While some people dream of owning a small business, not everybody thinks about the day-to-day implications — especially the financial ones. Knowing what you might face can help make it easier to plan for various scenarios that can affect your business financially.
Here are five aspects of owning and running a small business that can be easy to overlook.
1. Cash Flow Is Important
Owning a small business means you're not only soliciting the work and getting it done, but collecting fees in a timely manner. Clients may pay quickly, but some may have a lengthy payment process involving multiple layers of approval. Companies also vary in their payment terms: Some pay on receipt, some in 90 days, and still others somewhere in between, so your collections process probably shouldn't run on autopilot. Someone needs to stay on top of your accounts receivable, in other words, tracking the invoice date and expected due date, and following up should the payment date pass.
Before working with a new client, it's important to fully understand their payment policies so you know what to expect. Without a consistent cash flow, it can be hard to pay company bills on time while keeping money on hand for other expenses.
2. Employees Mean More Than Just Payroll
When deciding how many employees to hire, it's important to look at more than just the costs of their hourly wages or regular salaries. The employer is responsible for a portion of payroll taxes. Depending on the number of employees, a state may also require a business to provide worker's compensation insurance. An employee benefits package, a common way to attract and retain employees, may include health insurance, a retirement plan and disability insurance.
Another way to reward employees is to share the business's profits. There are many types of profit-sharing and retirement plans, and they all have risks and benefits. Choosing a plan type is important, as there are rules moderating how much you can contribute, affecting both you and the employees — especially if you want a more generous plan for yourself. Employee benefits as a whole typically make up about 30 percent of total employee compensation, according to the U.S. Department of Labor.
3. Mind Your Business Structure
The way you structure a business can impact the business's taxes and legal liabilities, including your personal legal exposure to business risks.
Let's say Aisha wants to open a bakery. If she opens it as a sole proprietor instead of a corporation, she may have difficulty getting a bank loan for her business's startup expenses. If her business fails or if she's sued for, say, food poisoning, she can be held personally liable for the damages. If she registers her business as a limited liability corporation (LLC), though, her business and personal assets are separated, and she's no longer personally liable if the business incurs debt it can't pay. With both of these business structures, Aisha pays taxes through her personal tax returns, including self-employment tax. If she opened the bakery as a corporation, however, the business would pay corporate taxes, which may be a different percentage than Aisha's personal taxes. Aisha would also pay taxes on her salary and any distributed profits. As bakery owner, Aisha wouldn't be personally liable if her corporation couldn't pay its debt.
Such are just a few of the considerations when choosing a business structure. It may be helpful to consult a lawyer to determine the right business structure (and for help setting up), and you may need to enlist the help of an accountant to handle business taxes separately from your own. Some corporate structures also have more stringent yearly administrative requirements, like additional record-keeping and public disclosure obligations.
4. Both Successes & Failures Count
If you've never worked for yourself, it can be hard to wrap your head around the idea that everything that happens in your business is your responsibility. If your employee brings in a lot of deals, that's your success. If your salesperson doesn't close the deal, that's your failure. Ultimately, the buck stops with you. While no one likes to think about what would happen if they were suddenly unable to work, the possibility matters quite a bit when owning a business. Given your expertise in the field and in running the business, could someone easily step in and take your place if needed? Could you continue to support yourself and your employees if you became disabled?
Thinking about this early on and making contingency plans can help relieve some anxiety. Key person insurance is one way to help buffer a loss in your business, providing money to help the company get back on its feet in the event a covered employee dies or becomes disabled. Disability insurance can help you secure income should you experience a disability while employed.
5. Delegating Is Your Friend
While the business is your responsibility and you should know what's happening with it, you don't have to do everything yourself. Few people are experts in all things. Maybe your partner is good with social media and can run a marketing campaign better than you could, allowing you to spend time focusing on something else. Hiring a bookkeeper — even by the hour — may cost you more than doing it yourself, but that time may be better spent developing sales prospects or doing paid work. Plus, keeping your business finances in order can help you know where your money is and what you need at all times.
Running a business is an exciting way to make a living, especially in an industry you're passionate about. Completing thorough research ahead of time and preparing for financial contingencies can help put you in a better position to face them should they someday arise.