you need.
Eventually, founders outsource their record-keeping and accounting. Be sure you find a bookkeeper that knows accounting principles; some understand only Quickbooks or Xero, another accounting software. A CPA (Certified Public Accountant) can be an important resource, so long as you remember “their job is tax planning, tax strategy and tax reporting. They’re not always set up to advise you.” CPAs tend to have a lot of clients, and may not be able to give you and your business the attention needed, especially in the early stages.
Ultimately, small business owners need a financial and tax professional who has the bandwidth to really sit with them and someone who has experience with businesses in their industry. Meet with them at least twice a year, or even quarterly–don’t wait until tax time. Taitt also shared that when it comes to taxes, she recommends clients work with either a CPA or registered tax preparer “so that if you ever get any notices from the IRS, or if you have to argue in front of the IRS, they are able to do so because of their certification.”
However, support goes beyond CPAs. Look to business advisors at small business development centers, SCORE and even other entrepreneurs for help.
Focus on profits, not sales.
A business with high sales volume can’t succeed if those sales don’t translate to profits. This is where entrepreneurs have to think strategically about sales and pricing. “How does the business model need to shift in order to pay yourself more, plus afford to invest in the business, plus taxes, plus pay down debt, plus the operating expenses?”
One profit-boosting approach is to raise your prices. “Many business owners should be charging more than they are charging right now,” explained Taitt. A scary prospect for many entrepreneurs, but understanding what separates your business from others, especially major competitors like big-box stores, will help you understand why it’s time to increase your rates. “You try it with the next new client. Charge a higher price; they might not even blink,” Taitt assured our community.
You can also assess your market and see what other relevant products and services potential clients need from your business. Talk to your customers. What are their paint points? Addressing them can bring in valuable revenue. “A lot of the time, we think of [profits and marketing] as disparate things, but they all tie back to the financial core.”
Track your performance for continued success.
Even business owners that work closely with bookkeepers need to know their numbers. “One of the things that most small business owners forget is that they are the CFO of their business and of their life,” said Taitt. Pick five or six metrics to track at all times. Sales, cash received, cash dispersed and lead conversions are good places to start, but they don’t actually need to all be financial. You can also track things like the amount of time spent on projects–choose anything that lets you track the health of your business. “As a good business advisor told me, ‘when you’re a CEO, you can outsource 80 percent of what you do, [but] you should always keep your eye on the other 20 percent,” Taitt shared. “You should always be keeping your eyes on the numbers, and how the business is performing.”
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