Sometimes, more than training or knowledge, it is the habits of an individual that determine how successful we can be in our endeavours. Naturally, there are certain financial habits that successful entrepreneurs practice and have been practising from the days when they were just a small business.
The following financial habits should provide small business owners with a new perspective which should help them to be better prepared for the future without sacrificing their craft, client relationships or the interests of their team.
Review Finances Regularly
Businesses tend to have a natural ebb and flow to their operations and often have a rhythmical pattern of expenses and income. It could be the result of seasonality, the contract terms or the duration of projects.
Holding monthly or even weekly financial reviews can help business owners to understand the scale and frequency of their operations, the rate at which their business is growing or the financial risks that they could be facing.
Maintaining a Budget
A budget should simply express the expectations that you hold from your business in numbers. For those who have just begun they can make it a practice to create a budget on the first day of the month.
It should contain information as to what should be the income that they expect to earn in that particular month and how much your expenses are likely to be.
At the end of the month you should carefully review your budget to see how accurate you have been in terms of the projections you made for the income and expenses. Follow this procedure every month to further refine your techniques of financial planning. The benefit of inculcating this practice is that you will make better decisions and also become quicker in identifying potential problems.
The money that you reserve in your budget to pay taxes is not exactly your money. It is the government’s money technically and therefore you must set it aside as soon as you earn it and not use it for any other purpose.
While it is difficult to ascertain the exact amount of money that you need to pay as taxes, to be on the safe side you must set aside at least 90 percent of the amount that you paid as taxes in the previous taxation year. This way you can avoid having to pay penalties as a result of your ignorance.
A debt can also be useful at times but that largely depends on the proportion and the stage of business at which it is owed. A short-term debt gives you the necessary funds that you need to take on more business operations and support your existing expenses.
But unnecessary debt can create a dent on your balance sheet and it is quite undesirable for any business owner. To prevent debt from draining your profits, as a business owner you must persevere to reduce the principal amount of debt that you owe and make consistent payments for the same.
Salary Is Paid from Business Earnings
As an entrepreneur it is upto you to decide whether you should pay yourself a salary each month or draw a certain amount from your business earnings at regular intervals to take care of your personal expenses. The amount of money that you withdraw should take the overall financial health of your organisation into consideration.
The term ‘salary’ doesn’t usually apply to most businesses and it is rare to find business owners that send themselves a regular bi-monthly paycheck. Also, in difficult times it is a common practice amongst entrepreneurs to draw lower than usual salaries.
Optimal Business Structure for Taxes and Liability
Partnerships, sole proprietorships and corporations are some common business structures. Different tax and legal requirements are applicable to different company structures.
You should seek professional assistance to know which type of structure would be most suitable for the type of business that you are looking to set up.
Besides the financial habits mentioned above, another trait of a successful business owner is that they prioritise securing their business and personal assets. As a small business owner you should learn about how to make a Will and also enquire about which insurance policies would be most suitable for your business.