Have you decided it is time to leave behind a steady paycheck and launch your own business? Does becoming an entrepreneur have you feeling excited, anxious, and maybe overwhelmed? Launching a business comes with a lot of stresses, opportunities and to-dos. However, none of these emotions should deter you from following your passion and achieving your goals. Instead we have a few tips to help with getting started and avoiding some common financial mistakes of getting launched.
1. Maintain a Cash flow
When getting started it is very important to know where every dollar coming in will be going. Before launching, it is a great idea to start keeping track of your cash flow coming in and going out. This will help identify where you may be able to cut costs and where you may need to increase spending. For example, some of our entrepreneur clients have shared that investing in good technology and marketing at the onset was crucial to successfully launching their businesses.
To invest where needed and still maintain your cash flow, try to limit expenses as much as you can at the onset or carefully consider potential expenses so you can plan for them. It is crucial to create a realistic budget and one that you can stick to, to avoid jeopardizing your business and your life.
2. Set up an Emergency Reserve
Keeping an emergency fund for personal use is always important and we counsel clients to keep six months or more of expenses at the ready. But setting up an emergency reserve when launching your business is perhaps even more crucial. An emergency reserve is one of the most important steps an entrepreneur can take to assure their financial well-being and reduce stress in the early start up months.
Emergency funds are essential especially when you need them but they also give you that breathing room to focus on launching your company without daily financial fears. It is hard enough to put all your energy into the early days of a business; it can be debilitating if you are also worried how you will pay for monthly bills. We never know what challenges may come our way in life, and 6-12 months of funds can mean the difference between disaster and getting through.
Finally, a note for managing life and business- do not commingle business reserves with personal reserves. It is important to keep a separate checking and savings account for personal and business.
3. Pay Yourself First
Setting funds aside to cover expenses and creating an emergency fund is important but paying yourself first is also important. It is tempting when starting a new business to put all your income back into the business and to forget to pay yourself.
You may even consider paying yourself regularly. If you are used to being in a salaried position, you may choose to take a bi-weekly or monthly draw from the business. Taking a draw also helps with planning for household expenses.
Your savings and retirement are also important, even if it means starting out small. To insure you are setting funds aside for retirement, you should consider setting up an individual retirement account (IRA) or small business retirement plan. You may even consider funding a ROTH IRA (if income limits allow you to do so). For 2020 and 2021, IRA’s have annual contribution limits of $6,000 (or $7000 if age 50 or older).
Another option is a SEP -IRA. A SEP is a simple plan for small businesses and those with individual business income. It has higher contribution limits and contributions are tax deductible on your business tax return. SEP-IRA’s allow entrepreneurs to contribute up to 25% of net earnings up to a maximum of $57,000 for 2020 and 2021.
When you are ready for even more retirement savings, you can look into an individual 401K if you are a solo entrepreneur or a full 401K plan as your number of employees grow. Even as you hire employees, remember to always figure in paying yourself.
No one likes discussing taxes, but it is very important, when launching your own business, that you understand your new business taxes and filing requirements.
Working with an accountant is a very good idea, especially in the first year, to ensure you are filing all appropriate tax forms. Hiring a professional will allow you to learn the process and reduce any fears that you might miss an important requirement. Another advantage of hiring a tax professional, the tax preparation fees are deductible to your business.
If you left a salaried position you are probably used to having taxes withheld from your paycheck. With a business, taxes are typically handled differently. You may now be required to pay quarterly estimated taxes. These estimated payments are based on your business income and may be calculated by your tax professional. Setting tax funds aside into a separate savings account will help keep you organized and ensure you have funds earmarked for taxes.
Another common tax filing besides estimated taxes and your business return are payroll taxes. All employees will need to complete form W-4 for federal withholding and as an employer you will be required to withhold federal payroll taxes as well as match the employee’s Social Security and Medicare withholdings with the IRS. Unemployment returns and state taxes must also be filed.
It is important to note that payroll tax filings for both the state and federal government will need to be filed on time as well otherwise penalties may be assessed.
Starting your own business involves taking many risks; one of the biggest is financial risk. Use these suggestions to develop a plan and a strategy to stay committed to good financial practices as you launch. We hope these steps help you reduce the financial stress of a start up and turn your passion into a successful business.