Business Finances 101
Running your own small business isn't easy. You might be a one-person show or have a small team of people, but either way, literally everything is your responsibility. And getting it all right is damn near impossible. Owning your own business is extremely rewarding – but also, oh so challenging. Nobody has it all figured out. Each and every one of us has our own set of strengths and weaknesses, things we love to do and things we don’t, areas of business that come naturally and ones that we have to work really hard at. That’s why we’ve got to be in this together!
5 Big Misconceptions About Your Business Finances
1. Owing money at tax time is a bad thing or your CPA’s fault.
When you owe money at tax time, that means your business generated a profit and a profit means your sales were higher than your expenses. A lot of business owners I talk to want to spend all their profit on equipment or other not-so-necessary expenses before the year-end so they don’t owe any tax. The problem with this thinking is that people end up forgetting why they went into business in the first place! Spending money just to save taxes is absurd. Why spend a dollar to save 30 cents? IF, you are going to make purchases with the idea of saving taxes, those purchases should either be “essential” to your business or they should allow your business to make more money in the future. You didn’t work all those long hours just to end up being no better off financially than you were at the beginning of the year, did you? Unfortunately, with profits, come the dreaded “taxes”. You need to save for these. That is why having a proactive CPA like Stephen P. Gunby & Associates is essential. If you are doing tax planning all year, you won’t be surprised by a large tax bill–and you’ll have the money set aside to pay those taxes. If you don’t, and you can’t pay your taxes at the filing deadline, you are going to be subject to penalties and interest.
2. You only need a budget when money is tight
A budget isn’t something you use or put in place when you’re just getting started or when money is tight. A budget is giving your money a purpose and plan. It doesn’t matter if you’re barely making the bills or bringing in millions every year. If you don’t put a budget in place for your money, you can easily overspend causing financial hardships in your business and personal life. I recommend setting an overall budget for the year then breaking that down by month. You should reevaluate your budget, at the very least, every month to make sure you’re on track or if you need to make some adjustments.
3. Sales Tax and Income tax are the same things.
These two taxes are easy to get mixed up, but they have a few distinctions to help you keep them separate in your mind. Let’s start with sales tax. This is a tax that your state manages and is assessed to your customers (not you) on taxable products and services (check with your state to see what qualifies). As the business owner, you are simply the collector of the tax. You’ll hold on to it until your sales tax return is due and then you’ll pay it into your state. Keep in mind though, when you collect those monies–these are not YOUR monies and they should not be spent as if they are. Income tax is a tax you pay on the federal and state level, with the exception of the few states that don’t have an income tax. They are collecting tax from you, the business owner, based on how much income you made for the year.
4. You need a business degree to be good at business and understand your finances.
This is so far from the truth, it hurts. Sure, education helps, but at the same time, everything is learnable. My father in law had his own business. He never went to college–he grew up on the streets of New York City and what he lacked in “book smarts” he made up for in spades in “street smarts”. He taught me a lot about owning my own business. None of us knows everything. You don’t need to be an expert in everything - you just need the right information, skills, resources, and tools for your business.
5. My business isn't big enough to worry about setting up a bookkeeping system.
Even if you just have one client right now, putting a bookkeeping system into place is important. When you get into the habit of recording your income and expenses on a regular basis, it sets you up for success later on in your business when you have more transactions. If you put this off until your business is booming, you won’t have much time to spend on figuring out the best bookkeeping process for your business. Then you’ll likely put off your bookkeeping until your taxes are due, which can be very stressful.