April 11, 2016
Efficient financial management is one of the key components of your success, both in terms of personal and business financial assets.
Being an entrepreneur requires experience in multiple areas, however not all of us are great when it comes to playing with the numbers. If accounting isn’t your key strength, check out the following four steps for making better financial decisions.
1. Decide on Your Incorporation Structure
Once your business gets first traction you will have to give it a legal shape. The two most common types of business incorporation are Limited Liability Company and the S corporation.
The decision you make will impact the way in which you pay taxes, Social Security and Medicare taxes.
In case with LLC your share of business income, deductions, credits and other tax items pass through and are reported as the owner’s tax return. LLCs are also subjected to self-employment taxes, meaning you will have to pay self-employment tax on the share of your net earnings.
If you opt for S-corporation you’ll receive a salary, meaning you’ll be subjected to pay less employment taxes and no self-employment task.
When deciding on your incorporation do consult with an accountant or you may end paying more taxes than needed.
2. Make Sure Your Finances Don't Mix
Smart entrepreneurs keep their personal and business finances completely separate. Don’t commingle as that may result into a huge nightmare during tax season. Mint and FreshBooks can help you with that.
Another smart move – manage your personal finances just as your business assets. Create a financial forecast. Make sure you keep track of your expenses, your cash burn, cash inflows and unexpected expenditures too (as those occur more often than you think). Figure out where does the money for your personal account comes from and how you can leverage your personal revenue streams. If you have liquid assets, don’t leave them hanging. Smart re-investment may give you the much-needed funds for further business development. Wealthfront can be an effective tool to help you with that.
3. Keep a Safety Cushion
One of the cons of being an entrepreneur is that your income may not be stable. The feast and famine months often occur even with the best of us. To keep yourself afloat and stay 100 percent debt-free make sure you have a financial safety cushion set up.
The easiest way to do so it to identify the minimal viable income you need to stay afloat and keep the same amount in your savings account. Additionally, make it as a habit set aside at least 5 percent of your monthly paycheck. Monitor your average monthly spendings to modify the amount you can set aside in your cash reserve and what things you can ditch in case of rainy days (months)
4. Diversify Away from Your Business
What happens if your original market dries out? What if your brilliant startup idea eventually fails? You’ll either have to invest into new products or pivot to another business.
Hence comes diversifying. You can either invest into new markets or ventures, which operate independently of each other. This may always lead to more exciting opportunities and further growth.
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