Starting your own business is a bold move. One thing you need to know is everything revolves around your finances, particularly when running a startup. One wrong decision can result in regrettable outcomes. You need to take financial planning seriously. A business has vast spending decisions and lacks steady, predictable incomes; therefore, setting yourself up for success starts with proper financial planning.
When it comes to personal finances, the needs of entrepreneurs are different from those of employees. While entrepreneurs have greater earning potential, their income is usually unpredictable, hence the importance of planning.
General liability insurance coverage is all about financial protection—for you and your business. If your business is a sole proprietorship or partnership, you have unlimited personal liability. This means you take responsibility for all business debts.
Throughout your everyday operations, numerous risks can impact customers. Maybe your floors are slick, and a customer falls and injures themselves. In this case, you may be legally responsible for the damages or injuries. General liability insurance helps cover legal expenses and third-party medical bills, and property damage.
Your Profits or Paycheck
When money streams into your business, there are several things to consider—your paycheck is often not the first thing. You’ll need to take care of your overheads, fixed costs, and most importantly, taxes.
Of course, you need to add yourself to the payroll—but there are several different ways to do this based on your business structure. A sole proprietor’s income is not considered separate from the business and is taxed in full. If you run a partnership, each partner is taxed on their portion of the business. S corporations also tax each shareholder based on their percentage, but the business itself is not taxed. In a C corporation, shareholders and the business itself are taxed, making it the least popular among the options.
As ambitious as you are with your business, there comes a time when you have to let it go—retirement. This also means an end to your regular revenue or income streams. So, be sure to start retirement planning as soon as possible.
Identify your retirement goals. Retirement planning is not about having a certain amount of money but finding the right places or ventures to invest that money. Saving amasses money but investing multiplies it.
401(k) plans are usually the starting points for most people, but you can explore other areas, such as mutual funds, real estate, and other real assets. If you already have a 401(k) plan, consider an Individual Retirement Account (IRA), which can help increase your retirement funds.
You work hard to grow your business, so you want it to continue long after you’re not around. That’s why you should put thought into estate planning. It helps you designate your responsibilities to the right person and determine who will inherit your assets.
You should inventory your assets and account for your family’s needs to develop the right plan. Be sure to consider legal directives, such as a trust, medical care directive, and power of attorney. Also, review your beneficiaries and understand your state’s estate tax laws.
Your Business Launch
When ready to launch your business, there are some key aspects you should take into account during financial planning:
Make income projection statements for about a year. Be sure to subtract the anticipated expenses for that period. This helps you figure out how much money your business will generate, allowing you to plan accordingly and identify ways to achieve the projections.
What equipment will your business need? This can be computers, office machines, machinery, furniture, vehicles, and electronic devices. Be sure to account for the cost of such equipment, particularly for those items that you’ll regularly need, such as office supplies.
You should always take stock of your inventory. This generally includes raw materials, finished goods, and goods in production. Good inventory management helps to reduce costs, improve cash flow, and boost your bottom line. Bear in mind that your inventory management will evolve as your business grows.
You should have a complete list of all your employees, freelancers, or contract workers. Remember you have to pay them accurately and on time. Take into account their deductions, net pay, wages, bonuses, and salaries. Investing in a software program can help simplify the process.
You need to file an annual income tax return with the IRS. If you’re a sole proprietorship, you can use the Schedule C attachment or Form 1120 to report your income and expenses. You can also use the attachment if your business runs as an LLC. Pay attention to deadlines to avoid fines, which will cost your business even more.
You’ll also need an insurance policy for your business, and that’s why it’s vital to calculate your startup business insurance costs. The cost varies depending on your industry, business size, and coverage. Most small businesses pay about $600 per year, and larger businesses can pay up to $5,000. Be sure to factor in your insurance costs in your financial planning.
A Plan for Your Business
The success of any business hinges on its financial health. As such, you need to invest in financial planning to support the needs of your business. The process is continuous, and you can make changes as needed to meet your goals. As you grow, finances will become less stressful and allow you to focus on other components of your business.