4 Steps To Prepare Your Finances For Self-Employment

For a first-time business owner the road
 ahead can be rewarding and tough. Getting the best possible financial head start can make all the difference.

For those itching to test their resolve in the world of business, the thought of waiting to launch a business can be a tough one to stomach. But diving
 straight in at the wrong time can lead to poor financial decisions and even poorer returns on your investment.

Before you sign any agreements or purchase any stock, it’s a good idea to think about the realities of starting your business. Do you have enough money to see yourself through tax season? Are there any legal matters you need to attend to first?

Questions like this are
 important and extremely necessary if you don’t want to end up running out of steam before you’ve even left the runway. For a first-time business owner the road
 ahead can be rewarding and tough. Getting the best possible financial head start can make all the difference.

 

1. Decide how you’ll fund your business.

Many entrepreneurs choose to bootstrap (i.e. self-fund) their business ambitions. There is certainly nothing wrong with this approach. However, unless your investment is a sure-thing, it is never wise to pump large sums of money into your business from the outset.

Take the lean startup method route instead. Launch a minimum viable product (MVP). One reason for limiting the amount you invest early-on is stagnation. Whilst
 starting your own business might be something you’ve dreamed of (and even saved for) since you were a little kid, you will quickly see aspirations
 evaporate if your money only serves to keep you afloat rather than move you forward. Find the quickest path to profit. If your business doesn’t generate revenue then you will soon run
 out of ways to reinvest.

One smart way around this is to keep an emergency fund on-hand. Having at least six months worth of basic living expenses in a separate account will keep you covered during
 the period when your business is barely breaking even. Once you begin turning a profit, you will look back on that half year and be grateful you set
 those funds aside.

 

2. Set up a separate bank account for business transactions.

Knowing exactly how much of your income comes from your business is vital for tax and bookkeeping purposes. It’s also important to be able to
 differentiate between business and personal expenses when deciding what to claim on your tax return.

Whilst keeping careful records of every stock, travel
 or equipment cost is advisable, it isn’t always the most practical way of dealing with things. Bookkeeping can quickly fall by the wayside during daily business operations. Details of expenses can become hazy further down the line.

A simple way to differentiate your business from your personal life is to set up a completely separate business checking account. With your business operating from
 your new account you will no longer have to work out whether an expense qualifies as tax deductible.

Everything going out of your business account will be directly
 related to your business and can be considered as a work expense. If you still have any doubt over what you can claim on, then contact a business accountant for
 advice.

 

3. Set aside money for business taxes.

You’re near the end of your financial year and your company is turning a tidy profit. But wait. You’ve forgotten to budget for tax and now you face losing
 all your hard earned cash to the tax office.

It’s easy to forget that a percentage of your earnings belong to the government. Unfortunately, taxes will play a major part in your financial plan and you need to bear this is mind throughout the year.

One method of tax planning for your business is to put aside an estimated amount every month, so at the end of the year you are covered for all taxation expenses. You can
 also pay estimated tax on a quarterly basis, making it easier to keep track of how much you owe. However, you need to ensure your estimations don’t fall
 short, as underpaid tax can result in government fines.

 

4. Start planning for retirement sooner than later.

Although your business is young and exciting, you should always keep one eye on the future. Unless you are set to inherit millions from a very generous
 benefactor, there is no reason not to start a pension from the very beginning of your venture.

“With so many types of accounts available, you can work with a financial advisor to open and manage a retirement fund at any stage of your company’s growth,” according to Forbes contributor Drew Hendricks.

For example, “a Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA), [is] one of the most common types of IRAs available to entrepreneurs in the United States. There are negligible administration costs if you happen to be a solo entrepreneur. If you have people working for you, all of you will receive the same SEP benefit (Cleverism).”

The sooner you start saving, the sooner you can reap the
 benefits a pension brings. If your business is a success and you receive steady income for a decade or more, you could earn yourself a considerable amount
 of interest in this time.

Simply put, the earlier you save your money, the longer it has to grow. It’s never a bad idea to have an end goal in sight and a
 pension is one way to ensure a guaranteed return on all the hard work you put into helping your business expand.

 

This article has been edited and condensed.

Chris Weston is the Director of Milton Keynes based accountancy, Aston Black. Chris has over 25 years experience in accounting and taxation, working with his small team of staff to provide quality advice for small businesses up and down the country. Connect with @astonblackacct on Twitter.

 

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