Evolved Finance

Bookkeeping and business education company dedicated to helping online entrepreneurs create profitable and healthy businesses.

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Making the Shift: Running an Online Business vs. Generating Income (part 2)

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In last week’s blog post, we discussed the perspective shift that online entrepreneurs experience once they realize they aren’t treating their online income like an actual business. We shared our observation that many online entrepreneurs spend so much time focusing on generating revenue that they neglect other aspects of their business that are essential for future growth and stability. When online entrepreneurs begin to truly see themselves as business owners, they inevitably start to think about their business differently as well.

They develop a long-term strategy.

In the beginning, generating any sort of revenue seems like such a difficult task that many entrepreneurs don’t envision what their business might look like years down the road. Whether you’re currently making money or getting ready to launch a new business, there are some key question that you should be asking yourself:

  • How will your operations change as the business grows?
  • Where will new revenue streams come from when you’ve exhausted your current channels?
  • What is your role and how will it evolve? How large can the business grow before you reach your maximum capacity for managing clients and/or projects?
  • What areas will require investments to help the business grow?

They track and organize their financials.

Bookkeeping and taxes are a big part of managing your business, and we’ve seen online entrepreneurs really stunt their potential by either avoiding this aspect of their business completely or handing it off to someone who isn’t capable of managing it properly. It’s difficult for an online entrepreneur to envision a bright future when their finances are a mess and tax problems are constantly looming.

They utilize financial data to monitor the health of the business.

Many online businesses wait until the end of the year to have their accountant sift through their bank statements and homemade spreadsheets for tax purposes. Although we commend these owners for taking their tax liabilities seriously, not maintaining the books on a monthly basis means they miss out on the opportunity to analyze financial data when it’s actually useful. It’s far more difficult to spot issues and opportunities if you have no grasp of the state of the business from month to month. For more on this, check out our earlier post about why every online business needs a bookkeeper.

They understand the importance of leadership.

Just because you’re running an online business from your home doesn’t mean your leadership skills are any less important. Your ability to make smart decisions, strategize effectively, manage contractors or employees, and develop a clear vision for the business are all important leadership qualities to cultivate. The business starts and stops with you, so your limitations and weaknesses will decide how far the business can go.

They get smarter about using their profits.

New online entrepreneurs (and even some seasoned veterans) focus so intently on how to make money that they don’t always know how to manage it effectively once it starts coming in. If you’re not sure what to do with your newly earned profits, we recommend the following:

  1. Save for taxes each month.
  2. Pay off your business debt (loans, credit cards, etc.).
  3. Create a savings account with enough money to cover 3-6 months of expenses.
  4. Establish a retirement plan for yourself.

They bring on professionals.

As much as some wish they could, it is virtually impossible for online entrepreneurs to effectively manage all aspects of their business themselves. There are three key people you’ll want to bring on once you can afford them.

  1. A bookkeeper to track your finances and provide valuable financial reporting
  2. An accountant to file your taxes and help you develop a tax strategy
  3. A lawyer to advise you regarding the creation and maintenance of your business entity and the protection of your assets in case of a lawsuit

Learning how to generate revenue is important. Knowing how to connect with your audience is important. Developing products and services that add value to your customers and clients is important. There is no question that mastering these things will be vital for your success, but as your income grows, it will only become more important to learn how to manage every aspect of your online business, not just the parts that generate your revenue.

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When Corey and I talk to prospective clients for the first time, we frequently have to explain to them that Evolved Finance is not an accounting firm. This confusion is understandable, as most online entrepreneurs don’t engulf themselves in the financial aspects of running a business. The majority of entrepreneurs will hire an accountant at the end of the year and then hope for the best.

If you’re unclear about the difference as well, you are in luck! We want to clear up the confusion and explain how bookkeepers provide a much different service than your accountant.

What does a bookkeeper do?

Let’s see how Wikipedia defines bookkeeping:

“Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation.”

This is a nice and concise definition of the role bookkeeping plays in a business, but it still might seem a little foreign if you’re not familiar with the financial side of your business. Here are the basics of what you need to know about bookkeeping.

  • A bookkeeper collects and records all of your business’s financial data using accounting software like QuickBooks. These financial data include all of the transactions that occur in your various business accounts (checking, savings, PayPal, credit cards, etc.).
  • Once your financial data are recorded into the accounting software, a bookkeeper will then organize these data so you and your accountant can more easily see:

How much revenue your business generates before expenses (your gross revenue)

How much money your business spends on expenses such as rent, utilities, software, advertising, etc.

How much profit your business makes (profit = gross revenue – expenses)

  • A bookkeeper will also make sure that your financial data in QuickBooks match up with the transactions occurring in your bank, credit card, and merchant accounts. This is called “reconciling” an account and it’s usually done on a monthly basis.
  • Once all of your accounts have been reconciled and your transactions organized, the bookkeeper can then generate a profit and loss statement (P&L), a basic financial report that shows your revenue, expenses, and profit.

Hiring a bookkeeper isn’t just for tax purposes. The financial reporting a bookkeeper can provide (like your P&L) can be hugely valuable for managing your business more effectively. It’s so much easier to make decisions when you have clear financial data to utilize.

What does an accountant do?

The main service an accountant provides is the actual filing of your taxes. An accountant will take the financial data your bookkeeper has compiled and use it to file your taxes.

Here are the five main ways an accountant can serve your business.

  • An accountant will file all the necessary paperwork with the federal government and your state government during tax time.
  • An accountant will provide advice and guidance around what expenses you are able to write off for the business.
  • An accountant can help you estimate your tax bill throughout the year. They can also file estimated payments for you every quarter if you’d rather not wait.
  • An accountant can provide general guidance around building a tax strategy that will limit your tax liability while also ensuring you stay within the confines of state and federal tax laws (very important when your business starts generating six or seven figure revenue).
  • An accountant can help you through an audit with the IRS.

Accountants can provide some other services as well, such as helping you to create a business entity or setting up a payroll system for your employees. Not every business needs these extra services, but all businesses – making any amount of revenue – need a tax professional to make sure their taxes are handled properly.

If you have aspirations to grow your business in a significant way, establishing strong financial practices early on can make future growth so much easier to handle, especially as the business becomes more complex and the IRS starts to want a bigger cut of your profits. A strong financial team can significantly reduce stress around your taxes and finances while also freeing up your time to focus on driving revenue and managing your team. Don’t wait until you’re in tax trouble to get professionals involved in your business.

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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.

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