Most small businesses will experience different financial struggles throughout their lifespan, and the ability to properly identify and resolve them will be crucial. To help you start on the right foot in 2020, we talked to Katelyn Magnuson, owner of The Freelance CFO, and an expert in small business finances, about five financial resolutions you should consider implementing for the new year.
5 Small Business Challenges and the Resolutions That Can Solve Them
These common financial struggles can have a big impact on you and your small business, but having the right solutions in place will help you feel in control in 2020.
1. Taking a Salary for Yourself
Struggle: Some small business owners are so focused on the business, they don’t pay themselves. Magnuson explained that there are typically two reasons why business owners won’t take official salaries: “Either their income is variable or unreliable, or they’ve co-mingled personal or business accounts. In either case, what they take or are taking becomes muddled.”
This makes it more challenging to keep up with your financial records, and it doesn’t align well with scaling your business, which often requires more careful bookkeeping.
Resolution: Take 50% of what you make as an owner salary to start.
Solution: A qualified CPA can help you establish what salary you should be paying yourself, but Magnuson recommends taking no more than 50% of what the business makes as a salary. To make this easy, you can set up payroll software that will pay out your salary throughout the year, positioning yourself as an employee with a W2.
2. Get Help from a Professional for Tax Season
Struggle: Taxes are often relatively straightforward when you’re a traditional employee, but business-related taxes are another matter.
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Magnuson explained that when it comes to tax season, many of her clients struggle. She said that many are confused about deductibles and business expenses, along with how to manage the crossover of business and personal finances.
Resolution: Get help from a CPA specializing in small businesses.
Solution: Having a qualified CPA who has a background in small business walk you through your finances can be a gamechanger. In many cases, a CPA will be able to help you come up with a list of deductions you didn’t know you qualified for or suggest a different business structure that may result in significant tax savings.
They can also ensure that you know what you’ll owe long before tax time and keep you from making any mistakes that will land you with penalty fees if you get audited.
If you don’t have a referral for a CPA, you can use a database like AICPA to find one near you.
3. Prioritizing Retirement
Struggle: More than one-third of all business owners don’t currently have a retirement plan in place.
Plenty of business owners have a lot of financial decisions to make, and some may struggle to decide how much to put into savings and how much to reinvest back into their business.
This can result in business owners neglecting their retirement accounts, even though the later you start, the harder it is to catch up.
Resolution: Start saving for retirement now, even if it’s just 5 percent of what you make per year.
Solution: Starting early is key when it comes to retirement because you can benefit from compounding interest.
“Taking care of [your] future selves almost always falls to the wayside,” said Magnuson. “I can’t stress what a difference even 5 percent per year in savings can make when compounded over 20, 30, or 40 years,” she explains.
Even if funds are tight, try to get as close as you can to the maximum contribution limit for your retirement account each year. Keep in mind that you can always consider other options for business funding like small business credit cards so that you can invest money into your business without sacrificing your personal future.
Roth IRAs are a popular savings vehicle for small business owners because they offer more flexibility than traditional IRAs. That being said, you can’t deduct contributions from your taxes with a Roth like you can with other types of retirement accounts, so talk to your accountant about what’s best for you.
4. Taking the Time to Protect Your Business Financially
Struggle: It’s not uncommon for small business owners to be so excited about getting things up and running that they don’t worry about how to protect themselves legally or financially. This can be a mistake – there are plenty of risks that business owners should be protecting themselves from.
This includes clients who cancel big orders and don’t want to pay, clients or vendors who try to sue you for reasons that may include injuries on company property or with your company’s equipment, perceived breach of contract, or someone claiming you’ve infringed on their intellectual property.
Resolution: Create a plan to best protect your business and yourself from financial threats.
Solution: There are multiple things you may be able to do to protect your business from common financial risks, but the first thing you should do is to set up a business designation. There are multiple types of business structures available, and some will offer financial protection for your personal assets.
LLCs, for example, can help you create a slight separation between personal and business assets, but only if you actually keep the two separate. Set up a separate bank account and credit cards for your business, and don’t mix them with personal funds.
Magnuson points out that separate accounts are the best approach, regardless of your business entity. “The number one mistake I see is not separating their personal and business finances,” Magnuson said. “Even if they’re a sole proprietor, setting up a separate checking account is the bare minimum any business owner should be doing.”
You probably won’t need a lawyer on retainer, but it’s worth establishing a relationship with someone you trust who you can turn to in an emergency or for basic business concerns, like reviewing contracts you use with vendors, clients, or employees.
5. Staying on Top of Cash Flow
Struggle: Intermittent cash flow can be a common problem for small businesses, especially if clients are paying late. You don’t have a standard set paycheck coming in every few weeks, so the ups and downs of income can be hard on businesses.
Resolution: Have a plan in place for slower seasons or dips in cash flow.
Solution: Keep a watchful eye on your cash flow, knowing what bills you’ll have coming in before you splurge on a new business expense. Invoice and expense tracking software like FreshBooks or QuickBooks will help with this, making it easy for you to see the projected income you may have coming in and what expenses are coming your way, too.
While sometimes cash flow problems can be inevitable, careful planning based on realistic financial projections can be useful. A qualified accountant can help you set up relatively accurate projections based on your current performance and overall business trends from previous years.
If cash flow is consistently a problem, look at different funding options. You can consider taking out a small business loan, especially if you need to make a few investments into your business so that it can scale to a point where it will be more consistently profitable.
You can apply for small business loans through traditional banks, local credit unions, and online lenders. Applying through an online lender can typically be a faster and more convenient process, and they may have less stringent requirements than conventional banks. Conventional loans from traditional banks, however, may be able to grant you more capital and they may be able to do so at a slightly lower interest rate. Loans through the Small Business Administration (SBA) are backed by the government and come with low rates and long terms, though they have more stringent requirements.
Ana Gotter is a business and financial writer with years of experience creating content on the topics, including personal loans, financial planning, business management, and business finances.