There is Strength in Numbers
Businesses are born to fulfill passions, meet community needs, and even change the world. Bookkeeping and financial analysis are likely not on anyone’s mind in the early stages. But, soon enough, finances will come to the forefront. Dealing with the complexities of accounting and taxes can feel like defensive work, when it should be offensive. How can business owners change their finances from a drawback to a major strength?
The key is financial visibility. When you know your numbers, you can grow your numbers. Today, we will share five ways that you can turn your finances into a major business strength and get actionable insight to scale your business!
Separate Personal and Business Bank Accounts
The first step toward financial visibility is separating your personal and business bank accounts and credit cards. This saves you time while doing your bookkeeping and accounting, minimizes error, and gives you a clearer picture of your financials.
Keeping your personal and business expenses under one bank account is referred to as commingling. It takes additional time to complete your bookkeeping and increases the risk of error, as you have to sort through business and personal expenses. Important business transactions could be missed, or personal expenses could be added to your business records by mistake.
The same principle applies to credit cards. Keeping track of multiple credit cards makes bookkeeping that much more time-consuming. With multiple business credit cards, you could also incur excess bank fees. Use two business credit cards at most to save on bank fees and keep your finances organized.
By separating your bank accounts and credit cards, you can be certain that you are recording the right transactions, and making informed business decisions based on accurate numbers.
Review Your Reports
Business owners have a hand in every aspect of their company, and finances should be no different. In order to gauge the health of your business, review your financial reports on a monthly basis, preferably with a professional online bookkeeper. The key financial reports to be aware of are:
- The Balance Sheet summarizes your business’s assets, liabilities, and equity at a specific point in time. This statement provides insight into your cash, inventory and other asset levels, how much money is owed to you (Accounts Receivable), how much money you owe (Accounts Payable), credit card and bank balances, and the equity in the company.
- The Profit & Loss Statement (also referred to as an Income Statement) shows profit and net income. Your net income provides insight into the profitability of your company, and includes all the operating costs of your company.
- The Cash Flow Statement allows you to see when cash flows into and out of your business, and how your cash balances have changed over a period. It can also be used to project cash needs of the business.
Each of these reports provide insight into business performance. They can also help you make financial projections and prepare you for tax season. Whatever type of business you run, it is crucial to stay on top of your business’s financial health through monthly financial analysis.
Know Your Cash Flow
At first glance, profit and cash flow may seem like interchangeable terms, but there is a major difference between the two.
- Profit, also referred to as Net Income, is the difference between income and expenses. It is the amount of money that remains after subtracting everything from revenue, including taxes and operating expenses (rent, payroll, utilities, etc).
- Cash flow represents the money that comes into (inflows) and out of (outflows) your business over time. Positive cash flow means there is more money coming in than going out, while negative cash flow means that there is more money going out than coming in.
Both are key indicators of business success, just in different ways. Profit shows immediate, short-term success, and cash flow informs the long-term financial outlook of a business. Think of cash flow like gas in your vehicle - you must keep gas flowing in for the vehicle to keep running.
While healthy cash flow is crucial for business success, 93% of small business owners run their business from their bank account, according to a U.S. Bank Study. This means that they monitor their account balance, but do not consider their cash flow, such as the money they have in inventory, or other upcoming expenses. They see a positive amount, and figure they have what they need to keep operating. This can lead to business failure, because they incur expenses that they cannot cover due to lack of cash.
82% of businesses that fail were actually profitable, but did not have visibility into their cash flow. A common cash flow struggle for eCommerce business owners is cash being tied up in inventory. To alleviate stale inventory, liquidate it at 20 to 50 cents on the dollar and eliminate bad skus in order to keep your cash flowing.
Businesses thrive when business owners have visibility into their cash flow. Just like your financial reports, cash flow should be reviewed monthly to ensure that you have the cash you need to continue operating successfully.
Maximize Your Tax Savings
Many businesses start out as Single-Member LLCs (Limited Liability Company), and are taxed as Sole Proprietorships by default. Income “passes through” directly to the business owner, and is taxed at individual income tax rates. Because of this, single-member LLCs are only required to file a personal tax return, using Form 1040, Schedule C. This is a simple way to save on CPA costs, with the personal and business tax returns being filed together.
That being said, LLCs are required to withhold self-employment taxes on the entire share of their profits to fund Social Security and Medicare. As of right now, the self-employment tax rate is 15.3%. To maximize your tax savings as your business grows, you can elect to be taxed as an S-Corporation, as owners only pay self-employment taxes on their wages, rather than the entire share of company profit.
To illustrate, here is an example:
Your eCommerce business makes $100,000 in profit.
As a single-member LLC, profit is “passed through” to you as personal income. You will pay $15,300 in self-employment taxes and be taxed at your personal income tax rate.
If you file the S-Corp Election, you pay yourself a reasonable salary of $40,000, and the remaining $60,000 is taken as distributions from profit. You will pay $6,120 in self-employment taxes only on your salary. The remaining $60,000 will not be subject to self-employment tax, for a savings of $9,180 compared to the LLC!
Through S-Corp Election, you can drastically reduce your taxable net income, giving you a considerable advantage when it comes to tax savings. To determine if S-Corp Election is right for your business, speak to an online accountant at Xendoo.
Partner with Professionals
DIY bookkeeping can seem like an effective way to save money, but it takes significant time away from running your business. A professional team will keep you tax-compliant, and maximize your savings all throughout the year, while you focus on growing your business. Many companies provide online services, in which you have access to a robust financial team:
- An online bookkeeper accurately categorizes and reconciles your monthly business transactions, and produces the key financial reports that show you how your business is performing, as well as where you can make improvements.
- An online accountant can advise you on the steps you need to take in order to scale your business in the most cost-effective way possible.
- Having an online Tax CPA file your taxes will maximize your return and minimize errors, so you can spend your time growing your business!
You Do You. We Do Your Books.
Financial visibility enables you to make informed, data-driven decisions, scale your business, and turn your finances into your greatest strength.
Everyone deserves a supportive team of people who care. Let Xendoo handle the hassles while you put more money in your pocket, reduce your stress, and focus on what you love - growing your business.
Xendoo is an online bookkeeping, accounting, and tax service, passionate about providing small business owners with the tools and resources they need to grow their business. Our expert bookkeepers and CPAs deliver timely and accurate financials, so business owners can make informed decisions faster.
We take the stress out of bookkeeping and we’re in the office next door, virtually. Schedule a call with one of our experienced accountants to get started.