How to Protect Your Finances When Handling a Small Business
Operating a small business, especially for the very first time, can be risky. And not just for the business’ finances, but for your personal wealth, too. However, there are many ways to manage that risk.
Here are a few that you need to keep in mind.
Separate business and personal finances
Even if your operation starts out small, it’s a good idea to separate your personal and business finances. Having a bank account specifically for business not only displays professionalism, but it also helps with money management.
The Balance adds that it makes filing taxes much easier because you don’t have to sort through personal and business transactions. It’s critical to keep accurate bookkeeping for general financial management purposes and also for special cases, like an IRS audit. Though not every business gets audited, it’s important to be prepared. You can avoid a personal audit by keeping those accounts separate, and you can protect your personal assets in case of litigation.
Choose the right business entity
Mixing business with personal funds usually only applies to sole proprietorships, but not to limited liability companies or LLCs. This is a type of business entity that operates kind of like a corporation. The requirements are more formal than a sole proprietorship and are set up to limit the liability of the owner. This simply means that the owner (or owners) is/are not legally responsible for lawsuit settlements, debt, and any other issues that can happen when you own a business.
Fortunately, it’s not too complicated to start an LLC. ZenBusiness outlines five simple steps to forming an LLC whatever state you are in — from choosing your official business name, to registering for an employer identification number with the IRS. The process also involves hiring a registered agent who can help you complete all of the other requirements and paperwork.
Get the right insurance
Getting insurance is non-negotiable for businesses — you simply must have it. Even with every kind of precaution in place, you cannot control outside factors like the weather or theft.
A guide to insurance needs by Small Business Trends lays out the different types you might need. One of these is general liability insurance, which has a wide coverage, including medical fees from injuries and property damage. You also need workers’ compensation insurance if you have a small amount of staff. This provides financial coverage for employees who experience work-related harm like accidents. Another type of insurance worth looking into is cyber insurance — critical if you handle sensitive data. It can protect you from the financial consequences of cyberattacks as these are becoming all too common among small businesses.
Set up an emergency fund
You’ve heard of having a rainy day fund for personal finances. For businesses, it’s also ideal to set up an emergency fund that can cover several months of “rain” or, to be more precise, drought. As a business owner, you can’t guarantee that the profits will flow steadily, or that you won’t run into any emergencies. You need to have a financial safety net to handle these situations, just in case.
Some emergency fund tips from an expert panel on Forbes highlight that you need to plan your finances with an emergency fund in mind. Regularly transfer a small percentage of your revenue to a savings account specifically for your business’ emergency fund. It’s even better if you can automate this process, so it becomes a key practice for the business. Go through a re-evaluation process regularly, maybe every quarter, so you know exactly how much you spend, make, and save.
Have proper money management techniques in place
Even with all those protective measures in place, nothing beats implementing the proper financial strategies. For that, our ‘Money Management Tips for Small Business Owners’ is a useful guide. It can help small business owners monitor cash flow, cut down on expenses, and maximize revenue. Ultimately, ensuring that your business remains healthy even through difficult times is the biggest financial guarantee you can get.