The Right Choice Changes Everything
Empower Your Ambition With ECS
January 9, 2023
Business ownership often seems like an alluring dream, but if careful thought isn’t put into the finances of running a business, it can become a nightmare. Thankfully there are some easy ways to stay on top of the money with these financial tips for small business owners.
First, it would be helpful to understand why people go into business ownership. A Cox Business survey found that around 50% of business owners started a business because they wanted to be their own boss. While a significant percentage said they wanted to build something from the ground up. And only 8% were motivated by making more money.
The implication of these findings is that small business owners go into business because they are motivated by the idea of freedom and pursuing a passion. The Bureau of Labor Statistics agrees. They indicate that autonomy, independence, and flexibility drive small business start-ups.
However, business owners quickly learn that making ends meet requires more than freedom and passion. There are downsides to consider with self-employment, such as lack of benefits, long hours, and financial fatigue. Around 32% of businesses will fail within two years. More than 51% of them will fail within five years. And ten years after starting up, only 34% of them survive.
Many economic and business pundits point to a variety of reasons as to why small businesses typically fail: there’s no business, there’s no market, there’s no marketing…and so on. But perhaps very telling is one study’s findings that suggest around 82% of businesses actually fail because of cash flow problems, including mismanagement. In other words, freedom and passion alone can’t pay the bills, and they can’t keep a business afloat. Running a business requires a good grasp of finances.
Proper money management is key in every aspect of growing your business. Some business owners neglect to pay themselves an adequate salary, instead putting everything back into the business—which may include paying others. Make sure you are creating a budget that includes taking care of yourself so your personal finances can keep your own household financially solvent.
If you have financial trouble in your own domestic sphere, the stress can quickly derail how you run a business. From a tax savings standpoint, you need to pay yourself first as well. This is because in order to create the most advantageous tax setup, you will need to pay yourself a reasonable salary.
If your business is set up as a corporation (and it should be) and your salary is comparably low to what you would reasonably make elsewhere, it can potentially trigger a tax audit…which of course, you do not want. Although paying yourself first seems counterintuitive to keeping your business finances as robust as they can be, it can keep you out of legal trouble (which also ends up costing money in terms of fines and lawyers’ fees).
Financial planning can save you in times when business is not so good. These times can include recessions or inflations every 3-5 years and even seasonal changes within that calendar year that naturally slow down the flow of customers. Emergency funds are essential for these times.
Financial advisors recommend having at least six months of cash reserves on hand so that you can keep up with your bills, your vendor contracts, and your payroll. There are a number of ways to build up cash reserves.
One method facilitated by fintech app technology involves linking your business purchases to a platform that rounds off the change on purchases into a brokerage or savings account. You could also use credit cards with points or cashback to make all your purchases and deposit the earnings into a savings account.
And then, of course, you can allocate a fixed amount every month or even every week to go into the reserves. You’ll be surprised to find that after a short while your savings have snowballed into a significant amount of padding.
Many business owners do a poor job of exhausting their funding options. But as it turns out, these days there are tons of options for funding a business. Crowdfunding platforms like GoFundMe or Kickstarter can allow you to create campaigns and obtain some grassroots funding.
There are P2P lending platforms like Upstart, Prosper, and Lending Club. There are traditional bank loans and private small business loans that offer long and short-term payment term options. If you network with the right people, you can find some angel investors who are interested in putting venture capital to work.
There are loans offered through the Small Business Administration. And there may even be free grant money for certain businesses, based on the nature of the business, the market they serve, and the demographics of the business ownership (e.g. you).
One of the best ways for business owners to save money is to stop doing their own taxes and find a competent accountant or tax advisor. A good tax advisor can help you set up your business as a corporation (specifically an S-corp).
This allows you to pay yourself a salary and claim the rest of the business income as profit, which helps you sidestep the 15% FICA taxes taken out of your own personal income (with the exception of the paycheck you issue yourself).
This alone can result in significant tax savings. There are also lots of tax breaks, tax deductions, and potential opportunities for depreciation a good accountant can help you explore. Remember that it’s not always about how much money you make…it’s about how much money you keep.
Another big expense for business owners is going to be their contracts, whether they’re in the food business or running a service-based enterprise. Don’t be afraid to constantly review all your contracts, including vendors, insurance, services, and utilities.
Shop around and make sure you are getting the best deal you can. If you aren’t, call up your vendor, insurer, or service provider and ask if they can match the other opportunities you are looking at.
It’s also good to constantly review the fine print of your contracts, statements, and bills to see what you’re being charged for. Typical areas where businesses overspend are internet and telecom services, data storage and management, software services, and marketing. In fact (regarding that first culprit) estimates from Tech Target suggest that a whopping 90% of businesses are overpaying for telecom by as much as 30%.
As you’ve probably heard, it’s not what you know…it’s who you know. Networking with other business owners is more than a social activity. It can also help your business financially. Fellow business owners can make vendor and service provider recommendations that could save you money, while also letting you know who to avoid.
Putting yourself out there can also help you catch wind of opportunities like liquidated inventory. And of course, networking with other business owners can lead to referrals for new customers and clients, resulting in some extremely cost-effective (essentially free) organic growth. As customer acquisition is a significant expense in any business, networking can end up being a great way to save money.
Our last tip may seem like a bit of a scrappy way to save money, but in today’s day and age, it’s a must-know. That’s because your phone is a free goldmine of marketing possibilities through social media.
First off, it is free to organically grow a community around your business with something like a Facebook page. Signage in your store or on your website can direct customers to follow your business on social accounts for discounts, giveaways, and more. These online communities become great places to tap into your already existing customer base.
Social media is also the best place to run ads. This is because the ads are very inexpensive and can be extremely targeted to drill down to your exact desired demographics (for example dog owners between the ages of 25 to 45 who enjoy the outdoors and live in a 5-mile radius). Some estimates suggest that small business owners spend around 10% of their budget on marketing. If you stop outsourcing this process and learn to use what’s in your pocket (your phone) you could bring this percentage down significantly and save a lot of money.
Consistency is key to making all these tips for entrepreneurs work. And a big part of maintaining consistency is having a plan and sticking to it. Since many small business owners are drawn to the idea of freedom and pursuing a passion, it can seem confining to entrap themselves in a business plan with concrete, numbers-based goals (e.g. building up cash reserves of six months of expenses). But as it turns out, small business owners will find out that Newton’s First Law of Physics also applies to business ownership: objects at rest will stay at rest, and objects in motion will stay in motion.
Once you start paying yourself, building up cash reserves, exploring funding options, investing in tax savings, reviewing your contracts, network, and learning how to market, you will find that you have the energy and discipline to continue pursuing these financial tips, keep saving money, and achieve success in both your business and personal goals.
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