There’s no business without revenue, but too many online entrepreneurs fail to realize that managing their income is just as important as generating it. Most are simply not prepared for the extra complexity that comes with managing the cash flow and controlling the expenses of a quickly growing business.
That’s where Evolved Finance can help!
In this post, we review seven crucial financial practices to adopt so you can manage your financials more effectively. The sooner you start thinking about these aspects of your operations, the more profitable your business will become, and the better prepared you’ll be for future growth.
1) Putting money aside for taxes
We’ve said it before and we’ll say it again: it never ceases to amaze us how many entrepreneurs just don’t prepare for taxes until it’s too late. The bottom line is that any profit your business generates will be taxed.
The easiest solution is to automatically put 20-40% of your profits into a savings account that will be used to pay your tax bill at the end of the year. This way, you won’t be tempted to spend money that will eventually have to go to the IRS.
Calculating your estimated tax bill can be complicated because there are so many variables to take into consideration, so talk to an accountant if you have concerns about how much money you’re going to owe the IRS. Your accountant can also provide additional advice about where you should be on the 20-40% savings scale.
2) Planning for future expenses
It is always important to understand your business expenses, but it is even more critical when you’re business is starting to grow. It’s not very fun to get sideswiped by new costs that you just weren’t expecting.
This is why it’s important to understand early on how you want to grow your business and where you think that growth will come from. This way, you can forecast which expenses will increase and where new expenses may pop up. A little bit of planning with a simple spreadsheet can go a long way in helping you to support an influx of new business, so it’s no surprise that our most successful clients are often the most effective planners.
3) Creating the right business entity
Creating a business entity can be a great way to limit your legal liability as the owner. It can also provide some pretty big tax benefits once your business gets into the six-figure range.
Thanks to the Internet, it’s now easier than ever to create a business entity. We’re big fans of CorpNet, mainly because their customer service is phenomenal and their pricing is competitive.
However, despite the ease of creating a business entity, it’s always safe to talk to an accountant and/or lawyer first to make sure the business entity you choose is right for your situation. Depending on the size of your business and your long-term strategy, the entity you choose now can cause big headaches down the road from both a tax and legal perspective.
4) Having an accountant who understands your business
Believe it or not, making money online is still a relatively new concept. Although there are some online entrepreneurs who got an early start and have been actively generating income for the past ten to fifteen years, many accountants still don’t understand how this world works.
If you are running an online business, any accountant should be able to file your taxes for you, but not every accountant will understand what your business does and know how to maximize your tax write-offs. Things like affiliate income/expenses, merchant accounts, and digital products may feel like commonplace concepts to you, but be totally alien to an accountant who has dealt primarily with personal tax filings or brick and mortar establishments like restaurants, retailers, and dry cleaners.
If your accountant has to spend extra time trying to understand your PayPal statements or figuring out all of the affiliate payments you’ve processed for the year, that’s going to mean a larger accounting bill for you. We feel that you shouldn’t be charged more money because your accountant doesn’t understand how your business model works. Do some research and find someone who gets it. For a more general overview of the services an accountant provides, check out our August article, What’s the Difference Between a Bookkeeper and an Accountant?
5) Setting revenue goals
During my time in Corporate America, I got to work with a world-class sales team. One of the commonalities I saw among the best sales reps in the company was the setting of clear sales targets.
Once a rep set their sales target for the year, they would then break that down to more achievable monthly targets (and sometimes even weekly targets). By doing so, they made their goals much more achievable and easier to track. This type of revenue forecasting isn’t very common with online entrepreneurs, especially when so many businesses lack the financial data to keep track of their monthly progress.
To illustrate, let’s look at the following statements:
“I want a six figure business this year.”
“I’m going to have my first $10,000 month 12 weeks from now and I’m going to do X, Y, and then Z to make it happen.”
See the difference? Having clear revenue/sales targets will help you visualize a clearer path to achieving your goals, leading to much more deliberate and focused actions. This type of clarity is tremendously useful whether you’re aiming for your first thousand dollars or your first million.
6) Creating a budget
The way the owner of an online business manages their expenses not only decides how much profit they get to keep, but how much fuel the business has for continued growth. The best way to keep your expenses under control is to create a monthly budget.
Driving big revenue is definitely an accomplishment, but it doesn’t mean much if your expenses are out of control, resulting in little or no profit to show for all of your effort. We rarely see our clients creating budgets on their own and feel this is a very undervalued exercise in the online entrepreneur community. If you desire longevity and stability for your business, wrapping your head around your budget is vital to accomplishing this.
7) Start a business savings account
We regularly see entrepreneurs take all of their profit out of the business every single month. This leaves the business with no savings buffer for unexpected expenses or for slow months when there is less revenue generation. Without a business savings account, owners are forced to use their personal funds to cover basic expenses until things pick back up again.
Once you stabilize your business to the point where you’re able to pay yourself a consistent salary, use your extra profits to build a business savings to cover 3-6 months worth of your expenses. For example, if your business has $10,000 in expenses every month, you’ll want to build up a savings of $30,000 – $60,0000 in case you hit a slow period.
This savings nugget can also come in handy as you start to strategize for the future growth of your business. Maybe you need to hire a new employee? Perhaps you need some cash to create a new digital product? Or, you might want to try a new advertising strategy and need to kick up your add spend. You now have the cash to invest in these ventures, eliminating the need to take out a business loan, rack up credit card debt, or front the money personally.
We hear from entrepreneurs all the time how stressful this side of their business can be for them, but it really doesn’t have to be. Taking some time to plan ahead and getting the right people involved in managing your finances and taxes is the biggest battle. If you’re capable of creating a business that is actually making money, you’re more than capable of getting the financial side of your business under control as well.