I decided to write about the topic of organizing your business finances simply because I noticed Mrs Micah is also doing freelance blog consulting and design work. I myself run my website and I’d thought I’d share some things that I have learned about this. I will highlight in this post some very basic steps you have to do when you have your own business and some tips about going about doing it.
Set up a separate business checking and savings account – This step is obviously very elementary, but which bank you set up with and what sort of services you look for is very important. Many bloggers have stated the benefits of online savings banks or online “high yield savings accounts”. I personally prefer a branch near my place because very often, you might receive checks from your vendors and having the convenience being able to walk to a branch manager.
Make sure you scrutinize things like overdraft fees, minimum balances, check writing fees etc. Ask if your bank has got automatic sweep feature between a savings and a banking account? As most of you would know, checking accounts generally do not pay interest but savings do. Many banks are able to offer low fees to business owners but they not move excess money from checking to savings account automatically so there is quite a bit of opportunity cost there. Some brokerage houses have such automatic sweep features which you should try to explore. You might also want to check out how Mrs Micah optimizes her bank account.
Set Up Quicken or QuickBooks – When you have your own business, keeping track of finances are so important. While folks procrastinate in their personal finance, I would suggest not delay in setting up a proper financial system in place. For most simple business, Quicken should do. I won’t be giving a Quicken tutorial here, but here are some tips when you are setting it up.
The most important thing is to categorize your expense properly. What do I mean by properly? While Quicken allows you to categorize expenses in whatever way you want, I found that for tax preparation purposes, the best way to categorize your expenses is to simply to follow the categories in the IRS schedule C (Form 1040) that you will have to fill out if you have a business. Here is their list of “expenses” –
- Car and Truck Expense
- Commission and Fees
- Contract Labor
- Employee Benefits
- Insurance (other than health)
- Interest: includes mortgage
- Legal and professional services
- Office Expense
- Pension and Profit Sharing
- Rent or Lease
- Repairs and Maintenance
- Taxes and Licenses
- Travel, Meals and Entertainment
- Other Expenses
If you categorize your expenses according to schedule C, then come tax time, it is easier to just export the data to Turbotax. Or if you gave your file to your CPA, it would be a breeze and you will save money on the fees he or she would have billed you for the extra hours to sort through all the mess.
Operating Agreements and Insurance – If you are in a partnership, then make sure an operating agreement is in place. Make sure you have a buy-sell agreement in place if one partner wants out. If your business already has positive cash flow, then find out if purchasing buy-sell insurance makes sense for your partnership. If you have a partner who is the key rain maker and salesperson, consider taking out a key-person insurance which can protect your business and give it time to find a suitable replacement in case anything happens to that person.
Retirement Plans – Most of us are familiar with IRAs, Roth IRAs or 401ks. Many folks who start their business continue to contribute to their IRAs. But rather than just take it for granted that this is the way to go, a business owner has to explore all opportunities. For example, a sole proprietor can consider an individual 401k which allows higher contribution limits than the traditional IRA. There are other plans like SIMPLE, SEP for example, which you have to explore.
Get a separate business credit card – Like everything else, you want to separate your business finance from your personal finance and you want to have a separate small business credit card. If you are not in a position to get a separate business credit card, then you can use a personal card, but make sure you use one just for business.
I prefer a business credit card because issuers tend to have features like monthly statement summaries for their business credit cards and not for their consumer cards. You also tend to get extra rewards for “business type expense” spending on the card. Here are a couple of other tips I have in this area. Firstly, get a rewards card. Your priority in your business on the expense front is to cut cost. Get a cash back business credit card that can earn you cash rebates. Or if you fly a lot for your business,then a rewards card may be a better choice.
Diversify your sources of funding – If your business needs working capital, then make sure you diversify your sources of working capital. For example, do not just rely on your business credit card. I have received many letters from readers complaining that their credit cards have slashed their business card lines by 50% and they cannot operate their business! Do not let this happen to you.
Make sure you have a business line of credit from your bank or a secured loan from your credit union. That does not mean you cannot use your credit cards as a means of financing. For example, you can make use of a 0% APR business credit cards to get a computer and manage your cash flow more efficiently. But do not rely solely on it.
Get a History with the Business Credit Bureaus – To be able to get loans, lenders will look at a business’s credit history. To establish one, you have to make sure that business credit bureaus like Dun and Bradstreet and Experian are aware that you exist. You can register your business with them to get a start. This is important for business that need working capital and need working capital loans. For service based folks like what Mrs Micah is doing, perhaps that is not so important. But those that sell physical goods will probably need to establish a good business credit history to get financing outside of vendor financing.
Have an emergency fund – Sounds like a boring pf advice, but this applies to businesses too. If you rely only on credit and have no back up plan, then events like the recent (and still on-going) credit crunch and shut your business overnight. Bill Gates (in the early Microsoft days) figured he wanted Microsoft to have 2 years of emergency funds! Smart thinking.
Conclusion – There are probably more things we could talk about in regards to business finances. Hopefully, you have found these helpful. And just in case you want to know (and for full disclosure), I use the American Express Plum Card for my business.