Planning Business Finances

History shows that typically, before the pandemic, more than half of new businesses will fail within two years. The main reason is because they run out of money. Their initial funding was inadequate, often because the owner started without a reliable budget or financial projections in their business plan. They don’t – or don’t know how to – do the necessary homework to learn the real cost of delivering their product or service.

Projecting the financial needs for a new business is not the time for being overly optimistic or taking wild guesses. It’s important to invest the time needed to research actual costs and develop realistic assumptions for revenue and expenses. The investment will really pay off.  

Planning business finances so you don’t run out of money can be done by following these three realistic assumptions:

  1. Revenue Takes Time to Ramp-Up

Even with a huge demand for your business in your market, achieving projected revenues will take time. Ramping up and making contacts does not happen overnight. Top potential revenue will not happen in the first year. Develop one-to-five-year projections to illustrate revenue growth and the crossover point when expenses are expected to be covered, adjusting as needed.

  1. Expenses are Always More Than You Think

Research the actual cost of labor, materials, space, transportation, equipment, etc., based on market rates and quality requirements. Worker costs should include the employer portion of payroll taxes, benefits, licenses, training. Don’t forget back-office costs, like payroll services, billing, financial management and reporting, and tax preparation.

  1. Build in a Financial Cushion

Avoid failure from under-estimating costs and over-estimating revenue by building in a financial cushion. Initial funding needs should include an amount equal to a few months of estimated expenses to cover payroll and overhead in the months when revenue is not enough to cover costs. Of course, that’s on top of funding for equipment, legal fees, and other start-up costs.

Planning business finances is not an easy task. Don’t take the easy way out by guessing or painting a rosy picture that probably won’t come true. Avoid being among the one-half of new businesses that fail within two years by applying these three realistic assumptions about revenue, expenses, and funding.

Tax Basics for New Business

 

Today, I spoke with my absolute favorite kind of new client – a new business owner who wants to make sure she is covering all her bases when it comes to business taxes. Entrepreneurs who plan and ask for qualified professional advice have a better-than-average chance of meeting their goals.

 

All business owners need to know about taxes. All kinds of taxes: income, employment, sales and use, and property. Plus, if the business has sales or other business activities in more than one state, it has to follow the tax rules for each state. Needless to say, that involves more details than I can fit into this blog.

 

Here are the four basic tax areas that small businesses need to know:

 

  1. Income Tax

Net business income is subject to federal and state income taxes. For sole proprietors, net income is figured on Schedule C, which is part of the IRS Form 1040 for individual tax return. Net income is total business income minus the “reasonable and customary” expenses necessary to operate and sustain the business.

 

  1. Employment Tax

Payroll taxes of 15.3% must be paid on business wages or on net business income from self-employment using Schedule SE on the owner’s return. Non-owner employees must have taxes withheld and remitted to the IRS, state and Social Security Administration. Contractors to whom $600 or more is paid during the year are required to receive IRS Form 1099 to report their earnings.

 

  1. Sales Tax

State taxes are assessed on sales of products and some services, depending on the jurisdiction. Internet and mail order sales are subject to tax depending on the location of the seller and purchaser, and applicable laws. Businesses that operate in more than one jurisdiction, like my new client, must collect, report, and remit taxes in all applicable states.

 

  1. Business Property Tax

Tangible personal property used in a business is subject to property tax, usually collected at the local, or county, level. Taxed property includes furniture, machinery, tools, and all computer and peripheral equipment hardware and all operational software.

 

One business “tax” often overlooked by new businesses is a getting the appropriate business license for each jurisdiction in which it operates. Every business needs to be registered and licensed at the state and local level.

 

I am looking forward to meeting again with my new client next week. Entrepreneurs who plan and get professional advice not only meet their goals – they are fun to help.