Okay, you’ve set aside some money, you can now purchase that expensive machine or that beautiful storefront… But how do you get yourself prepared for your new venture? What accounts do you open, and how do you manage and track expenses? Even if you’re a freelancer, money must be managed carefully and with attention to detail.
When you become your own boss, you have to think about money in a way you haven’t had to before. Maybe you do some level of personal budgeting. Maybe you’re winging it and just looking at your bank account once a month. But when it comes to managing your company’s money, you have to take on a new perspective that may or may not be natural to you. It’s very tempting to keep one giant bank account for your personal & business funds, because who wouldn’t want access to business profits as soon as possible?! But there are definitely some practices you need to nail down before (or as soon as) your business move any money around. You’ll thank me later when you’re filing for taxes or figuring out whether or not you were actually profitable.
1. Before you do anything else, make a separate checking account.
In some cases, like in freelancing, or in circumstances where you don’t have too many transactions every month (or smaller sized transactions) it might make sense to have a personal checking account to start. They’re cheaper, they often don’t have exorbitant fees, and they’re quick to set up. But if you’re anticipating higher transaction amounts or otherwise more frequent transactions, then a business account may make more sense, if you can afford it. Research the fees that each bank offers, and make sure you’re getting the best deal!
There are some banks that offer free business checking accounts, but they often come with certain restrictions. Check out this awesome resource by NerdWallet, which lists free business checking accounts in each of the 50 states. Once you figure out the approximate cash flow of your business — that is, how much money is going in and out of your business — then you can determine what kind of business account is right for you, and whether free business checking is worth it.
2. Get a business credit card that racks up points or miles.
Now, credit cards are dangerous business, because if you’re not careful, you can spend with abandon and never feel the pinch of your wallet until it’s too late. However, if you can’t manage a credit card, let me be the first (and last) to tell you that you’d better learn how before you manage a business.
An important aside: If you are not a financially savvy person, that’s okay, and I am not judging you for it. We are all given different talents, and if yours is crafting the most badass model trains, then GREAT. That’s what you’re here to do.
But! If you want to be smart about your business, you either need become financially savvy, or hire someone who is pretty darn quickly. Money is not a joke when it comes to running a business. You can technically just shovel your own personal money into a business and watch it run dry over and over again, but I know you’re reading this blog because you don’t want your business to run dry. You want it to be profitable and sustainable. You want to make a living off your business. So, in all seriousness, get savvy or hire savvy pronto.
Okay, now that we got that out of the way, let’s talk about rewards-earning credit cards. The beauty of them is that, if you run a business, all of your expenses are tax deductible and will still earn you rewards or miles. You can use those rewards or miles on yourself or on your business. They can be excellent resources if you’re careful about planning your payments and major purchases.
3. Get savvy with a free or cheap accounting solution.
A popular choice is Intuit QuickBooks which offers affordable and reliable accounting tools (and also does your taxes for you). It’s currently $4.99 /month for independent contractors, but $10.36/month for small businesses. One reason I like it is because it integrates with many other payment solutions.
What I use right now is called Wave Accounting, which offers 100% free online accounting software for small businesses. Yes, FREE. It’s great for freelancers and small businesses with under 10 employees. It links directly to your checking account and pulls your transaction data so that you can see your sales & expenses in real time. You can label each transaction, and it pulls everything together into beautiful balance sheets, income statements, and other ledgers. They unfortunately don’t have a mobile application, so if that’s something you value, another great option is FreshBooks (which is $9.95/month but has great support AND a mobile application; it’s also great for small businesses).
4. Take advantage of tax-deductible expenses, and save your receipts.
When you work out of your house, you can declare business expenses for purchases made on that part of the house. For example — did you purchase a calendar or office supplies for your home office, where you do your work? Put them down as business expenses! Did you buy textbooks directly related to your trade? Expense it! Did you drive to meet a client for coffee… and then paid for their coffee? Expense all of it!
That said, when you do declare something a business expense — it no longer becomes part of your personal expenses. That is, you have to claim it on your own accounting as a business expense. Otherwise you’re just lying to everyone, and the IRS doesn’t exactly appreciate lack of transparency… which brings me to my next point: save your receipts. That way, when you declare your tax deductions later, there are no surprises for you or the IRS.
5. Pay your state & federal taxes!
This one is a no-brainer, but make sure you are registered to pay taxes, and that you meet your state’s tax paying deadlines. This also means that you need to calculate how much tax you owe. That’s where those handy accounting solutions come in. You need to calculate your revenue for the period to figure out how much you owe.
Some states have an excise tax or sales tax (which aren’t the same thing, but serve similar purposes) that businesses must pay on all revenue. Filing can be monthly, quarterly, semi-annually, or annually. Check with your state’s guidelines to make sure you’re meeting your deadlines! Tax evasion is a nasty crime and gets very ugly.
For Hawaii, my current state of residence, most businesses are required to pay a General Excise Tax (GET) which is 4.5% on Oahu. In Hawaii, businesses are permitted to pass on the excise tax to customers, but since the state expects taxes to be paid on ALL income, businesses will sometimes charge 4.712% instead of 4.5% on their customer’s receipts or invoices — this percentage includes the excise tax ON the excise tax. Try not to think about it too hard, but check with your state’s tax obligations and, when in doubt, ask a tax specialist!
There are many, MANY other things to keep in mind when managing money, and this is just one of many posts you’ll see about financial management. Tell me in the comments: what is something YOU want to know about managing money for your business?