Five Money Management Rules for Young Small Businesses
by AccountingWEB on
There are many things to consider when starting a new business, and money management probably tops the list. Get started on the right foot with these five money management tips provided by guest writer Bert Doerhoff.
By Bert Doerhoff
One: Know your minimum cost of living
If you are new in managing your small business, this tip is extremely important within the first couple of years. Calculate how much money you need to live on and withdraw that money from your business income. With the remainder of your profits, invest it back into the company. Put it back for growth.
It is exciting to be making money from your business, but many new owners use it on a big vacation or a housing upgrade. Resist the urge. Wait until your business is a little more established in a few years; then you can begin to take more profits out for yourself.
Two: Do not hire staff too early
In a young small business, the biggest expense, by far, is covering the payroll. When things get busy and it seems like you are carrying a heavy load, it is tempting to hire a new staff member right off the bat. However, make sure that it is absolutely necessary first. Never hire staff until you absolutely need them. Always stretch out existing staff first and ensure that all employees are working to their full potential.
Three: Employ the "JIT" strategy
"JIT" is an acronym for "just in time." It is a strategy of reducing carrying costs of loans or inventory. For example, if you anticipate that you will need $100,000 to cover overhead costs for the next year, do not borrow that $100,000 all at once. If you do, you will be paying interest on money in January that you will not actually use until the end of the year.
Instead, apply for a $25,000 loan for the first couple months of the year. Later, apply for another $25,000. By following this model, you will reduce the overall amount of interest you need to pay to the bank. Eventually, it will add up and save you a hefty sum of money in the long run.
Four: Negotiate terms with vendors
When dealing with outside contractors or vendors, such as delivery services, caterers, electricians, or janitorial services, do not be afraid to negotiate the terms of agreement. Use contractors that will allow you to pay up to thirty days after the receipt of their services as opposed to paying on the spot. This grace period allows you to manage your money better and place your bills in order of priority. Many vendors allow this method anyway, but be willing to request otherwise if they expect payment on the spot.
Five: Do not spend money intended for Form 941
Federal law requires business owners to hold a certain amount of money from employees' paychecks for Social Security, federal income tax, and Medicare tax for each pay period. The business then has a certain grace period before it must report those funds to the federal government. As a business owner, it is important to keep these withholdings completely separate from other funds. Do not use this money for investments or overhead costs.
Instead, place the money in a separate account that you do not access except to file your 941s. This practice will keep you from spending money that is not really yours to spend. It is a good habit that will prevent your business from getting into a financial pinch at the end of the month. Government penalty fees are not forgiving in this type of situation.
- Pay Me the Money: Improving Collection Rates Step-by-Step
- New Xero Survey Reveals Most Common Small Business Financial Mistakes
About the author
Bert Doerhoff is CPA and founder of Accubiz, an accounting firm based out of Jefferson City, Missouri. Accubiz was chosen for the first ever National Client Service Accounting Firm of the Year Award by the National Association of Small Business Accountants. Doerhoff specializes in small business taxes and wealth management.
Wait, there's more!
There's always more at AccountingWEB. We're an active community of financial professionals and journalists who strive to bring you valuable content every day. If you'd like, let us know your interests and we'll send you a few articles every week either in taxation, practice excellence, or just our most popular stories from that week. It's free to sign up and to be a part of our community.