The 4 Rules of Money Every Small Business Should Know

It’s been a crazy month, to begin with, and as I write this, we’ll be onboarding three clients this week.  I’m excited for them and for me 😉.  I have noticed that one of the common issues my clients have is that they don’t follow any rules when it comes to understanding the rules of money for small businesses.

Whenever I take over the accounting tasks for small businesses, I start by asking questions.  Hopefully, if your reading this it will help you out.

Money Rule 1:  Know Where All Your Money Is

Another no-no is to have business expenses tied to your personal credit card.  That makes it really hard on you to track the expenses and you may lose out on deductions. 

Money Rule 2:  Set Aside Money for Taxes (and Other Long-Term Obligations)

If you don’t have a business savings account, you should open one soon.  This way you can set aside money for things like taxes, balloon payments, and other long-term obligations that you may have.  My rule of thumb on how much money you should set aside is fairly straight forward.  If you a service-based organization, I suggest a portion of any sales be moved into savings account as soon as you receive payment.  That way when you pay your estimated tax quarterly your covered and you don’t have to sweat it. 

I have tax brackets laid out for you in the Tax Brackets for 2020.  That way you can use the highest tax bracket that you fall into to set aside the money for tax payment.

Money Rule 3:  Embrace Your Real Expenses

My son just turned 16 and will be getting his driver’s license soon (which scares the crap out of me).  He recently told me that HE wouldn’t get into an accident (You know, because he such an awesome driver).  However, as I told him the statistics prove him wrong almost everyone gets into an accident as a young driver and he’s no different.  Well your expenses are just like that…

Embrace it!

Inevitably you will forget about a bill, have an unexpected expense or your cash flow will be low.  As I like to say it’s time to whack the mole. 

1. Take some money from a different category pay it off,
2. Annotate it so it doesn’t happen again or your prepared for it.
3. And move on.

If you don’t know where your money is going that will be the quickest way to go out of business.  If you need a little help organizing check out our 4 Steps to Organizing Your Small Business Finances.

Keep an eye on your expenses and you’ll have enough to cover those unexpected expenses.

Money Rule 4:  Prepare for the Down-Cycle

Every business has downtime.  As the cycle of life, it’s inevitable.  As a business owner, you’ll need to prepare for seasons or years where you’re not in growth mode.  Using a phrase from personal finance it’s time to pay yourself first and set aside money to handle those times when things are stressed. 

For example, I have a lawn care provider.  He generally works from March through October.  He’ll make little to no money from November, December, January, and February.  I make sure that he sets enough aside so that he can continue getting a paycheck during those months.  We worked together to figure out how much he needs to set aside and we make that one of his goals for the year.

If your business has a slow time during the year make sure you know when it is so you can plan for it.

Putting it All Together

If you follow the rules of money for your small business, you’ll be at ease during times when cashflow is tight.  By understanding where all your money is coming in and going out will help you build a long sustainable business that can manage the small business roller coaster. 

As always if you need help and want to understand your business finances better you can always give us a call and talk to one of our amazing financial geeks.  Schedule a time right here.

You’ve Got This!

Andrea