Small Business, Finances, Money Tips, Entrepreneur, Bookkeeping, Accounting, Financial Tips, Self-EmployedYou’re a brand new business owner and you’re STOKED to be following your passion and dream! You’re thrilled, you’re energized, you’re ready…and you’re clueless about how to setup the money side of things! Because as excited as you are about starting your business, they money stuff is SUPER overwhelming.

How do you get your money setup? What are the first few steps you need to take? What needs to happen now and what can you wait on? How do you know you’re taking the right steps? Are you going to screw it all up?

Many new business owners wait to deal with the financial side of their business. I’m going to give you some compelling reasons why you need to start thinking about this stuff. I want to start off with why you shouldn’t wait.

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Why you shouldn’t wait (6:33)

It’s tempting for new business owners to wait until their business hits a certain marker, level or growth point. Here’s what they think: I want to wait until I’m more established. I’ll wait until my business has been around for a year. I want to have X amount of clients. I want to make $100,000 then I’ll think about organizing my finances.

Here’s the thing. You actually have an advantage as a small new business. The smaller you are, the easier it’s going to be to set up your business finances.

Don’t wait for an external indicator to set up your finances. Set them up now!

It’s much easier to set up your finances when you have fewer transactions because, not only do you have less to catch up on, you also have less moving pieces to work into a system. You’ll have more time to dedicate to setting up your system now and growing your skills in this area.

Do your future self a favor and deal with this stuff now.

Right now, you might be thinking, I don’t know anything about business finances! I’m going to wait to figure this out, after I’ve built enough momentum. But if you’re a new business owner, your model is simple at the moment. It’s only going to grow more complicated as your business grows. You can learn how to track your finances now while you have the time and space to do so.

I know it’s boring. I know it is not the thing you want to do with your shiny new business. You probably want to work on products, marketing, branding, pretty designs or basically anything else. But give yourself this gift!

Step 1: Separate your biz and personal finances. (11:23)

The first thing you should do as a new business owner is keep your business and personal finances separate. I don’t care if you have two transactions per month, you need to have that separation. You need all of your income and expenses from your business to go into one account. Don’t mix your income and expenses with your personal account.

There are a few exceptions (internet and home office), but you should be separating at least 90 percent of your financial transactions that have to do with your business.

The easiest way to do this is to open a business bank account for your business.

I did an entire show on the importance of keeping your business and your personal finances separate. In this post I talk about what you need to separate, why you need to separate and give you some options for separating. I suggest a few alternatives for the entrepreneurs out there who are resistant to opening a new business bank account.

To keep this simple, I’m saying my golden rule is to open a business bank account for your business.

Step 2: Choose a record keeping method (14:38)

Step number two is about selecting a record-keeping method or tracking system. You’re never too small to start your financial record keeping! In fact, the smaller you are, the better it’s going to be to get your financial system up and running.

As a new business owner, you have the luxury of making a very intentional decision about what type of bookkeeping program you want to use. The earlier that you start your bookkeeping system, the easier bookkeeping will be. You’re going to learn as you go, but also you’ll be up to date on all your records.

The most overwhelming thing that small business owners have about their business finances is how easy it is to fall behind. The reason they fall behind is that they don’t set up a system in the beginning.

If you have not already chosen a financial record keeping system, you’re going to take three weeks to do this.

Week One: Identify what you need in a system and what program meets those needs

You need to research your options. Make a shopping list of what you might need from your bookkeeping system. If you don’t do this first, then you’ll get overwhelmed when you start looking at different software.

Week Two: Set up and implement your system.

One thing people forget when they buy a bookkeeping system is that you have to set it up. Give yourself a solid week to set up your system, connect your bank accounts, change your categories, and set up your invoices.

Week Three: Learn your system.

Before you even start catching up on your bookkeeping for the last six months, learn your system first. Take a week to research stuff that you don’t know how to do. Watch tutorial videos and read blog posts. My website has a lot of information about using different bookkeeping systems.

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Step 3: Understand your tax deductions (22:19)

Understanding your tax deductions is another financial aspect that new business owners skip over. One of the hardest things for new business owners to do during bookkeeping is to categorize their income and expenses. It gets overwhelming!

Take time to research and learn about tax deductions before you start a financial tracking system.

The reason you want to do this is that so often when people learn as they buy rather than learning ahead of time, they miss deductions. You don’t want to make assumptions about what you can and can’t write off.

There are three things that I recommend that you focus on in your tax deduction research.

Step 4: Make a tax savings plan (28:47)

This is where we move into the stuff that I wish every new business owner would do in the first year of their business. If you make a tax savings plan, you’ll have fewer challenges moving forward. I want you to think about your tax saving strategy at the beginning of your business. Not in the future when you owe a bunch of money on your taxes.

People who transitioned from a 9-5 job underestimate how much they’re going to pay on their taxes. One of the nice things about being an employee is that taxes are automatically taken out of your paychecks. But when you’re self-employed, you have to be proactive about setting aside money that you owe to the government.

Saving for your taxes as a small business owner is the second most important thing you need to work into your financial routine.

Here’s my strategy: run a Profit & Loss report and determine your net income. Your self-employed income minus your tax deductions and expenses equals your net income.

Now you can see how these steps start to build on top of each other; why you need to know your tax deductions, why you need to have a record keeping system, why you need to have your business and personal finances separated. It’ll make this process much easier to work through.

This will clue you in how much money you need to set aside for tax payments.

Say you made $5,000 last month, and then you have $2,000 in tax deductions. Your net income is $3,000. 25% of that is $750. Yes, I’m telling you to set aside $750 because that’s going to add up quickly over the course of a year.

Now you may be like, holy crap, you want me to put $750 away for taxes? And the answer is, I do. I really, really do. Because if you think about the holy crap moment right now, imagine what that $750/month looks like over the course of a year.

The second step is sending your payment to the IRS every business quarter. This is part of being proactive and making sure you’re paying off your taxes on a regular basis.

Step 5: Know your profit, know your cash flow (37:39)

This is the one that I feel most passionate about, and it’s probably going to be the most surprising to some of you. Know your profit and your cash flow.

Most small business owners don’t get to this point until they are many years into their business. One of the biggest reasons they have problems with their business finances is because they do not know their profit and they do not know their cash flow. This one is really about understanding the way money works in your business.

This is part of understanding the overall picture of how money is going to move throughout your business, which is going to help you make financial decisions.

The first thing that we need to understand is the difference between profit and cashflow because they are not the same thing.

Know your profit.

Is your business sustainable? Does it make money? In the early stages of owning a business, you may not be profitable. You may have to put out a lot of money to get your business setup. You’re still gaining momentum with sales or clients or customers.

In order to know your profit, you’re going to look at your revenue and your spending. You have to figure out if you’re overspending or underspending.

Know your cashflow.

Do you have enough money coming in and out of your business? Are you managing the money in your business sustainably?

When we talk about cash flow, we are not talking about income and expenses. We are talking about all the money that comes into your business and all the money that goes out. Some money goes out of your business that isn’t an expense like credit card payments.

There is a little bit of manual math you have to do, but it’ll help you understand your cash flow situation. Let’s say your Profit & Loss report says that you made $3,000 in profit. You set aside $800 for taxes which leaves $2,200. You decide to pay yourself $2,000 which leaves $200 in your business bank account. 

While you may have $3,000 in profit, you don’t have money in the bank because your savings and owner pay don’t show up on your Profit & Loss statement.  Doing this manual math helps you assess your cash flow even if you’re profitable.

If you can start to understand these five steps first year of your business, you’re going to be able to take that skill with you as your business grows. Your finances will thank you for it!

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