So you have made the big decision to start a home-based business and officially become “self-employed.” The next step is coming up with a financial strategy. Sadly, figures show that most home-based businesses fail because of insufficient financial planning. Be sure to familiarize yourself with the laws and regulations that affect your line of business. Below are several recommendations that you should keep in mind to make your new business a successful one:
Plan a Budget that Considers Hidden Costs
Nearly half of home-based business need less than $5,000 for a startup but do not forget that there are many hidden costs involved in running a business such as insurance, postage, fuel and transportation expenses.
A new business start-up usually does not have reliable, predictable income for a while. However, you as the business owner can set a budget for how much average income you need monthly to pay your personal expenses. Although you will not always be able to know your income from month to month, you can determine how much money you need to live on until income becomes more regular. Take into account things like mortgage, rent payments, and utilities. If you are not making at least this much monthly, then you need to increase your income flow. If you are lucky enough to be making more than your allotted budget, do not increase your spending. Use the money frugally; it would be wise to put the extra amount into a savings account to supplement months with lower income.
If you have a more established home-based business with fluctuating income based on specific months of the year, plan your budget based on percentages, not dollar amounts. You should divide your monthly income into three main categories: taxes, savings, and retirement. By affixing a specific percentage to these items, you will avoid saving too much during lower-income months or too little during the months with higher income. A good rule of thumb to remember to set at least 10% aside in an emergency fund monthly.
If Possible, Do Not Rely On Credit Cards
Using a credit card can quickly add up to a lot of trouble. If you need money for a start-up, consider a small business loan in place of relying on a credit card. Sometimes a credit card is necessary for business expenses. In this case, open a card that is designated specifically for business expenses – nothing else. There is no greater way to lose money than through needless interest paid on purchases.
Deal With Paperwork in a Timely Manner
It is imperative to complete all paperwork on time, especially when regarding client billing or customer-related correspondence. Some companies can take several weeks to process invoices, delaying payment that is needed for business expenses.
For tax purposes, keep copies of all receipts and other related paperwork. Be sure to keep everything well-organized, to avoid having to sort through a pile of paper crammed into a banker’s box.
Networking is crucial for most businesses. Hence, it is critical to keep good track of contact information. Here, too, it is essential to keep these records in an orderly fashion.
Taxes, Taxes, Taxes!
To ensure your business finances are in order as a self-employed business owner, the saying, “pay yourself first” is not applicable. Taxes must take precedence in this situation. Depending on your situation and type of business, some self-employed business owners may owe up to 15% self-employment tax on top of regular income taxes. Make quarterly tax payments as necessary to avoid under-withholding penalties from adding up at the end of the year. Always set money aside for taxes! It is recommended to save 35%-40% of all income towards taxes.
Don’t Be Afraid to Get Help
According to the Small Business Administration (SBA), home-based businesses account for around half of all U.S. businesses. Be sure to take advantage of the many resources available to small business owners. One such resource is the SBA’s website, www.sba.gov.
Also, take advantage of the many professionals that are trained in helping small business owners – lawyers, accountants, and insurance agents.
After you get your financial plan laid out, be sure to do a bi-monthly check in to make sure you’re able to run your business while meeting your financial goals successfully. This means checking to ensure that you are consistently paying expenses, paying taxes, and savings and retirement, but also saving enough money for your personal expenses. Getting your finances in order should be at the top of your list to ensure the success of your business.