Starting a business? A quick Q+A to get your most pressing money questions answered
The following is a guest blog written exclusively for The Quiet Sage. The Quiet Sage, launched by Rachael Roehmholdt, is a go-to resource for female entrepreneurs looking to take their businesses to the next level while still balancing family life. Find them at http://www.thequietsage.com/. Enjoy!
Whether you’re brand new to online business or have been getting your feet wet with the idea of making money online for a while, one of the biggest things that has so many budding entrepreneurial women overwhelmed is the details of their FINANCES!
I’ve heard from so many of you with question after question as to what’s the right way to get things set up with a brand new business. To be honest, even though I’ve been at this online business thing for a few years now, I don’t have all the “right” answers – just those that have applied to me in my state thus far.
So I took to an expert in the financial space – especially when it comes to budding entrepreneurs – to interview her in an informal Q+A to find out the RIGHT way to set up your business from day one.
Jennifer Faherty is a Certified Financial Planner™, Certified Coach, and Money Psychology expert. She specializes in helping women “live within their means” while still living “a life of their dreams” through holistic, fee-only planning and money/career coaching. Suffice it to say, she is JUST the right person to ask all these questions that you all have been throwing my way the past few months.
So without further ado, here’s our Q+A interview on how to cover your financial bases when you’re just getting started in online business.
HOW DO I FIND OUT WHAT THE TAX LAWS ARE IN MY STATE? WHAT FEDERAL TAX LAWS DO I NEED TO KNOW ABOUT? WHAT DO I NEED TO DO IN ORDER TO MAKE SURE I’M COMPLYING WITH THEM?
You’re an aspiring entrepreneur, not an accountant. I get it. But the truth of the matter is, you do need to somewhat savvy about the state and federal tax laws regulating business owners.
Even if you end up hiring a tax professional so you can focus on other aspect of your business, it’s vital to have at least a basic understanding of what’s required. You never want hand over your books to someone and look the other way entirely – remember the responsibility is ultimately on you as the business owner, so having a base line knowledge is key.
For state tax laws, a great place to start is the Small Business Association. You can look up your state and it will redirect you to its respective division of taxation where you can start familiarizing yourself on what applies.
For federal tax laws, there is no better resource that going directly to the IRS.
So as not to be overwhelmed, start with these basic sites and allocate one hour a week, at least, to go through them. For my own business, I’ve implemented “Financial Fridays” when I review my general business finances for one hour, whether that means going through expenses, checking invoices, or reading an important piece of new legislation that will affect my bottom line. In the beginning, you might want to do this daily, so you establish a good foundation and system.
https://www.irs.gov/businesses/small-businesses-self-employed/starting-a-business
For starters, you also might choose to focus on reviewing IRS Tax Forms – Schedule C and Publication 535 to gain an understanding of the general business categories and rules for deducting business expenses. I would also recommend familiarizing yourself on the federal rules for estimated taxes and self-employment tax, both of which can be found on the above IRS site.
HOW IMPORTANT IS IT TO KEEP MY BUSINESS AND PERSONAL FINANCES SEPARATE?
This is by far one of the most essential things to do – like, right now if you haven’t already! The IRS will not be pleased if your accounts are commingled and it will be difficult for you to make certain deductions, etc. if a gray line exists between what is personal and what is business.
That means having a separate Tax Identification Number (TIN or EIN), legal paperwork with a registered business name, a business checking account (and possibly a business savings again to set aside money for future savings/investment purchases/estimated taxes), and a business credit card.
If you must use a personal account – for example, you can’t find your business credit card and must make an immediate purchase – then make sure you file a “report” and transfer the money, much like filing an “expense report” and getting reimbursed (except in this scenario, you are the employer). Try to do this as close as possible to the date of transaction, to avoid and mismanagement or slips.
WHAT KINDS OF BOOKS OR RECORDS DO I NEED TO KEEP TRACK OF IN MY BUSINESS?
To err on the safe side, keep a record of everything! Okay, maybe that’s a bit unrealistic and conservative, but I would recommend that if you’re unsure, keep it. Nowadays, with technology, it’s so easy to scan documents for safekeeping, file them electronically and create a back up for security.
Though by no means exhaustive, you want a file for receipts/expenses, invoices, bank statements, bills/accounts payable, and legal documents. You will also want some kind of system of tracking daily activity, whether that’s a comprehensive spreadsheet or an online tool like Quickbooks, Wave, etc.
If you are working with a tax professional or bookkeeper, this is an excellent topic to bring up with him/her. He/she will most likely have a checklist or recommended system that coordinates with his/her own processes.
WHAT SOFTWARE SHOULD I USE TO TRACK MY BUSINESS EXPENSES? OR DO I NEED TO HIRE SOMEONE TO DO THIS FOR ME?
I would recommend an online system that syncs securely with the bank where you house your business accounts, such as Quickbooks, Freshbooks, Wave, or Xero. This will make it so much easier than having to enter data manually. However, if you are spreadsheet savvy, that’s always a safe option as well.
As far as hiring someone, I would say this: It can be overwhelming to start a business and therefore smart to delegate certain tasks to another person whose expertise might save you both time and money in the long run. At the same, time you need to keep expenses down and be as lean as possible, especially in the early stages of your business.
So, unfortunately, there is no clear-cut answer here. It depends on how financially savvy you are – or how willing you are to invest the time to travel the learning curve.
Either way, remember to at least maintain that baseline knowledge – because, as I mentioned above, as a business owner, the buck always stops with you! Taking some time for a little financial education will go a long way and help set you up for long-term business success.
HOW MUCH MONEY SHOULD I INVEST IN MY BUSINESS WHEN I START?
Again, though for different reasons, there are no clear-cut answers here. For some, start-up costs could be as little as $1,000; for others, it may be upwards of $100,000.
First things first, make sure you have a rock-solid business plan that lays out the expected incoming revenue and outgoing expenses, projected over at least three years. Do your research by soliciting advice from experts, organizations like SCORE or SBA, and mentors who are familiar with your particular industry.
You also want to make sure that your business plan is in sync with your personal financial plan. Remember, you may have little or fluctuating income initially, with none of the common benefits of a corporate gig, like having health insurance, a 401(k) plan, etc. Account for those adjustments and make sure your personal financial ducks are in order before taking the plunge!
WHERE CAN I GET MONEY TO START MY BUSINESS? SHOULD IT BE MY OWN MONEY?
If you can swing it, self-financing is a great option because you are indebted to no one but yourself. Ideally, the money would come from savings that you’ve squirreled away over the years and have set aside specifically intended for your start-up. Other possible options for self-funding include borrowing from the cash-value of your life insurance or a (gulp!) loan from your 401(k) or other retirement plan as you build your business part-time.
However, before you self-fund, especially in the case of borrowing against an insurance policy or retirement plan, make sure you understand the consequences and terms of re-payment, and how it may impact your overall financial picture. Borrowing from a 401(k), for examples, involves a short repayment period and high penalties if not paid on time, not to mention the opportunity cost of no longer having that money invested with pre-tax dollars and the added risk of having to repay the loan in full within 60 days if you lose your job before your side hustle takes off.
If you cannot bootstrap, other options for finding the money to start your business include: asking friends and family to invest, finding angel investors, crowd-funding or securing a small business loan.
The bottom line with all of this is: Do Your Financial Homework. Take the time to acquire a baseline knowledge of the tax/business laws, create a solid business plan, review your personal financial plan, and understand the many intermingled factors involved.
You may be eager to leap into that great business venture and get up and running as soon as possible, but taking a little time to test your wings and build a solid financial safety net will make sure your new start-up with fly peacefully into the horizon.
So there you have it! I hope you enjoyed getting answers from an expert herself on this big topic of finances in online business. If you have any questions for Jennifer, be sure to pop them into the comments below.
Thanks again Jennifer for being a guest on my blog today! I certainly learned a few things – and added a couple notes to my to-do list as well.