How to be Financially Prepared to Grow Your Small Business

If you’re ready to grow your business – or maybe your business is bursting at the seams and begging to grow (congrats!) – these are the financial foundations you need.

No matter how well you’re doing today, if you don’t build a strong financial base for your business before you grow, it’s likely to all come crashing down when you try to scale.

But even more than just not wanting your business to fail, I want you to have clarity when it comes to your finances so that you feel confident and in control of your money in all aspects of your life.

File with the Correct Federal Tax Status

Filing in and of itself is not rocket science. You can do it on your own. But should you file as a LLC, Partnership, Corporation, S-Corp, Non-profit, or Sole Proprietorship? How you file will affect how you structure and grow your business, and what you get charged in taxes. To make sure you don’t make costly mistakes, meet with a Certified Public Accountant (CPA) to understand what type of business you are – and what that means for how you run your business - before you file with the IRS. Filing for the correct tax status will also ensure your business finances and assets are protected from anything affecting your personal finances and assets, and vice versa. 

Organize your Business Bank Accounts

This step is second because you’ll need to have filed with the correct tax status and received an Employer Identification Number (EIN) from the IRS before opening business accounts. If you haven’t yet, set up business bank accounts that are completely separate from your personal ones. This allows you to be clear about where money is coming from and going to when it comes to your business, and to make sure you’re not supporting your business with your personal savings (if you are, you need to optimize your offers and/or work on your marketing strategy before growing your business – stay tuned next week for more on how to do that!). I recommend opening 8 accounts in total – more on why and how in the Allocate Revenue section below.

Track and Categorize your Expenses

Even if you didn’t have business accounts set up before, you can – and should – be tracking your expenses. Make sure you have a clear view of your weekly, bi-weekly, monthly, quarterly, and annual expenses. Hire a bookkeeper. They will likely have a preferred software, and will work with you on connecting your accounts and/or inputting your expenses and categorizing them so they can support you in optimizing your business. You certainly don’t need a bookkeeper or CPA to start your business. This is about outsourcing when you’re ready to take your business to the next level, because you have enough hats to wear and your finances are so critical to the success of your business. These professionals will make tax season bearable, and also help you leverage your financial data to get new insights so you are able to make the best possible financial decisions as you grow your business.

Allocate your Revenue

Just because you have a professional financial support team doesn’t mean you get to hand over day-to-day money management or bury your head in the sand. You are still in charge of your money. (Side note, that also means that your bookkeeper and CPA are part of the team you are in charge of. If they aren’t working out for you, find a financial team that gets you and your business.) It may sound counterintuitive, but you need several business bank accounts to simplify managing your money. Weekly, you’ll take the money you received (Revenue Account) and allocate it to your other 5 accounts: Taxes, Profit, Salary, OpEx, and Debt (if you don’t have business debt, scratch that last one. Hooray for you!). How much you allocate to each of these will depend on your type of business, how much revenue you make, and how much debt you have. But the key guidelines are:

• Give yourself a reasonable, consistent salary. If you have extra, leave it in the account for those weeks that are a little slim on revenue.
• Move the money for taxes and profit into 2 high-yield savings accounts (HYSAs). Pay taxes quarterly (see the Pay Estimated Quarterly Taxes section below), and give yourself half what you have in the profit account every quarter. Reward yourself for doing such an amazing job at managing your money and running your business! Keep making money off of any money leftover.
• Try to keep your operating expenses below 30% of your revenue. If you’re spending more than that, review and cut where you can.

Pay Estimated Quarterly Taxes

Let’s paint a little picture. Your business is booming. You’ve surpassed your revenue goals every quarter, are paying yourself a reasonable salary, and even paying down debt. You’re doing amazing. But then tax season rolls around. You realize you owe more in taxes than you expected. Way more. You thought you had a nice cushion of money to help you hire a few new positions and invest in some needed supplies to get to your next level of growth. But now it all has to go to your tax bill. Plus some of your personal savings. The growth of your business is on hold, and you’re scrambling to keep your personal finances on track. Don’t sabotage your growth like this. Take the simple, proactive step of working with your CPA to figure out your estimated quarterly taxes and paying them on time so you know exactly what you will have to invest in your growth at the year’s end. No surprises.

Create a Hiring Plan

People cost money. They will likely be one of your biggest expenses, if not the biggest. They are also one of your biggest assets. The right team will do wonders for your business growth. So don’t leave hiring and creating the right teams to chance. Do your research and take the time to really map out what positions you need, what skillsets you need, and when you need them. Create a 6-month, 1-year, 3-year, and 5-year plan. Yes, you will probably change these, and that’s ok. But start somewhere. A few questions to ask yourself:

• What professional, contracted services are the best investment in my future?
• Am I spending time on aspects of the business that aren’t really moving the needle for growth (i.e. responding to emails)?
• What are my strengths, and where do I struggle with running the business?
• What do I enjoy doing, and what do I dread doing when it comes to running the business?
• Do I need someone with a specific skillset to be able to grow?
• How can I ensure I have a diverse team that helps me think about my business and strategy in new ways as I grow?

Set & Review Financial Goals

If you don’t know where you are, and you don’t know where you want to go, you can’t map out a route. Once you’re clear on your current financial situation (aka, you’ve done all of the prior steps), consider how you want to grow your business. What are your financial goals for the quarter? How about for the year? How can you achieve those goals? Work backwards from your goals to help you focus on the actions that will have the biggest impact. Do you need to hire to hit your goals? Or invest in equipment? Or cut overhead costs? Or spend more of your time on marketing and selling? Review your products and offers – are they in alignment with the company you want to have next year? Are they profitable? (Stay tuned for the next blog, where we’ll talk how to optimize your offers.) Every quarter, spend a day reviewing your last quarter and adjusting your goals for the upcoming quarter and year based on what you learned and where you are.

Understand Retirement and Health Insurance Options

If attracting top talent is part of your hiring plan, you’ll need to be prepared with retirement and health benefits. But regardless of your hiring plan, it does not cost as much as you think and is really a basic feature that I would every business should offer. There are a ton of resources out there for small businesses – check out healthcare.gov/small-businesses and irs.gov/retirement-plans/retirement-plans-for-small-entities-and-self-employed. I highly encourage you to look into your options. At the very least. you need to be planning for your own retirement, and getting healthcare insurance that cover you (and/or your family) so you’re not financially wiped out by unexpected illnesses or accidents. These are typically pre-tax expenses that cost you little each month but have a huge positive impact on your life.

It's a lot, but you got this far and I know you can do this! And if you’re ready to invest in a business coach as part of your professional growth team, I got you.