Growing your business requires creating a stable financial foundation to support its future. Implementing proven financial techniques and practices helps you create the foundation your business needs to enjoy steady profits and sustainable growth. The following tips will help you create plans, and budgets, and engage in practices that are used by successful businesses of all sizes. Your business can experience the same success and growth as other businesses that have weathered economic ups and downs without suffering the risk of closing their doors.
Set a Budget for the Business
Just as you set a budget for your personal finances, you should set one for your business. A business budget differs from your budget in that the income is prone to fluctuations from month to month. That means you need to base your budget on your lowest month of income to prevent overspending and ensure you have enough to cover your bills.
Outside the fluctuating income issue, setting a business budget is the same as a personal budget. The expenses are different, but the concept is the same. Write down your recurring expenses and subtract them from your base income to make sure everything’s covered. In the event you have more income, you can set aside the money to put back into the business or build a fund for an important purchase.
Track Income and Spending
This type of tracking is a cornerstone of basic accounting practices. You create sheets for accounts payable and receivables and keep updating them as money comes in or is spent. Accounts payable gets a line item such as utilities, rent, equipment leases, and anything else you spend money on. Whereas accounts receivable is a list of people who owe money to the business and how much.
Both sheets are totaled up to a bottom line, and compared against each other. It’s preferable to have the number at the bottom of the accounts receivable sheet total more than the accounts payable. Ultimately, both sheets show you where the money is coming from and where it’s going, so you can figure out how to adjust accordingly.
Forecasting Sales to Estimate Future Income
Forecasting sales involves using an analysis method to get an idea of how many sales are likely in a given period, and how much profit you can expect. There are several methods to forecast sales for an upcoming period, which means you can run the numbers to determine which strategy works best. Once you determine a method that works best for your business, you can keep using it indefinitely as the results are reliable.
The act of forecasting sales makes it easier to predict how much material you’ll need for production or if you need more employees to handle the workload for a given time. However, it’s not always accurate as the unpredictability of human nature can upend the best-laid sales plans. Taking the time to forecast is still worthwhile because it lets you get an idea of how much profit you can expect in the near and far future.
Spend More on Equipment and Software
The desire to spend less in the hopes of getting more is a natural one, but it doesn’t always pan out the way you hope it will. Budget software and used/cheap equipment are not known for their features, reliability, and overall performance. You spend less at the outset but wind up paying more in lost hours and wages as efforts are made to overcome the shortfalls.
It can be painful to spend a large sum of money upfront, but you save money over time with better-quality products. You spend less time struggling to get things to work the way you need them to, which means your product gets to market faster for a quicker return on investment. The money you spend on acquiring a high-quality software suite or piece of equipment is handily repaid and continues to improve your profitability.
Pick the Right Corporate Structure
Most of the time, a business begins its life as a sole proprietorship until it’s been formed into a corporation. The sole proprietorship designation is primarily for tax deductions as it doesn’t offer liability protection and various advantages that come from being incorporated. To grow the business, a corporate structure is necessary.
The most common corporate entities include limited liability corporations (LLC), S and C. LLCs are known as pass-through entities for taxation on profits, while S and C corps have more complex rules for operating. Creating a corporate structure gives you access to business products such as bank accounts, wholesale access, lines of credit, and more. These and other business products help you gain legitimacy with vendors and customers, and provide you with a strong base to grow from.
Use Allowable Deductions for Reducing Your Tax Liability
Taxes are an unavoidable part of running a business, but they don’t have to hold it back, either. The IRS allows businesses to take deductions and credits that reduce the tax burden, sometimes significantly. Deductions such as vehicle mileage, equipment depreciation, utility bills, and more serve to reduce the amount of profit you report.
This is where working with a tax professional is a good idea, as they are familiar with how to apply the deductions without getting you into trouble. You’re much less likely to get audited, and you keep your business compliant with tax laws. Furthermore, a tax professional stays on top of the changes to rules and laws so you don’t have to.
Set Money Aside for Taxes
Paying taxes for the business is a necessity and not taking care of them can lead to serious consequences. Businesses are required by the IRS to pay quarterly estimated taxes if it looks like they’re going to owe more than $1,000 after credits and deductions are taken out. In the event you have employees, you’re required to pay FICA taxes every pay period.
Keeping money aside for taxes is an excellent strategy, no matter if you’re certain or unsure about the amount of taxes you’ll need to pay. This prevents your business from getting into trouble with taxing authorities and takes away the stress and uncertainty of not having enough money for the taxes due. Opening a separate bank account for holding tax money keeps it out of your main account, and prevents it from being spent.
Ashley Nielsen
Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer who loves to share knowledge about general business, marketing, lifestyle, wellness, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.
