Financial Literacy for Small Business Owners
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You know all about running your business — or do you? You may be an expert at running the day-to-day operations of your company, but you might not know as much as you should about the business side of running a business. However, taking care of mundane aspects such as keeping the books can mean the difference between a thriving enterprise and one that is struggling – or floundering.
Obtaining Financing
Many entrepreneurs and small business owners begin their companies on a shoestring. More than one highly successful company has been launched through maxed-out credit cards. However, obtaining funding from banks and other commercial lenders involves writing a sound business plan. On the other hand, crowdfunding and online lenders might not require a formal business plan, but prospective borrowers are still required to make a case that they can generate and maintain a positive cash flow – and that they will repay the loan.
Other bootstrapping means of obtaining financing involve taking a home equity loan or line of credit or selling assets. While these strategies may require less formal paperwork than submitting a bank loan, there are potential risks to your personal assets if you are unable to repay the loan in a timely fashion.
Borrowing from friends and family members can be a viable means of obtaining working capital or funds for major purchases. If you go that route, treat the loan as a business transaction. Draft a written agreement stating when the loan will be repaid and whether you will be required to pay interest. Having an attorney draft an agreement isn’t unreasonable.
Personal and Business Credit
Many would-be business owners are surprised to learn that their personal credit can and frequently does impact business credit. Until you are able to establish business credit, you may be required to provide a personal guarantee to obtain business credit or financing. In plain English, that means passing a personal credit check.
However, personal guarantees are just that. You are essentially pledging personal assets to protect against business loss. On the other hand, building business credit allows you to obtain financing without putting your assets at risk. One of the most important aspects of establishing business credit is maintaining personal and business related income and expenses separately.
Opening a business bank account is an excellent foundation for establishing business credit. You will need to provide paperwork pertaining to your business – articles of incorporation, a certificate of doing business (DBA) or similar documentation, plus proof of personal identity. Many banks offer online banking and mobile apps for their customers. Taking advantage of these tools makes it easier to create accurate records.
Establishing payment accounts is another means of establishing business credit. Small vendors may allow you to establish net-30 or net-60 payment agreements, especially if you have already established a good purchase and payment history with them.
Obtaining a D-U-N-S number is also advisable for establishing business credit. It helps to establish your business as a viable enterprise. And if your company does business with the federal government, obtaining a D-U-N-S number is a must. Obtaining a D-U-N-S number can be done online through the Dun and Bradstreet website for no charge.
Managing Inventory
Many larger companies operate on a “just in time” model – carrying minimal or no actual inventory. While this approach can be a money saver, it’s risky for small business owners and entrepreneurs. On the other hand, carrying too much inventory is a needless drain on your company’s bottom line – never mind storage costs.
A smarter way of managing inventory requires keeping a log of orders, along with mapping trends for rush periods and slowdowns. If you notice that you are always swamped in August but have little or no business in October, you should be able to conclude that carrying more inventory in August and less in October makes sense.
Bookkeeping Basics
Double-entry bookkeeping may be like Greek to you, but understanding the basics of income and outflow can help you anticipate potential problems before they become unmanageable. Even if you outsource your books to an accountant, you should maintain a dated, running log of business related expenses. This includes retaining receipts. Even the best accountants need accurate records to produce and maintain sound financial records.
Staying in the IRS’ Good Graces
As an entrepreneur or small business owner, paying quarterly estimated taxes may be a necessity. If you find that you cannot pay your full tax bill at tax time, file your return anyway, and pay as much as you can. The penalty for filing a late return is much higher than the penalty for paying your taxes late.
An Employer Identification Number is also required if you hire workers or contractors. Sole proprietors aren’t required to have an EIN for tax purposes – but most banks will require one. Obtaining an EIN can be done instantly and free via the IRS website.
Disclaimer: This article represents an overview of basic financial concepts for small business owners and entrepreneurs. It is not intended to provide legal or financial advice. Please consult with a financial advisor, accountant or attorney in your area with specific financial or legal questions concerning your company or entrepreneurial practice.
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