As an entrepreneur, how do you manage your business finances? Managing your business finances is crucial for survival. There are several methods to do this effectively. The goal, regardless of method, is to track your finances accurately and avoid financial issues.
It’s vital to record all earnings and expenses to determine your tax obligations and understand your profitability. The skills to manage your business finances were taught in the Start Your Business in 30 Days Programme. Enrol now.
Let’s look at important elements of business finance and how to manage your business finances effectively.
Understanding Taxes
Having the right mindset toward taxation is a good first step to understanding taxes. Taxes are pools of funds created by individuals and responsible profit-making businesses within a society to enable the government to meet its obligations toward its citizens.
The common social good taxes are aimed at should encourage you as a business owner to do your part by paying a fair share of your income. It may seem like a lot to you at the end of the month or year when filing, but focus on the collective good it is meant to serve.
Managing taxes can be complex, so consider hiring a professional. At ReDahlia, I initially outsourced our tax management to a certified accountant who handled our finances, bookkeeping and regulatory filings efficiently. For me, the benefits of professional help far outweighed the costs.
As my experience working with entrepreneurs grew, I recognized the critical role of tax compliance in business success. This led me to establish a dedicated unit – Complify, focused on assisting entrepreneurs with tax obligations.
Understanding And Tracking Your Expenses
One of the best practices for any business is understanding expenditures. Expenses directly reduce your net income and at the same time reduce the payable company income tax as an LLC or sole proprietor. Obsessively keeping receipts is a great way to track purchases, prices and vendors.
These expenses might include rent for a physical office space or home office, domain and web hosting, telephone and internet bills, office supplies and equipment, insurance, advertising, professional fees, business expenses and employee expenses.
Steps To Manage Your Business Finances
Follow the steps below to effectively manage your business finances and meet your tax obligations:
Step 1: Set up financial tracking.
Choose a financial tracking tool.
Select a financial tracking tool that suits your business needs and budget. Consider using accounting software, online tools or spreadsheets like Excel or Google Spreadsheets.
Record all income and expenses
Ensure that all business income and expenses are accurately recorded in your financial tracking tool. Keep track of receipts for all transactions and update the records regularly.
Separate personal and business finances
This is a crucial step. In my Start Your Business in 30 Days Programme, we dedicate a module to teaching entrepreneurs exactly how to separate themselves from their businesses.
Some entrepreneurs think that by doing this, they are losing control. However, separating yourself from your business actually gives it a better chance of success.
Step 2: Pay yourself a salary.
First, establish a salary structure. Then determine a reasonable salary for yourself as the business owner. Paying yourself a salary from the beginning helps separate your personal finances from the business and ensures that you maintain financial discipline.
When I consult with entrepreneurs, I look at their business finances to see what the business can afford to pay them at the moment and set a salary based on that amount. As the business grows, we review and adjust the salary to reward the business owner better.
Step 3: Understand taxes and compliance.
Educate yourself on tax obligations
I have seen entrepreneurs pay high fines because of ignorance. Familiarize yourself with the different taxes applicable to your business. Understand the tax rates and due dates for filing.
Consider hiring a professional
If tax matters seem complex, consider hiring a certified professional. (As I mentioned, my team outsourced this unit when we started.) They can efficiently manage tax calculations, bookkeeping and document filings.
Track and document expenses
Keep detailed records of all business expenses, including receipts and invoices. This will enable you to claim legitimate deductions and reduce your taxable income.
Save money for tax obligations
Set aside a portion of your business earnings specifically for tax payments. This proactive approach will prevent penalties for late or insufficient tax payments.
Step 4: Review and analyze expenditures
Categorize and analyze expenses
Organise your expenses into categories and analyse their impact on your net income. Identify areas where cost-cutting is possible without compromising business operations.
Review advertising and marketing effectiveness
Analyse your advertising expenses and assess the effectiveness of different marketing campaigns. Focus on strategies that yield better results for your business.
I once worked with an entrepreneur who was pumping money into Facebook ads without a clear objective. He did see that the ads increased traffic to his website, but that was not his goal. He wanted to get viable leads with the potential to convert to sales.
After we reviewed his marketing objectives and spending, he realized he was wasting money. We worked together to redefine his marketing objective, and my marketing team designed and deployed another campaign to help him achieve his objective.
Step 5: Implement financial strategies
Develop budgets.
I have seen entrepreneurs spend money they don’t have because they lack a budget. Make sure to have a budget for everything. Create budgets for different aspects of your business, such as marketing, operations and expansion. Stick to these budgets and regularly review them for adjustments.
Set financial goals
Define financial goals for your business, such as increasing revenue, reducing costs or achieving a specific profit margin. Regularly monitor your progress toward these goals.
At ReDahlia, we set quarterly financial goals and hold review sessions to track our progress. This not only keeps us on track but also motivates the team to work toward common objectives.
Conclusion
By following these steps, you will effectively manage your business finances, ensure tax compliance and make informed financial decisions.
Good luck!
This was first published on Forbes.com by Florence Chikezie.
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