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Finance basics for small business owners

4 min read
Andrea Rowland

If you’ve ever found yourself calculating just exactly what percentage of your power bill you can write off as a home office deduction, or watching the calendar approach December 31 when making a major equipment purchase, congratulations! You’re a small business owner.

As such, your personal and business finances might be tied in ways that are hard to fathom. The first question in your budgeting software might stymie you: “How much is your monthly net income?” As with many questions in small business, the answer to that one is, “It depends!”

While every small business owner’s situation is different — maybe you’re the sole breadwinner, maybe you have a spouse with stable income, or perhaps your whole family is in on the business — there are a few finance basics that will help you keep your pocketbooks in order.

Disclaimer: This content should not be construed as legal or financial advice. Always consult an attorney or financial advisor regarding your specific legal or financial situation. 

1. Create a budget.

As we mentioned above, monthly income? Who knows! But hopefully you’re at a point where you have at least a small baseline of income coming in, whether it’s from your business or another source. A good rule of thumb is to start there and try to budget for necessities within that set income.

For many online sellers and service providers, income is seasonal. Online sellers see a huge boom around the holidays while freelance writers might find themselves struggling for work as their clients take off to spend time with family. For that reason, it’s a good idea to try and think of your income as annual instead of monthly. Sure you’ll have to spend more time making an annual budget, but then again, random expenses like a car repair or a health problem won’t come as a huge shock.

2. Start saving for emergencies.

After you have your budget in place, it’s time to think about saving for a rainy day. Personal finance gurus the world over advise varying amounts of emergency savings, but a good rule of thumb is to save enough to cover six months of expenses.

3. Pay down debt.

Small business owners often start businesses for a sense of freedom. But heavy debt can steal that sense and make striking out on your own away from a steady income feel like a foolish choice. Reputable debt consolidation and resolution companies can help you get out of debt the smartest, quickest way possible… and restore that sense of freedom you sought when you opened your business. Also, don’t forget to keep track of your expenses on a regular basis to make sure that you aren’t adding to that debt!

4. Save for retirement.

You started your business because you love what you do, right? But that doesn’t mean you aren’t going to want to retire someday. It’s not enough these days to count on Social Security or the equity in your home to get you through your golden years, and all self-employed people should save for retirement – the earlier the better!

Fortunately, the Self-Employed Individual Retirement Account (SEP-IRA), and in many cases, the Roth IRA, are both great vehicles to start saving for the day you stop working so hard. Retirement plans often have different tax implications as well, which could save you money with the IRS in the here and now.

5. Buy the right insurance.

It’s a sad fact of life that one bad move can cost you your business. Whether it’s getting sick and having to shut down your sole-proprietorship or making a mistake that leads to a lawsuit. It’s in these moments that we’re grateful for insurance.

Sometimes, when it isn’t needed, insurance can seem like a costly line item in your monthly budget. But it’s worthwhile to think ahead. For example, an umbrella policy will protect your assets should you be sued, and disability insurance to protect your income should you become unable to work. Consider speaking to an insurance agent about policies that might be right for your business.

Every small business owner’s situation is different. You might be struggling to pay off the high-interest credit cards you started your business with, or perhaps you’re working on making enough side income to quit your day job. We hope these finance basics will get you started on the right path.