Self-employment has become more than just a trend. A large and growing number of Americans are choosing self-employment and small business ownership over traditional full-time jobs with various entitlements, like steady income, health benefits, and 401(k) plans.
The benefits of career independence, such as setting one’s own hours, earning an uncapped income, or simply pursuing a passion, are obvious. So too are the potential downsides.
The obstacles facing small business owners must be managed on top of the demands of actually operating a successful small business which include: carving out a unique value proposition, finding and keeping customers, delivering work profitably and on time, managing money, investing in the future, and balancing the demands of family.
How does one overcome the obstacles and become a high independent performer? According to Matthew Baker, VP of Strategy of Freshbooks, from a financial perspective there is, for the first time, data to clearly illustrate the seven financial habits of highly effective small business owners. And, based on a comprehensive study of 1,700 small business owners in the U.S. by Freshbooks, fewer than one in four entrepreneurs currently adopt all seven financial habits.
According to Baker, “Those who follow the best practices consistently outperform other small businesses based on annual revenue and report higher levels of satisfaction with their decision to be a small business owner.”
Below he reviews the seven financial habits will equip small business owners with a new perspective to better help them prepare for the future, without sacrificing their client relationships, craft or team.
1. Regularly review finances — 69 percent of small business owners do this.
Every business has a natural ebb and flow, a rhythmical pattern of income and expenses. Sometimes it’s due to seasonality. Sometimes it’s due to the duration of projects and the contract terms. In any case, weekly and monthly financial reviews are an exercise in understanding the frequency and scale of your business operations and the extent to which your business may be growing or at risk due to clients who pay late.
2. Maintain a budget — 47 percent of small business owners do this.
A budget is simply an expectation for business results. At the beginner level, make a budget on the first day of the month to estimate how much income you’ll receive that month and how much you’ll pay out in expenses. Then review the budget compared to actual results at the end of the month. Rinse and repeat. You’ll get better at budgeting. And because of budgeting, you’ll make more informed decisions and identify potential problems before they occur.
3. Save appropriate amount for taxes — 52 percent of small business owners do this.
Money you set aside for taxes isn’t really your money. It belongs to the government. That’s why it’s best to set it aside immediately and not get it confused with your remaining business income. For federal taxes, the safe harbor rule is your friend. Set aside at least 90 percent of your prior year’s taxes, and you’ll be penalty-free. A common heuristic is that 30 cents of every dollar you earn from your clients is owed to the government.
4. Proactively reduce debt — 50 percent of small business owners do this.
Sometimes debt is good. You take on debt in the short-term to enable longer-term health and growth for your business. However, unnecessary debt is a drain on your business. And more importantly, once you have business debt, it’s important to make consistent payments, and proactively reduce the principal amount.
5. Pay yourself a salary from business earnings — 49 percent of small business owners do this.
The term “salary” may not apply to your business. You don’t have to send yourself a regular bi-monthly paycheck. Instead, you can pull money out of your business account at regular intervals to set aside your personal income. When you pay yourself, it forces you to think about your business and your personal income separately.
6. Establish an optimal business structure for liability and taxes — 64 percent of small business owners do this.
Common business structures are sole proprietorships, partnerships and corporations. Each structure has different legal and tax requirements. While more self-employed professionals are choosing to incorporate, a corporation might not be the best structure for your business. If you’re not sure which structure is best for your business, you may want to seek professional advice because of the expense involved in changing and maintaining a business structure.
7. Maximize tax write-offs and deductions — 65 percent of small business owners do this.
Take advantage of every tax benefit available to your business. If not doing so, it’s a disservice to your business. Write-offs and deductions reduce your taxable income and therefore reduce the amount you pay the government. I know from talking to many small business owners that tax planning can feel like “gaming the system,” but it’s important to remember that it’s perfectly legal and adopted by all large businesses. If you’re new to the game, you may want to seek out a tax professional as an investment in the future of your business.