how to organize your personal year end finances

How to Organize Your Personal Year End Finances.

You should never organize your year-end finances all at once. Rather, you should be engaged in a steady process of organizing and reorganizing your financial documents and information throughout the year. The process you use when organizing at the end of the year will be basically the same process you use monthly or quarterly to evaluate your investments, insurance, and budget. Use the year-end financial organizational process to get the opinion of a financial planner to help you streamline your finances, identify areas of waste, and take corrective actions to save money.

Method 1 Getting Organized.

1. Select your organizational categories. Knowing how to organize your financial documents can be tough. Thinking broadly about the sorts of documents you ought to organize for your year-end finances will help the process move along smoothly. Some documents might need to be copied and placed in multiple locations. For instance, education loan payments might need to be in a “loans” folder and also a “taxes” folder. Depending on what sort of financial documents you have, you may or may not need folders devoted to each of the main financial categories, which include.

Financial management (bank statements and loan records).

Insurance and annuity documents (policies and statements).

Estate documents (wills, trusts, and powers of attorney).

Investments (stocks and bond).

Income tax information (tax returns and documents attesting to charitable giving).

Employment and military records (discharge papers and employee benefits).

Home records (appraisals, renovation receipts).

Medical documents (summaries of recent appointments and any medical bills or payments made).

Legal documents (passports, personal records, and real estate settlements).

2. Use the same organizational system for all your documents. You probably receive and pay some bills through regular mail, and some through digital outlets or automatic account debiting. In this case, it's important to impose a parallel structure on your analog and digital documents alike.

For instance, if you organize your vertical files containing utility bills, credit card bills, and other significant financial documents in order that they were received, you should not organize your digital files into folders containing payments, bills, and receipts according to the company or institution that you made the payments to.

3. Know what to keep. Retain anything tax-related for at least three years. Keep anything that demonstrates a financial loss for seven years. For instance, you ought to keep a bill of sale on a property that sold for less than what you paid for it. You should also retain receipts for transactions paid by credit card until you get the credit card bill that reflects them. Finally, keep all monthly account statements until you get the year-end reconciliation statement.

Conversely, you should know what to get rid of.When new insurance policies arrive, get rid of the old ones.

Err on the side of caution when disposing of financial documents. If you're unsure if you need to keep something, retain it.

For more in-depth guidelines on what you should pitch and keep, consult IRS Publication 17.

4. Use an app or website to help you organize. There are a variety of handy apps to help get your year-end finances organized. For instance, you might check out feedthepig.com, manilla.com, or mint.com.Apps that might help include Mint, Personal Capital, and Spending Tracker.

Method 2 Looking Ahead.

1. Set a budget. Find ways to save next year. Use your year-end financial organization time to identify sources that are draining your money. For instance, if you're paying for cable TV but never watch it, think about cancelling it altogether.

Overall, you should be spending about 35% of your income on home expenses (rent, utilities, and groceries), 15% on transportation expenses (car insurance, train fare, and auto repairs), 25% on entertainment and other miscellaneous expenses, 15% on paying off debt, and putting the final 10% of your income toward savings.

If you live in an expensive area or have a low income, you might need to contribute more money to home expenses and less toward debt or miscellaneous expenditures.

2. Simplify payments and financial data for next year. When you're done organizing your current year's financial data and documentation, look for ways to streamline the process next year. For instance, you can cut back on time spent searching for wayward documents by using automatic bill payments. You might also use debiting by tying regular payments like utilities and credit card charges directly to your bank account.

Cut back on the number of credit cards you use regularly. This will reduce the number of credit card bills you need to juggle. Use the credit card with the lowest interest rate as your day-to-day credit card, and use the other cards once a month in order to prevent their disuse from hurting your credit score.

For the same reason, limit your bank accounts. You should have one checking account and one savings account. If you have multiple checking and savings accounts, close the one with the most fees and least generous terms of service.

Consolidate your retirement accounts and investments, too. If you have several IRAs, transfer all the money into a single IRA. Use one brokerage firm to simplify investments.

3. Keep your finances organized throughout the year. Instead of putting all your receipts, account statements, and other financial documents in a stack and watching them slowly pile up over the course of a year, put them in the appropriate file or folder as you receive them. This will prevent confusion when trying to organize everything at year's end.

Use a three-ring binder with pockets to organize your financial materials in an orderly way. Move non-current financial records to your filing cabinet.

If you feel more comfortable printing out digital documents, print them out and put them in your vertical file or binder.

If you don't print out digital receipts and other documents, ensure that you put them in the appropriate folder according to your predesignated system as you receive them. For instance, when you get your digital W-2, immediately download it and put it with your other tax documents.

If you need to copy certain digital documents to make them accessible in multiple locations, don't be afraid to do so.

Method 3 Evaluating Your Financial Health.

1. Consult a financial planner or accountant. With the help of a certified financial planner or accountant, you'll be able to get your year-end finances under control. They can help you find ways to save when you file taxes in the coming months, and can explain some of the nuances of the tax code. For instance, you might want to ask.

Should I accelerate or defer income?

What losses or gains should I take this year?

Should I convert my traditional IRA to a Roth IRA so that my earnings will grow tax-free?

Are there any charitable donations I should make?

2. Total your year-to-date spending. You should have a column with all the payments, investments, and savings you have at the end of the year. Compare these numbers to their counterparts at the beginning of the year to get an overall sense of your financial health.

Your investment value should be greater at the end of the year than it was at the beginning of the year.

Your savings should be higher at the end of the year than it was at the beginning of the year.

Your spending should be less than the value of your savings.

3. Review your credit reports. Each year, you are entitled to three free credit reports, one each from the three major credit agencies (Experian, Equifax, and TransUnion). These reports will let you know if your credit score is good or if it needs a boost.

The best way to check your credit reports is not to check all three at once, but rather to space them out regularly over time. Ideally, you'd check one every four months.

4. Check your portfolio. Read the latest reports from your stock broker or financial planner to determine the relative health of your investments. If your portfolio is not doing well, think about investing elsewhere. Talk to a certified financial planner or stockbroker for advice about how to develop a robust portfolio.

Method  4 Finding Ways to Save.

1. Analyze your insurance coverage. If you have home, life, auto, or other insurance, contact some agents representing insurers in your area to find out if you have the best coverage you can afford. If you've made improvements to your home over the past year, you may have increased the value of your home, and that value should be reflected in your insurance policy.

Likewise, if you've welcomed a new family member into your family over the past year, you must check with your insurance provider to guarantee that they're covered under your insurance.

2. Review your tax data. Working with a tax professional, find ways to reduce your tax burden before the year is out. Charitable giving is the easiest way to do this. Look for reputable charities whose work you believe in through GuideStar (http://www.guidestar.org), CharityWatch (https://www.charitywatch.org/home) and Charity Navigator (http://www.charitynavigator.org).

You can also make in-kind (material) donations to thrift stores like the Salvation Army in exchange for a tax discount.

You can also qualify for tax deductions based on work-related expenses like travel or items of clothing you bought specifically for work.

3. Update your information where necessary. If you've had a change in your marital status you may need to revise your tax withholding and/or employee health coverage. If you're unsure if you need to update this information, contact a financial planner for assistance.

4. Empty your flexible spending account. A flexible spending account for healthcare should be used to cover outstanding claims from your doctor, dentist, or other health provider. If you have a flexible spending account oriented toward other types of spending like dependent care, employ the account to cover the appropriate expenses before the year is out.

Only $500 of a flexible spending account can carry over into the following year, so it's important to take full advantage of the account before the year ends.

January 22, 2020

How to Organize Your Personal Year End Finances

How to Organize Your Personal Year End Finances.

You should never organize your year-end finances all at once. Rather, you should be engaged in a steady process of organizing and reorganizing your financial documents and information throughout the year. The process you use when organizing at the end of the year will be basically the same process you use monthly or quarterly to evaluate your investments, insurance, and budget. Use the year-end financial organizational process to get the opinion of a financial planner to help you streamline your finances, identify areas of waste, and take corrective actions to save money.

Method 1 Getting Organized.

1. Select your organizational categories. Knowing how to organize your financial documents can be tough. Thinking broadly about the sorts of documents you ought to organize for your year-end finances will help the process move along smoothly. Some documents might need to be copied and placed in multiple locations. For instance, education loan payments might need to be in a “loans” folder and also a “taxes” folder. Depending on what sort of financial documents you have, you may or may not need folders devoted to each of the main financial categories, which include.

Financial management (bank statements and loan records).

Insurance and annuity documents (policies and statements).

Estate documents (wills, trusts, and powers of attorney).

Investments (stocks and bond).

Income tax information (tax returns and documents attesting to charitable giving).

Employment and military records (discharge papers and employee benefits).

Home records (appraisals, renovation receipts).

Medical documents (summaries of recent appointments and any medical bills or payments made).

Legal documents (passports, personal records, and real estate settlements).

2. Use the same organizational system for all your documents. You probably receive and pay some bills through regular mail, and some through digital outlets or automatic account debiting. In this case, it's important to impose a parallel structure on your analog and digital documents alike.

For instance, if you organize your vertical files containing utility bills, credit card bills, and other significant financial documents in order that they were received, you should not organize your digital files into folders containing payments, bills, and receipts according to the company or institution that you made the payments to.

3. Know what to keep. Retain anything tax-related for at least three years. Keep anything that demonstrates a financial loss for seven years. For instance, you ought to keep a bill of sale on a property that sold for less than what you paid for it. You should also retain receipts for transactions paid by credit card until you get the credit card bill that reflects them. Finally, keep all monthly account statements until you get the year-end reconciliation statement.

Conversely, you should know what to get rid of.When new insurance policies arrive, get rid of the old ones.

Err on the side of caution when disposing of financial documents. If you're unsure if you need to keep something, retain it.

For more in-depth guidelines on what you should pitch and keep, consult IRS Publication 17.

4. Use an app or website to help you organize. There are a variety of handy apps to help get your year-end finances organized. For instance, you might check out feedthepig.com, manilla.com, or mint.com.Apps that might help include Mint, Personal Capital, and Spending Tracker.

Method 2 Looking Ahead.

1. Set a budget. Find ways to save next year. Use your year-end financial organization time to identify sources that are draining your money. For instance, if you're paying for cable TV but never watch it, think about cancelling it altogether.

Overall, you should be spending about 35% of your income on home expenses (rent, utilities, and groceries), 15% on transportation expenses (car insurance, train fare, and auto repairs), 25% on entertainment and other miscellaneous expenses, 15% on paying off debt, and putting the final 10% of your income toward savings.

If you live in an expensive area or have a low income, you might need to contribute more money to home expenses and less toward debt or miscellaneous expenditures.

2. Simplify payments and financial data for next year. When you're done organizing your current year's financial data and documentation, look for ways to streamline the process next year. For instance, you can cut back on time spent searching for wayward documents by using automatic bill payments. You might also use debiting by tying regular payments like utilities and credit card charges directly to your bank account.

Cut back on the number of credit cards you use regularly. This will reduce the number of credit card bills you need to juggle. Use the credit card with the lowest interest rate as your day-to-day credit card, and use the other cards once a month in order to prevent their disuse from hurting your credit score.

For the same reason, limit your bank accounts. You should have one checking account and one savings account. If you have multiple checking and savings accounts, close the one with the most fees and least generous terms of service.

Consolidate your retirement accounts and investments, too. If you have several IRAs, transfer all the money into a single IRA. Use one brokerage firm to simplify investments.

3. Keep your finances organized throughout the year. Instead of putting all your receipts, account statements, and other financial documents in a stack and watching them slowly pile up over the course of a year, put them in the appropriate file or folder as you receive them. This will prevent confusion when trying to organize everything at year's end.

Use a three-ring binder with pockets to organize your financial materials in an orderly way. Move non-current financial records to your filing cabinet.

If you feel more comfortable printing out digital documents, print them out and put them in your vertical file or binder.

If you don't print out digital receipts and other documents, ensure that you put them in the appropriate folder according to your predesignated system as you receive them. For instance, when you get your digital W-2, immediately download it and put it with your other tax documents.

If you need to copy certain digital documents to make them accessible in multiple locations, don't be afraid to do so.

Method 3 Evaluating Your Financial Health.

1. Consult a financial planner or accountant. With the help of a certified financial planner or accountant, you'll be able to get your year-end finances under control. They can help you find ways to save when you file taxes in the coming months, and can explain some of the nuances of the tax code. For instance, you might want to ask.

Should I accelerate or defer income?

What losses or gains should I take this year?

Should I convert my traditional IRA to a Roth IRA so that my earnings will grow tax-free?

Are there any charitable donations I should make?

2. Total your year-to-date spending. You should have a column with all the payments, investments, and savings you have at the end of the year. Compare these numbers to their counterparts at the beginning of the year to get an overall sense of your financial health.

Your investment value should be greater at the end of the year than it was at the beginning of the year.

Your savings should be higher at the end of the year than it was at the beginning of the year.

Your spending should be less than the value of your savings.

3. Review your credit reports. Each year, you are entitled to three free credit reports, one each from the three major credit agencies (Experian, Equifax, and TransUnion). These reports will let you know if your credit score is good or if it needs a boost.

The best way to check your credit reports is not to check all three at once, but rather to space them out regularly over time. Ideally, you'd check one every four months.

4. Check your portfolio. Read the latest reports from your stock broker or financial planner to determine the relative health of your investments. If your portfolio is not doing well, think about investing elsewhere. Talk to a certified financial planner or stockbroker for advice about how to develop a robust portfolio.

Method  4 Finding Ways to Save.

1. Analyze your insurance coverage. If you have home, life, auto, or other insurance, contact some agents representing insurers in your area to find out if you have the best coverage you can afford. If you've made improvements to your home over the past year, you may have increased the value of your home, and that value should be reflected in your insurance policy.

Likewise, if you've welcomed a new family member into your family over the past year, you must check with your insurance provider to guarantee that they're covered under your insurance.

2. Review your tax data. Working with a tax professional, find ways to reduce your tax burden before the year is out. Charitable giving is the easiest way to do this. Look for reputable charities whose work you believe in through GuideStar (http://www.guidestar.org), CharityWatch (https://www.charitywatch.org/home) and Charity Navigator (http://www.charitynavigator.org).

You can also make in-kind (material) donations to thrift stores like the Salvation Army in exchange for a tax discount.

You can also qualify for tax deductions based on work-related expenses like travel or items of clothing you bought specifically for work.

3. Update your information where necessary. If you've had a change in your marital status you may need to revise your tax withholding and/or employee health coverage. If you're unsure if you need to update this information, contact a financial planner for assistance.

4. Empty your flexible spending account. A flexible spending account for healthcare should be used to cover outstanding claims from your doctor, dentist, or other health provider. If you have a flexible spending account oriented toward other types of spending like dependent care, employ the account to cover the appropriate expenses before the year is out.

Only $500 of a flexible spending account can carry over into the following year, so it's important to take full advantage of the account before the year ends.

January 22, 2020

How to Start a Finance Company

How to Start a Finance Company.

Finance companies provide loans to individual and commercial customers for a variety of reasons. Commercial customers can include retail stores, small businesses or large firms. Commercial loans can help established businesses construct a new office or retail space, or they can help new business get up and running. Personal loans for individual customers can include home equity loans, student loans and auto loans. Starting a finance company requires not only a thorough understanding of your target customer's needs and a comprehensive product line, but also a solid business plan that outlines how you will make your company successful. In addition,any new finance company must comply with strict state and federal regulations and meet initial funding requirements.

Part 1 Identifying the Finance Company Business Model

1. Select a finance company specialty. Finance companies tend to specialize in the types of loans they make as well as the customers they serve. The financial, marketing, and operational requirements vary from one specialty to another. Focusing on a single business model is critical to the successful creation and operation of a new company. Private finance companies range from the local mortgage broker who specializes in refinancing or making new loans to homeowners to the factoring companies (factors) that acquire or finance account receivables for small businesses. The decision to pursue a specific finance company specialty should be based upon your interest, your experiences, and the likelihood of success.

Many finance companies are founded by former employees of existing companies. For example, former loan officers, underwriters, and broker associates create new mortgage brokerage firms specializing in a specific type of loan (commercial or residential) or working with a single lender.

Consider the business specialty that attracted you initially. Why were you attracted to the business? Does the business require substantial start-up and operating capital?

Is there an opportunity to create the same business in a new area? Will you be competing with other similar, existing businesses?

2. Confirm the business opportunity. A new finance company must be able to attract clients and produce a profit. As a consequence, it is important to research the expected market space where the business will compete. How big is the market? Who presently serves potential clients? Are prices stable? Is the market limited to a specific geographic area? How do existing companies attract and serve their customers? How do competitors differ in their approach to marketing and service features?

Identify your target market, or the specific customers you intend to serve. Explain their needs and how you intend to meet them.}}

Describe your area of specialization. For example, if your market research indicates a growing number of small start-up companies needing loans, describe how the financial products and services you offer are strong enough to gain a significant share of that market.

Consider the companies already in the competitive space. Are they similar in size or dominated by a single company? Similar market shares may indicate a slow-growing market or the companies’ inability to distinguish themselves from their competitors.

Tip: Identifying your target market will require you to identify key demographics that are currently underserved and how you plan to draw these customers away from your competitors. You should list who these customers are and how your financial products will appeal to them. Include any advantages you have over competitors.

3. Identify the business requirements. What are the likely fixed costs to operate the business - office space, equipment, utilities, salaries and wages? What business processes are necessary for day-to-day operations - marketing, loan officers, underwriters, clerks and accountants? Will potential clients visit a physical office, communicate online, or both? Will you need a financial partner such as mortgage lender or a bank?

Mortgage brokers act as intermediaries between borrowers and lenders, sometimes with discretion up to a dollar limit. Factors typically leverage their own capital by borrowing from larger financial institutions.

4. Crunch the numbers. How much capital is required to open the business? What is the expected revenue per client or transaction? What is break-even sales volume? Before risking your own and other people’s capital, you need to ensure that profitability is possible and reasonable, if not likely.{{greenbox: Tip: Develop financial projections (pro formas) for the first three years of operation to understand how the business is likely to fare in the real world. The projections should include month to month Income Statements for the first year, and quarterly statements thereafter, as well as 'projected Balance Sheets and Cash Flow Statements.

Part 2 Making a Self Assessment.

1. Identify your skills. Before starting your new company and, possibly, a new career, it is important to objectively evaluate your skills and personality to determine what steps you need to take to successfully start and manage a finance company. Do you have special training in the finance specialty? Do you understand finance and accounting? Do you work well with people? Are you a leader, who inspires others to follow them, or a manager, who can assess a problem, discern its cause, direct resources to implement a solution? Are you a good salesperson? Do you have any special abilities specifically suited to the finance industry?

2. Assess your emotional strengths and interests. Do you work best alone or with others? Do you find it easy to compromise? Are you patient or demanding with others? Do you make quick, intuitive decisions or do you prefer detailed information and careful analysis before acting? How comfortable are you with risk? Are an optimist or a pessimist? When you make a mistake, do you beat yourself up or regard it as a learning opportunity and move on?

3. Consider your experience. Have you worked in the finance industry previously? Are you monetarily and professionally successful in your present position? Do you understand marketing, accounting, legal matters, or banking? Have you been responsible for creating new markets or leading sales teams?

4. Determine your financial capacity. Do you have sufficient capital to open the finance company you envision? Do you have assets that can cover your living expenses during a start-up phase? Will your family or friends contribute to the financing of your business? Do you have access to other financial sources - personal loans, venture capital, investment funds, or financial sponsors?

Part 3 Creating a Business Plan.

1. Set up your business plan. The Business Plan serves a number of functions. It is a blueprint for building your company in the future, a guide to ensure you remain focused in your efforts, and a detailed description of your company for potential lenders and investors. Begin writing your business plan by including all of the required sections and leaving room to fill them in. The steps in this part should serve as your sections, starting with the business description.

2. Write a business description. Your business plan will layout a blueprint for your company. The first part of your business, the description, is a summary of the organization and goals of your business. Begin by justifying the need for a new financial company in the industry or target location. You should briefly identify your target market, how you plan to reach them, descriptions of your products and services, and how your company will be organized.

Tip: You should also briefly explain how there is room in the current market for your company (how it will compete against competitors). You should already have this information from your initial market research.

3. Describe the organization and management of your company. Clarify who owns the company. Specify the qualifications of your management team. Create an organizational chart. A comprehensive, well-developed organizational structure can help a financial institution be more successful.

The Chief Executive Office leads the "executive suite" of other company officers.

The Chief Operating Officer manages the activities of the lending, servicing and insurance and investment units of the company.

The Chief Administrative Officer’s responsibilities include marketing, human resources, employee training, facilities, technology and the legal department.

The Chief Financial Officer ensures that the company operates within regulatory parameters. This person also monitors the company’s financial performance.

In smaller companies, executives may fill more than one of these roles simultaneously.

4. Describe your product line. Explain the types of financial products and loans you provide. Emphasize the benefits your products offer to your target customers. Specify the need your product fills in the market.

For example, if your target customers are small business owners, describe how the financial products and investments you offer to help them run their businesses.

5. Explain how your business is financed. Determine how much money you need to start your finance company. Specify how much equity you own. State what percentage other investors own in the company. Indicate how you plan to finance your company with leverage (loans),where these loans are coming from, and how the loans will be used in the business.

In most cases, equity in the company is used primarily for the company's operations, rather than the source of loans to customers. Secondary lenders provide funds to the finance company that is subsequently loaned to customers; the customers' loans collateralize the lenders' loans to the finance company. This is because profit is made in the spread, or the difference between your cost of acquiring capital and profit from lending it out.

Any funding request should indicate how much you need, how you intend to use the money, and the terms of the loan or investment.

6. Document your marketing and sales management strategies. Your marketing strategy should explain how you plan to attract and communicate with both customers and lenders/depositors. It should also show how you plan to grow your company. The sales strategy defines how you will sell your product.

Promotional strategies include advertising, public relations and printed materials.

Business growth opportunities not only include building your staff, but also acquiring new businesses or beginning to offer different kinds of products.

The sales strategy should include information about the size of your sales force, procedures for sales calls and sales goals.

7. Include financial statements in your business plan. Reviewing the pro forma financial statements you created during your business planning, be sure that your projections are reasonable and conservative. You may also want to cautiously estimate performance over the next two years after that. Include a ratio analysis to document your understanding of financial trends over time and predict future financial performance.

Prospective financial data should provide monthly statements for the first year and annual statements for the next two years.

Standard financial ratios include Gross profit margin, ROE, Current ratio, Debt to Equity.

Ratio and trend analysis data helps you document whether you will be able to continue to serve your customers over time, how well you utilize your assets and manage your liabilities, and whether you have enough cash to meet your obligations.

Tip: Add graphs to your analysis to illustrate positive trends.

Part 4 Determining Your Business Structure.

1. Consider forming a Limited Liability Company. A Limited Liability Company (LLC) is similar to a corporation in that it protects its owners from personal liability for debts or actions incurred by the business. However, they have the tax advantages of a sole proprietorship or partnership. A corporation typically files taxes separately from the shareholders.

Be aware that corporations pay double federal income tax, meaning taxes are assessed when profit is earned, and then again when it is distributed to shareholders.

You should seek legal advice to determine the best structure for your business.

2. Name and register your business. Choose a name that represents your brand and is unique enough to obtain a website address or URL. When choosing a name, check with the U.S. Patent and Trademark Office to make sure you are not infringing on any trademarks. Also, check with you state to see if the name is already in use by another corporation.

You will have to register with your state as a corporation. The exact registration process varies by state and type of corporation you decide to form.

Since your business name is one of your most important assets, protect it by applying for trademark protection with the U.S. Patent and Trademark Office.

3. Obtain a require operational licenses and permits. Financial institutions acquire these from the state in which they operate. Consult with your State Business License Office to identify the specific license and permit you need. Each state has different requirements for licensing financial institutions. You will need to specify exactly what type of financial institution you are opening, such as an investment company or a licensed lender. You will then furnish the requisite documents and pay any fees.

Due to the incredibly complex and constantly-evolving nature of the financial services industry, it is advised that finance companies hire and retain expert legal counsel to guide them through these regulations.

Note: You will also need to comply with any permit requirements surrounding your office space, like public and workplace safety regulations and operating permits.

4. Learn about regulations. The two categories of financial regulations in the United States are safety-and-soundness regulation and compliance. Safety-and-soundness regulations protect creditors from losses arising from the insolvency of financial institutions. Compliance regulations aim to protect individuals from unfair dealings or crime from the financial institutions. Financial regulations are carried out by both federal and state agencies.

Federal financial regulation agencies include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Securities and Exchange Commission (SEC).

State regulatory agencies may have additional requirements that are even more stringent than those set by the SEC.

With the help of your legal counsel, investigate reserve and initial funding requirements for your company. This will determine how much startup money you need.

5. Protect yourself from risk and liabilities with indemnity insurance. Indemnity insurance protects you and your employees should someone sue you. Financial institutions should purchase a specific kind of indemnity insurance called Errors and Omissions (E&O) insurance. This protects the financial company from claims made by clients for inadequate or negligent work. It is often required by government regulatory bodies. Remember, however, that staying in compliance with all regulatory requirements is still your responsibility.

Part 5 Setting Up Shop.

1. Obtain financing. You will need to finance your company according to your business plan, using a combination of equity and debt financing. Initial startup costs will be used for meeting reserve requirements and the building or rental of office spaces. From there, much of the company's operating capital will be lent out to customers.

Be aware of Federal and State laws regulating the private solicitation of investors. Adherence to securities laws regarding the information provided to potential investors and the qualifications of the investor will apply in most circumstances.

Sources of debt financing include loans from the government and commercial lending institutions. Money borrowed with debt financing must be paid back over a period of time, usually with interest.

The Small Business Administration (SBA) partners with banks to offer government loans to business owners. However, these loans can only be used for the purchase of equipment, not lent out to others. The SBA helps lending institutions make long-term loans by guaranteeing a portion of the loan should the business default.

Finance companies face the problem of having to raise large amounts of initial funding to be successful. They also often have to deal with a slew of other challenges before they become profitable. Without accounting properly for issues like fraud, it's very easy for a finance company to go out of business.

Note: Investors may want to provide financing in exchange for equity in the company. This is called equity financing, and it makes the investors shareholders in the company. You don’t have to repay these investors, but you do have to share profits with them.

2. Choose your location. A finance company should make a positive impression on customers. Customers looking for a loan will want to do business in a place that projects a trustworthy and sound image. Take into account the reputation of the neighborhood or of a particular building and how it will appear to customers. Also consider how customers will reach you and the proximity of your competitors. If your target customers are small local businesses, for example, they may not want to drive to a remote location or deal with heavy city traffic to meet with you.

If you are not sure, contact your local planning agency to find out if your desired location is zoned for commercial use, especially if you plan to operate out of your home.

Leasing commercial office space is expensive. Consider your finances, not only what you can afford, but also other expenses such as renovations and property taxes.

In today's connected world, it's also possible to run a finance company online, without a location for physical interaction with customers. While you'll likely still need an office for your employees, not having a retail location can save you some regulatory hassle expense.

3. Hire and retain employees. Write effective job descriptions so employees and applicants understand their role in the company and what your expectations of them are. Compile a compensation package, including required and optional fringe benefits. Compose an employee handbook that communicates company policies, compensation, schedules and standards of conduct.

Perform pre-employment background checks to make informed decisions about whom you hire. Financial planners and advisors require a specific educational background and are subject to rigorous certification requirements. Consider obtaining credit reports to show how financially responsible a candidate is.

4. Pay your taxes. Obtain an Employee Identification Number (EIN) from the IRS. This is also known as your Federal Tax Identification Number. Determine your federal and state tax obligations. State tax obligations include income taxes and employment taxes. All states also require payment of workers' compensation insurance and unemployment insurance taxes, and some also require payment of disability insurance.

5. Create loan packages for your clients. Decide if you are going to offer revolving or fixed-amount types of credit. Think about your target customers and what kinds of loans they would need. Homeowners and individuals may seek mortgages, auto loans, student loans or personal loans. Entrepreneurs may seek small business loans. Consolidated loans may help customers who are struggling to manage their finances.

Recognize that your loan offerings, rates, and terms will need to be constantly reworked with the changing loan market. Some of these items may also be subject to various regulations, so consult your legal counsel before finalizing your offerings.

6. Market your new finance company. Target your marketing efforts towards your chosen niche of clients. Marketing includes networking and advertising, but there are also other ways of letting potential customers know you have set up shop. Become a familiar face in your local business community by attending and speaking at events sponsored by the local chamber of commerce. Publish communications such as a newsletter or e-zine. Participate in social networking on sites like Facebook, LinkedIn and Twitter.

Note: In order to become successful, you'll have to attract both depositors and loan customers, so be sure to offer deals on both ends. Without attracting depositor, you will have no capital to lend out to customers.

December 03, 2019

how to start a finance company

How to Start a Finance Company.

Finance companies provide loans to individual and commercial customers for a variety of reasons. Commercial customers can include retail stores, small businesses or large firms. Commercial loans can help established businesses construct a new office or retail space, or they can help new business get up and running. Personal loans for individual customers can include home equity loans, student loans and auto loans. Starting a finance company requires not only a thorough understanding of your target customer's needs and a comprehensive product line, but also a solid business plan that outlines how you will make your company successful. In addition,any new finance company must comply with strict state and federal regulations and meet initial funding requirements.

Part 1 Identifying the Finance Company Business Model

1. Select a finance company specialty. Finance companies tend to specialize in the types of loans they make as well as the customers they serve. The financial, marketing, and operational requirements vary from one specialty to another. Focusing on a single business model is critical to the successful creation and operation of a new company. Private finance companies range from the local mortgage broker who specializes in refinancing or making new loans to homeowners to the factoring companies (factors) that acquire or finance account receivables for small businesses. The decision to pursue a specific finance company specialty should be based upon your interest, your experiences, and the likelihood of success.

Many finance companies are founded by former employees of existing companies. For example, former loan officers, underwriters, and broker associates create new mortgage brokerage firms specializing in a specific type of loan (commercial or residential) or working with a single lender.

Consider the business specialty that attracted you initially. Why were you attracted to the business? Does the business require substantial start-up and operating capital?

Is there an opportunity to create the same business in a new area? Will you be competing with other similar, existing businesses?

2. Confirm the business opportunity. A new finance company must be able to attract clients and produce a profit. As a consequence, it is important to research the expected market space where the business will compete. How big is the market? Who presently serves potential clients? Are prices stable? Is the market limited to a specific geographic area? How do existing companies attract and serve their customers? How do competitors differ in their approach to marketing and service features?

Identify your target market, or the specific customers you intend to serve. Explain their needs and how you intend to meet them.}}

Describe your area of specialization. For example, if your market research indicates a growing number of small start-up companies needing loans, describe how the financial products and services you offer are strong enough to gain a significant share of that market.

Consider the companies already in the competitive space. Are they similar in size or dominated by a single company? Similar market shares may indicate a slow-growing market or the companies’ inability to distinguish themselves from their competitors.

Tip: Identifying your target market will require you to identify key demographics that are currently underserved and how you plan to draw these customers away from your competitors. You should list who these customers are and how your financial products will appeal to them. Include any advantages you have over competitors.

3. Identify the business requirements. What are the likely fixed costs to operate the business - office space, equipment, utilities, salaries and wages? What business processes are necessary for day-to-day operations - marketing, loan officers, underwriters, clerks and accountants? Will potential clients visit a physical office, communicate online, or both? Will you need a financial partner such as mortgage lender or a bank?

Mortgage brokers act as intermediaries between borrowers and lenders, sometimes with discretion up to a dollar limit. Factors typically leverage their own capital by borrowing from larger financial institutions.

4. Crunch the numbers. How much capital is required to open the business? What is the expected revenue per client or transaction? What is break-even sales volume? Before risking your own and other people’s capital, you need to ensure that profitability is possible and reasonable, if not likely.{{greenbox: Tip: Develop financial projections (pro formas) for the first three years of operation to understand how the business is likely to fare in the real world. The projections should include month to month Income Statements for the first year, and quarterly statements thereafter, as well as 'projected Balance Sheets and Cash Flow Statements.

Part 2 Making a Self Assessment.

1. Identify your skills. Before starting your new company and, possibly, a new career, it is important to objectively evaluate your skills and personality to determine what steps you need to take to successfully start and manage a finance company. Do you have special training in the finance specialty? Do you understand finance and accounting? Do you work well with people? Are you a leader, who inspires others to follow them, or a manager, who can assess a problem, discern its cause, direct resources to implement a solution? Are you a good salesperson? Do you have any special abilities specifically suited to the finance industry?

2. Assess your emotional strengths and interests. Do you work best alone or with others? Do you find it easy to compromise? Are you patient or demanding with others? Do you make quick, intuitive decisions or do you prefer detailed information and careful analysis before acting? How comfortable are you with risk? Are an optimist or a pessimist? When you make a mistake, do you beat yourself up or regard it as a learning opportunity and move on?

3. Consider your experience. Have you worked in the finance industry previously? Are you monetarily and professionally successful in your present position? Do you understand marketing, accounting, legal matters, or banking? Have you been responsible for creating new markets or leading sales teams?

4. Determine your financial capacity. Do you have sufficient capital to open the finance company you envision? Do you have assets that can cover your living expenses during a start-up phase? Will your family or friends contribute to the financing of your business? Do you have access to other financial sources - personal loans, venture capital, investment funds, or financial sponsors?

Part 3 Creating a Business Plan.

1. Set up your business plan. The Business Plan serves a number of functions. It is a blueprint for building your company in the future, a guide to ensure you remain focused in your efforts, and a detailed description of your company for potential lenders and investors. Begin writing your business plan by including all of the required sections and leaving room to fill them in. The steps in this part should serve as your sections, starting with the business description.

2. Write a business description. Your business plan will layout a blueprint for your company. The first part of your business, the description, is a summary of the organization and goals of your business. Begin by justifying the need for a new financial company in the industry or target location. You should briefly identify your target market, how you plan to reach them, descriptions of your products and services, and how your company will be organized.

Tip: You should also briefly explain how there is room in the current market for your company (how it will compete against competitors). You should already have this information from your initial market research.

3. Describe the organization and management of your company. Clarify who owns the company. Specify the qualifications of your management team. Create an organizational chart. A comprehensive, well-developed organizational structure can help a financial institution be more successful.

The Chief Executive Office leads the "executive suite" of other company officers.

The Chief Operating Officer manages the activities of the lending, servicing and insurance and investment units of the company.

The Chief Administrative Officer’s responsibilities include marketing, human resources, employee training, facilities, technology and the legal department.

The Chief Financial Officer ensures that the company operates within regulatory parameters. This person also monitors the company’s financial performance.

In smaller companies, executives may fill more than one of these roles simultaneously.

4. Describe your product line. Explain the types of financial products and loans you provide. Emphasize the benefits your products offer to your target customers. Specify the need your product fills in the market.

For example, if your target customers are small business owners, describe how the financial products and investments you offer to help them run their businesses.

5. Explain how your business is financed. Determine how much money you need to start your finance company. Specify how much equity you own. State what percentage other investors own in the company. Indicate how you plan to finance your company with leverage (loans),where these loans are coming from, and how the loans will be used in the business.

In most cases, equity in the company is used primarily for the company's operations, rather than the source of loans to customers. Secondary lenders provide funds to the finance company that is subsequently loaned to customers; the customers' loans collateralize the lenders' loans to the finance company. This is because profit is made in the spread, or the difference between your cost of acquiring capital and profit from lending it out.

Any funding request should indicate how much you need, how you intend to use the money, and the terms of the loan or investment.

6. Document your marketing and sales management strategies. Your marketing strategy should explain how you plan to attract and communicate with both customers and lenders/depositors. It should also show how you plan to grow your company. The sales strategy defines how you will sell your product.

Promotional strategies include advertising, public relations and printed materials.

Business growth opportunities not only include building your staff, but also acquiring new businesses or beginning to offer different kinds of products.

The sales strategy should include information about the size of your sales force, procedures for sales calls and sales goals.

7. Include financial statements in your business plan. Reviewing the pro forma financial statements you created during your business planning, be sure that your projections are reasonable and conservative. You may also want to cautiously estimate performance over the next two years after that. Include a ratio analysis to document your understanding of financial trends over time and predict future financial performance.

Prospective financial data should provide monthly statements for the first year and annual statements for the next two years.

Standard financial ratios include Gross profit margin, ROE, Current ratio, Debt to Equity.

Ratio and trend analysis data helps you document whether you will be able to continue to serve your customers over time, how well you utilize your assets and manage your liabilities, and whether you have enough cash to meet your obligations.

Tip: Add graphs to your analysis to illustrate positive trends.

Part 4 Determining Your Business Structure.

1. Consider forming a Limited Liability Company. A Limited Liability Company (LLC) is similar to a corporation in that it protects its owners from personal liability for debts or actions incurred by the business. However, they have the tax advantages of a sole proprietorship or partnership. A corporation typically files taxes separately from the shareholders.

Be aware that corporations pay double federal income tax, meaning taxes are assessed when profit is earned, and then again when it is distributed to shareholders.

You should seek legal advice to determine the best structure for your business.

2. Name and register your business. Choose a name that represents your brand and is unique enough to obtain a website address or URL. When choosing a name, check with the U.S. Patent and Trademark Office to make sure you are not infringing on any trademarks. Also, check with you state to see if the name is already in use by another corporation.

You will have to register with your state as a corporation. The exact registration process varies by state and type of corporation you decide to form.

Since your business name is one of your most important assets, protect it by applying for trademark protection with the U.S. Patent and Trademark Office.

3. Obtain a require operational licenses and permits. Financial institutions acquire these from the state in which they operate. Consult with your State Business License Office to identify the specific license and permit you need. Each state has different requirements for licensing financial institutions. You will need to specify exactly what type of financial institution you are opening, such as an investment company or a licensed lender. You will then furnish the requisite documents and pay any fees.

Due to the incredibly complex and constantly-evolving nature of the financial services industry, it is advised that finance companies hire and retain expert legal counsel to guide them through these regulations.

Note: You will also need to comply with any permit requirements surrounding your office space, like public and workplace safety regulations and operating permits.

4. Learn about regulations. The two categories of financial regulations in the United States are safety-and-soundness regulation and compliance. Safety-and-soundness regulations protect creditors from losses arising from the insolvency of financial institutions. Compliance regulations aim to protect individuals from unfair dealings or crime from the financial institutions. Financial regulations are carried out by both federal and state agencies.

Federal financial regulation agencies include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Securities and Exchange Commission (SEC).

State regulatory agencies may have additional requirements that are even more stringent than those set by the SEC.

With the help of your legal counsel, investigate reserve and initial funding requirements for your company. This will determine how much startup money you need.

5. Protect yourself from risk and liabilities with indemnity insurance. Indemnity insurance protects you and your employees should someone sue you. Financial institutions should purchase a specific kind of indemnity insurance called Errors and Omissions (E&O) insurance. This protects the financial company from claims made by clients for inadequate or negligent work. It is often required by government regulatory bodies. Remember, however, that staying in compliance with all regulatory requirements is still your responsibility.

Part 5 Setting Up Shop.

1. Obtain financing. You will need to finance your company according to your business plan, using a combination of equity and debt financing. Initial startup costs will be used for meeting reserve requirements and the building or rental of office spaces. From there, much of the company's operating capital will be lent out to customers.

Be aware of Federal and State laws regulating the private solicitation of investors. Adherence to securities laws regarding the information provided to potential investors and the qualifications of the investor will apply in most circumstances.

Sources of debt financing include loans from the government and commercial lending institutions. Money borrowed with debt financing must be paid back over a period of time, usually with interest.

The Small Business Administration (SBA) partners with banks to offer government loans to business owners. However, these loans can only be used for the purchase of equipment, not lent out to others. The SBA helps lending institutions make long-term loans by guaranteeing a portion of the loan should the business default.

Finance companies face the problem of having to raise large amounts of initial funding to be successful. They also often have to deal with a slew of other challenges before they become profitable. Without accounting properly for issues like fraud, it's very easy for a finance company to go out of business.

Note: Investors may want to provide financing in exchange for equity in the company. This is called equity financing, and it makes the investors shareholders in the company. You don’t have to repay these investors, but you do have to share profits with them.

2. Choose your location. A finance company should make a positive impression on customers. Customers looking for a loan will want to do business in a place that projects a trustworthy and sound image. Take into account the reputation of the neighborhood or of a particular building and how it will appear to customers. Also consider how customers will reach you and the proximity of your competitors. If your target customers are small local businesses, for example, they may not want to drive to a remote location or deal with heavy city traffic to meet with you.

If you are not sure, contact your local planning agency to find out if your desired location is zoned for commercial use, especially if you plan to operate out of your home.

Leasing commercial office space is expensive. Consider your finances, not only what you can afford, but also other expenses such as renovations and property taxes.

In today's connected world, it's also possible to run a finance company online, without a location for physical interaction with customers. While you'll likely still need an office for your employees, not having a retail location can save you some regulatory hassle expense.

3. Hire and retain employees. Write effective job descriptions so employees and applicants understand their role in the company and what your expectations of them are. Compile a compensation package, including required and optional fringe benefits. Compose an employee handbook that communicates company policies, compensation, schedules and standards of conduct.

Perform pre-employment background checks to make informed decisions about whom you hire. Financial planners and advisors require a specific educational background and are subject to rigorous certification requirements. Consider obtaining credit reports to show how financially responsible a candidate is.

4. Pay your taxes. Obtain an Employee Identification Number (EIN) from the IRS. This is also known as your Federal Tax Identification Number. Determine your federal and state tax obligations. State tax obligations include income taxes and employment taxes. All states also require payment of workers' compensation insurance and unemployment insurance taxes, and some also require payment of disability insurance.

5. Create loan packages for your clients. Decide if you are going to offer revolving or fixed-amount types of credit. Think about your target customers and what kinds of loans they would need. Homeowners and individuals may seek mortgages, auto loans, student loans or personal loans. Entrepreneurs may seek small business loans. Consolidated loans may help customers who are struggling to manage their finances.

Recognize that your loan offerings, rates, and terms will need to be constantly reworked with the changing loan market. Some of these items may also be subject to various regulations, so consult your legal counsel before finalizing your offerings.

6. Market your new finance company. Target your marketing efforts towards your chosen niche of clients. Marketing includes networking and advertising, but there are also other ways of letting potential customers know you have set up shop. Become a familiar face in your local business community by attending and speaking at events sponsored by the local chamber of commerce. Publish communications such as a newsletter or e-zine. Participate in social networking on sites like Facebook, LinkedIn and Twitter.

Note: In order to become successful, you'll have to attract both depositors and loan customers, so be sure to offer deals on both ends. Without attracting depositor, you will have no capital to lend out to customers.

December 01, 2019

how to manage business finances

How to Manage Business Finances.

Effective and efficient management of finances is critical to the growth and success of any small business. The easiest way to do this is to hire a dedicated accountant or bookkeeper right away. If you don't have the resources to hire a professional, take advantage of bookkeeping and other financial software to track your cash flow and generate reports. That way you can stay on top of your profits and act quickly to minimize losses.



Method 1 Taking Payments and Paying Expenses.

1. Create a budget and review it regularly. A budget is essential if you want your business to be profitable. Categorize your business's regular expenses to determine how much income your business needs to generate.

Creating multiple budgets can be helpful. For example, you may want to create one with a bare minimum of sales, so you know how to allocate the money when there isn't much coming in.

Use your budget to plan for the growth of your business, such as hiring a new employee or expanding your advertising and marketing.

2. Open a separate business bank account. Even if you're running your business as a sole proprietorship, you still want to keep your business finances separate from your personal finances. Mixing your assets together can cause problems if you're audited, or sued by a business creditor.

Don't take money from your business bank account to pay for personal expenses. If you need money from the business, label it appropriately as a draw from the business and transfer the money to your personal bank account first.

3. Decide what types of payment you'll accept. Having a variety of payment options is a convenience for your customers. Each method of payment has its own costs and risks that you'll want to take into account.

Cash is the simplest method of payment, but presents security risks. If you're going to take cash, have a secure safe and plan on making regular bank deposits.

If you want to take credit or debit cards, look into the different services to find the one that best suits your needs and your overall budget. You typically have to pay a subscription fee for the service, plus a fee per transaction. You may want to require a minimum purchase amount for credit or debit cards.

4. Standardize payment terms. You should have a policy in place that establishes rules for payment of your products or services. Apply those rules to all customers, rather than creating payment terms for individual clients on a piecemeal basis.

Universal payment terms will make your bookkeeping easier, and can smooth your collections process. If you apply the same terms across the board, you also don't have to worry about remembering the arrangements you made with each individual customer.



Method 2 Tracking Overall Cash Flow.

1. Choose your accounting method. To manage your business finances, you must choose either the cash or accrual accounting method and use it consistently. With the cash method, you record sales and expenses when money actually changes hands. For the accrual method, on the other hand, you record sales and expenses when they take place, rather than when money changes hands.

For example, suppose you are a construction contractor and you receive an invoice. If you were using the cash method, you would record the expense in your books when you actually paid the invoice. However, if you were using the accrual method you would record it the day you received it, even if you didn't pay it for several days or weeks.

Cash accounting works better if you have a small business that deals primarily with point-of-sale transactions. If you deal with larger contracts that aren't paid all at once, the accrual method may be a better option for you.

2. Record all sales and expenses. Set up a system so that all sales and expenses are put on the books the day they occur, following the accounting method you've chosen. Only doing the books on a monthly or quarterly basis may result in errors.

If you have a store, you can use a point of sale system to track sales and produce reports that you can easily use to reconcile your books each day.

When you have employees or other partners buying things for the business, make sure you get those receipts as soon as possible so you can keep your books up to date.

3. Purchase bookkeeping software. There are a number of bookkeeping programs, such as QuickBooks, that you can purchase and use to manage your business finances. Most of these programs are arranged so that you pay a monthly subscription fee to use the service.

When you use a subscription, software-as-a-service platform, your data is stored in the cloud so that you don't have to worry as much about security or data loss.

These programs can be connected to your business bank accounts, credit cards, and other systems so that much of the information is entered into your books automatically.

4. Hire an accountant if you need help. If you don't have accounting and bookkeeping education and experience, you may want to hire someone who does. Particularly if you've borrowed money to start up your business, a professional can help you avoid potentially costly mistakes.

Check with the local licensing or regulatory authority to make sure any financial professional you want to hire has all the necessary education and certifications, and that their licenses are active and free of any disciplinary actions.

If you can't afford to have someone working for your business full-time, you may be able to consult with an accountant periodically, or use a bookkeeper occasionally to go over your books and correct any errors.



Method 3 Generating Financial Reports.

1. Download bookkeeping software to simplify report creation. When you use bookkeeping software, you also have the ability to generate the financial reports you need with the click of a button. However, the reports created are only as good as the information you put into the software.

Go over your sales and expenses before you generate your final reports. Reconcile your books with your receipts and bank account statements to make sure the information is correct.

Once you're satisfied with the information, click through to create your reports. You'll typically be prompted to enter the dates you want the report to cover, and the specific information you want included.

2. Create quarterly profit and loss (P&L) reports. Your P&L reports are among the most important tools for assessing and growing your business. Many bookkeeping programs will generate these reports for you if you input the parameters of the report you want.

Your P&L starts with your total sales. You then subtract from those sales the cost of the products or services sold to get your gross profit.

Take your gross profit and subtract other expenses, such as rent or utilities, from that number. You'll be left with your net profit for the time period.

P&L reports are especially important if you anticipate needing small business loans or other outside funding.

3. Prepare quarterly business financial statements. In addition to your P&L, there are several other statements, such as your cash flow statement and your balance sheet, that help you determine where money is flowing in and out of your business.

Your cash flow statement reports the increase or decrease of money flowing into your business. You can quickly see the amount of cash on hand and what you did with it, as well as where that money came from (whether from sales or other sources, such as a loan).

The balance sheet summarizes your business's assets and liabilities. It will be particularly helpful if you have a business credit card, or if you've taken out a small business loan to help fund the start up of your business.

4. Update your projections based on your actual cash flow. Your business plan likely includes cash flow and profit projections several years into the future. As you operate your business, you'll want to check periodically and make sure these projections are still accurate given your business's actual performance.

Look at your business plan and update it twice a year. You also want to update it any time you're applying for a small business loan or courting investors, so they have the most up-to-date information to make their decision.

Depending on how your actual performance compares to your initial expectations, you also may want to adjust some of your business goals and plans for growth or expansion.



Method 4 Filing Business Taxes.

1. Get a separate tax ID number for your business. Even if you're running your business as a sole proprietorship, a separate tax ID number for your business will help keep your business and personal finances separate.

If you have a US business, you can get an employer identification number (EIN) easily online at the IRS's website. Simply go to https://sa.www4.irs.gov/modiein/individual/index.jsp and begin your application.

In other countries, consult a tax professional or business attorney to find out what you need to do to correctly document your business for tax purposes.

2. Choose your tax year. For tax purposes, you can use the calendar year, or any 12-month period that starts on a specific date. In most cases, it's easiest to use the calendar year. When you choose your tax year, you have to use it consistently as long as you remain in business. Typically, you can't change it later.

Most businesses use the calendar year as their tax year. If you're thinking about using a different 12-month period, you may want to consult an attorney or tax professional first.

3. Maintain records of deductible expenses. When you run your own business, you have the ability to deduct many of your business-related expenses on your taxes. These deductions lower your profits and decrease your business's tax liability.

Generally, anything you buy to conduct business will be at least partially deductible. The expense must be reasonable. If you're unsure about something, save the receipts and discuss it with a qualified tax professional.

Expenses such as rent and utilities for commercial space, computers, and office supplies are examples of business expenses that typically are deductible.

4. Use depreciation for more costly assets and fixtures. If you buy something to use in your business that you anticipate using for many years, you typically can't deduct the entire cost at once. Rather, you deduct a portion of it for several years.

The amount and length of time you can claim depreciation depends on how the expense is categorized and the length of its useful life. These are defined by the government.

If you have a significant amount of purchases that are subject to depreciation, it's a good idea to have a tax professional do your taxes so you can make sure you're depreciating them using the right method and getting the maximum possible deduction.

5. Check tax and licensing obligations with your state or local government. State and local governments also may tax businesses, or require you to maintain certifications or licenses if you want to operate your business.

Your local small business association or chamber of commerce typically will have information on the licenses required to operate a small business in your area.

Visit the website of your state or local government tax authority to find out what taxes you must pay as a business owner. For example, if you have employees you typically are required to pay for worker's compensation insurance.

6. Set up the correct withholding for any employees. If you hire regular employees and pay them salary or hourly wages, you must withhold federal taxes and Social Security from their paychecks. You also may need to withhold for state taxes.

Many small businesses contract with a payroll service to take care of their withholding and the issuing of paychecks for them. Talk to business owners in your area to find out how they handle payroll.

7. Pay quarterly estimated taxes. As a business owner, you typically must pay taxes on a quarterly basis and then reconcile on the business tax return at the end of the year. Your state may have estimated tax filing requirements as well.

Depending on the nature of your business, you also may have to collect state or local sales tax for all purchases.

8. Use a tax preparation service to simplify the process. Many companies that offer bookkeeping services also have tax preparation services. Connecting the accounts together can save you a lot of hassle because they will automatically categorize your deductions and estimate quarterly tax payments for you.

As with bookkeeping services, tax preparation services are only as good as the information you put into them. If you're unsure about whether something qualifies as a deduction, talk to a qualified tax professional.

February 08, 2020

How to Manage Business Finances

How to Manage Business Finances.

Effective and efficient management of finances is critical to the growth and success of any small business. The easiest way to do this is to hire a dedicated accountant or bookkeeper right away. If you don't have the resources to hire a professional, take advantage of bookkeeping and other financial software to track your cash flow and generate reports. That way you can stay on top of your profits and act quickly to minimize losses.



Method 1 Taking Payments and Paying Expenses.

1. Create a budget and review it regularly. A budget is essential if you want your business to be profitable. Categorize your business's regular expenses to determine how much income your business needs to generate.

Creating multiple budgets can be helpful. For example, you may want to create one with a bare minimum of sales, so you know how to allocate the money when there isn't much coming in.

Use your budget to plan for the growth of your business, such as hiring a new employee or expanding your advertising and marketing.

2. Open a separate business bank account. Even if you're running your business as a sole proprietorship, you still want to keep your business finances separate from your personal finances. Mixing your assets together can cause problems if you're audited, or sued by a business creditor.

Don't take money from your business bank account to pay for personal expenses. If you need money from the business, label it appropriately as a draw from the business and transfer the money to your personal bank account first.

3. Decide what types of payment you'll accept. Having a variety of payment options is a convenience for your customers. Each method of payment has its own costs and risks that you'll want to take into account.

Cash is the simplest method of payment, but presents security risks. If you're going to take cash, have a secure safe and plan on making regular bank deposits.

If you want to take credit or debit cards, look into the different services to find the one that best suits your needs and your overall budget. You typically have to pay a subscription fee for the service, plus a fee per transaction. You may want to require a minimum purchase amount for credit or debit cards.

4. Standardize payment terms. You should have a policy in place that establishes rules for payment of your products or services. Apply those rules to all customers, rather than creating payment terms for individual clients on a piecemeal basis.

Universal payment terms will make your bookkeeping easier, and can smooth your collections process. If you apply the same terms across the board, you also don't have to worry about remembering the arrangements you made with each individual customer.



Method 2 Tracking Overall Cash Flow.

1. Choose your accounting method. To manage your business finances, you must choose either the cash or accrual accounting method and use it consistently. With the cash method, you record sales and expenses when money actually changes hands. For the accrual method, on the other hand, you record sales and expenses when they take place, rather than when money changes hands.

For example, suppose you are a construction contractor and you receive an invoice. If you were using the cash method, you would record the expense in your books when you actually paid the invoice. However, if you were using the accrual method you would record it the day you received it, even if you didn't pay it for several days or weeks.

Cash accounting works better if you have a small business that deals primarily with point-of-sale transactions. If you deal with larger contracts that aren't paid all at once, the accrual method may be a better option for you.

2. Record all sales and expenses. Set up a system so that all sales and expenses are put on the books the day they occur, following the accounting method you've chosen. Only doing the books on a monthly or quarterly basis may result in errors.

If you have a store, you can use a point of sale system to track sales and produce reports that you can easily use to reconcile your books each day.

When you have employees or other partners buying things for the business, make sure you get those receipts as soon as possible so you can keep your books up to date.

3. Purchase bookkeeping software. There are a number of bookkeeping programs, such as QuickBooks, that you can purchase and use to manage your business finances. Most of these programs are arranged so that you pay a monthly subscription fee to use the service.

When you use a subscription, software-as-a-service platform, your data is stored in the cloud so that you don't have to worry as much about security or data loss.

These programs can be connected to your business bank accounts, credit cards, and other systems so that much of the information is entered into your books automatically.

4. Hire an accountant if you need help. If you don't have accounting and bookkeeping education and experience, you may want to hire someone who does. Particularly if you've borrowed money to start up your business, a professional can help you avoid potentially costly mistakes.

Check with the local licensing or regulatory authority to make sure any financial professional you want to hire has all the necessary education and certifications, and that their licenses are active and free of any disciplinary actions.

If you can't afford to have someone working for your business full-time, you may be able to consult with an accountant periodically, or use a bookkeeper occasionally to go over your books and correct any errors.



Method 3 Generating Financial Reports.

1. Download bookkeeping software to simplify report creation. When you use bookkeeping software, you also have the ability to generate the financial reports you need with the click of a button. However, the reports created are only as good as the information you put into the software.

Go over your sales and expenses before you generate your final reports. Reconcile your books with your receipts and bank account statements to make sure the information is correct.

Once you're satisfied with the information, click through to create your reports. You'll typically be prompted to enter the dates you want the report to cover, and the specific information you want included.

2. Create quarterly profit and loss (P&L) reports. Your P&L reports are among the most important tools for assessing and growing your business. Many bookkeeping programs will generate these reports for you if you input the parameters of the report you want.

Your P&L starts with your total sales. You then subtract from those sales the cost of the products or services sold to get your gross profit.

Take your gross profit and subtract other expenses, such as rent or utilities, from that number. You'll be left with your net profit for the time period.

P&L reports are especially important if you anticipate needing small business loans or other outside funding.

3. Prepare quarterly business financial statements. In addition to your P&L, there are several other statements, such as your cash flow statement and your balance sheet, that help you determine where money is flowing in and out of your business.

Your cash flow statement reports the increase or decrease of money flowing into your business. You can quickly see the amount of cash on hand and what you did with it, as well as where that money came from (whether from sales or other sources, such as a loan).

The balance sheet summarizes your business's assets and liabilities. It will be particularly helpful if you have a business credit card, or if you've taken out a small business loan to help fund the start up of your business.

4. Update your projections based on your actual cash flow. Your business plan likely includes cash flow and profit projections several years into the future. As you operate your business, you'll want to check periodically and make sure these projections are still accurate given your business's actual performance.

Look at your business plan and update it twice a year. You also want to update it any time you're applying for a small business loan or courting investors, so they have the most up-to-date information to make their decision.

Depending on how your actual performance compares to your initial expectations, you also may want to adjust some of your business goals and plans for growth or expansion.



Method 4 Filing Business Taxes.

1. Get a separate tax ID number for your business. Even if you're running your business as a sole proprietorship, a separate tax ID number for your business will help keep your business and personal finances separate.

If you have a US business, you can get an employer identification number (EIN) easily online at the IRS's website. Simply go to https://sa.www4.irs.gov/modiein/individual/index.jsp and begin your application.

In other countries, consult a tax professional or business attorney to find out what you need to do to correctly document your business for tax purposes.

2. Choose your tax year. For tax purposes, you can use the calendar year, or any 12-month period that starts on a specific date. In most cases, it's easiest to use the calendar year. When you choose your tax year, you have to use it consistently as long as you remain in business. Typically, you can't change it later.

Most businesses use the calendar year as their tax year. If you're thinking about using a different 12-month period, you may want to consult an attorney or tax professional first.

3. Maintain records of deductible expenses. When you run your own business, you have the ability to deduct many of your business-related expenses on your taxes. These deductions lower your profits and decrease your business's tax liability.

Generally, anything you buy to conduct business will be at least partially deductible. The expense must be reasonable. If you're unsure about something, save the receipts and discuss it with a qualified tax professional.

Expenses such as rent and utilities for commercial space, computers, and office supplies are examples of business expenses that typically are deductible.

4. Use depreciation for more costly assets and fixtures. If you buy something to use in your business that you anticipate using for many years, you typically can't deduct the entire cost at once. Rather, you deduct a portion of it for several years.

The amount and length of time you can claim depreciation depends on how the expense is categorized and the length of its useful life. These are defined by the government.

If you have a significant amount of purchases that are subject to depreciation, it's a good idea to have a tax professional do your taxes so you can make sure you're depreciating them using the right method and getting the maximum possible deduction.

5. Check tax and licensing obligations with your state or local government. State and local governments also may tax businesses, or require you to maintain certifications or licenses if you want to operate your business.

Your local small business association or chamber of commerce typically will have information on the licenses required to operate a small business in your area.

Visit the website of your state or local government tax authority to find out what taxes you must pay as a business owner. For example, if you have employees you typically are required to pay for worker's compensation insurance.

6. Set up the correct withholding for any employees. If you hire regular employees and pay them salary or hourly wages, you must withhold federal taxes and Social Security from their paychecks. You also may need to withhold for state taxes.

Many small businesses contract with a payroll service to take care of their withholding and the issuing of paychecks for them. Talk to business owners in your area to find out how they handle payroll.

7. Pay quarterly estimated taxes. As a business owner, you typically must pay taxes on a quarterly basis and then reconcile on the business tax return at the end of the year. Your state may have estimated tax filing requirements as well.

Depending on the nature of your business, you also may have to collect state or local sales tax for all purchases.

8. Use a tax preparation service to simplify the process. Many companies that offer bookkeeping services also have tax preparation services. Connecting the accounts together can save you a lot of hassle because they will automatically categorize your deductions and estimate quarterly tax payments for you.

As with bookkeeping services, tax preparation services are only as good as the information you put into them. If you're unsure about whether something qualifies as a deduction, talk to a qualified tax professional.

February 10, 2020

How to Finance a Used Car

How to Finance a Used Car.

If you need a car and can't afford to buy one with cash, financing is always an option. If you want to finance a used car, you have the choice of getting your own direct financing, or having the dealer obtain financing for you. If you have a low credit score, "Buy Here Pay Here" lots may be your only option, but should only be used as a last resort.


Method 1 Getting a Direct Loan.

1. Request a copy of your credit report. Knowing your credit score will give you a good idea of what kind of rates and terms you'll potentially be offered. In the United States, you're entitled to one free copy of your credit report every year.

Check your report for errors or inaccuracies that could be affecting your credit score.

If you have a credit score of 680 or above, you're a prime borrower and should be able to get the best possible rates. The higher your score, the lower the rate you can potentially negotiate with lenders.

2. Contact local banks and credit unions. If you have had a credit or savings account with the same bank for a number of years, start there when looking for a direct car loan. Your history as a customer may get you better rates.

Branch out to other banks in your area. Credit unions often have more forgiving loan terms and fewer restrictions.

Banks typically won't do a direct car loan for a car purchased from a private owner or an independent dealership. In those situations, you may need to try to take out a personal loan. This is also true if you're buying a collector or exotic car.

3. Try online lenders. If you're not a prime borrower, it's still possible to get a direct loan for a used car. There are a number of online lenders who are willing to finance used cars for people with less than stellar credit.

Since online lenders have less overhead, they typically will offer you a lower rate than you could get from a brick-and-mortar bank or credit union.

These loans may come with more restrictions than the direct loan you could get from a bank with better credit. For example, they may not finance cars more than five years old, or cars with over 100,000 miles.

4. Get rates from multiple lenders. Before you choose a loan, apply for several so you can compare the rates offered. Many banks and lending companies have a pre-approval process that won't affect your credit.

Multiple offers may give you the opportunity to negotiate for a better deal. For example, if you got a better rate from a different bank than from your own bank, you could get your bank to match that rate to get your business.

5. Complete a loan application. Once you've decided which lender you want to use for your financing, you'll typically have to fill out a full loan application. Many lenders give you the option to complete the application online.

You'll need to provide basic identification information, such as your driver's license and Social Security numbers. You also may need to provide basic financial information regarding your income and debts.

If you've had some credit problems in the past, you may want to go into a bank and apply for the loan in person so you can talk to a lending agent.

Your loan agreement will include basic requirements that the car must meet. As long as the car meets these requirements, you can use the financing to purchase the car.

6. Negotiate with the dealer. In most cases, you're going to secure direct or "blank check" financing before you find the specific car you want to buy. Having financing already secured puts you in a stronger position to get the best price from the dealer.

When you bring your own financing, you're saving the dealer a lot of costs. Ask if there's a discount available for that.

Since you're buying a used car, have it inspected before you buy it and go over the car's history. The car is a better buy if it's had fewer owners and never been in an accident.

7. Give the dealer your blank check. Lender policies vary, but in most cases you'll get a check for the exact amount of your car, or a blank check that's worth any amount up to the maximum amount your lender has approved.

When you buy a car using direct financing, you still must maintain full coverage insurance on the car. Your loan agreement will include information on the minimum amounts of coverage you must maintain.


Method 2 Using Dealer Financing.

1. Research interest rates. Dealers have special financing offers available throughout the year. Especially if you're not picky about the make or model of your car, shop around and see who has the best deal.

Know your credit score and how qualified you are for different offers. Typically the best offers are only available for prime borrowers with credit in the 700s or higher.

If you're trading in an old car, look for dealer offers to double the price on a trade-in, or pay a minimum amount for any trade-in regardless of its condition.

2. Choose your car. If you've done your research, you have a few dealerships in mind. You should be able to evaluate their inventory online before you go visit in person. Find the best car for you, looking at overall price.

Dealers may advertise monthly payment amounts rather than total price. This can be a way to charge you a higher interest rate.

Dealers typically will finance any car on their lot, so you may have more variety to choose from if you use dealer financing than you would if you used direct financing. However, this might not necessarily be a good thing – you still need to check the car's history and have it inspected before you buy.

3. Offer a sizable down payment. Cars depreciate in value. If you're buying a used car, you want to finance as little of the total price of the car as possible. A down payment of 10 to 20 percent of the purchase price of the car typically will get you the best rates.

A sizable down payment can help you avoid being underwater on your loan – meaning you owe more for the car than it is worth. This is particularly important to avoid when you're financing a used car, which could develop mechanical problems relatively quickly.

4. Apply for financing through the dealer. You'll need basic identification information as well as information about your income and employment to complete the financing application at the dealership.

It may take a few minutes, but in most cases the dealer will have a financing offer available for you that day. Then they'll call you back into an office to discuss the terms you've been offered.

The finance company may require additional documents from you, such as pay stubs to verify income. If the dealer mentions any of these, make sure you get copies to the dealer as soon as possible so as not to jeopardize your financing offer.

5. Negotiate the deal. If you've done your research and know your credit score, you may be able to get better terms from the dealer than what you're initially offered. Review each term and see if you can improve it.

For example, you typically want the shortest term loan, since it will usually have the lowest interest rates. But dealers often focus on the amount of the monthly payment. Financing for a shorter term does mean a higher monthly payment, but it will save you money overall.

6. Use cash for extras. Dealers tend to tack on extra fees, including sales tax, registration fees, and document or destination fees. You also may end up paying extra for dealer warranties, especially for a used car.

The dealer typically has no problem rolling these extra fees into your financing, but there's no point in paying interest on fees and tax. Pay that out of pocket if you can.


Method 3 Using "Buy Here Pay Here" Financing

1. Exhaust all other options. If you need a car and have had credit problems or have an extremely low credit score, BHPH financing is available for you. However, due to the high rates you should consider this only as a last resort.

There are some franchised dealerships, particularly Ford and Chevy dealerships, who are willing to work with customers who have bad credit. It may be possible for you to get a loan there. It wouldn't be the best rates, but it you would still pay less than you would at a BHPH lot.

If you have a relative with a good credit score, you might find out if they are willing to co-sign on the loan with you. That could get you a better rate or make traditional lenders more willing to work with you. This option can be especially valuable if you're young and don't have much, if any, credit history.

2. Ask if the dealer reports to credit bureaus. Because BHPH lots finance the car themselves, they don't always report to credit bureaus. If you have bad credit or no credit, you want the payments you make for your car reported so you can start to rebuild your credit.

You may have to visit several lots before you find one that reports to credit bureaus, but be persistent.

3. Research the car thoroughly. Any car you buy from a BHPH lot typically is sold "as is." Some of these cars may have mechanical problems, and the lot may not be required to disclose those problems before you buy the car.

Demand a Carfax or similar car history report so you can see how many owners the car has had and whether it's been in an accident. These lots typically have older cars, so they've likely had several owners – but a car that's changed hands several times in the past few years may be a red flag.

Take the car to a reputable mechanic before you buy it and have them conduct a thorough inspection. If there are any major repairs that need to be made, you may be able to convince the lot to make those repairs before you purchase the car.

4. Negotiate with the dealer. BHPH dealers often present the price of a car – and the financing terms – as though they are non-negotiable, but that's typically not true. Even though you may not be in the best bargaining position, you can still try to get a better deal.

The more of a down payment you can make, the better your terms typically will be. These lots often specialize in low down payments, but that doesn't mean you can't pay more.

If you're buying a car at a BHPH lot, your down payment should be as high as possible to keep you from ending up underwater – try to aim for somewhere between 40 and 60 percent down.

5.
Make your payments on time. You typically won't have to make payments for a long term, but it's essential to make every payment on time if you want to rebuild your credit. Some BHPH lots will repossess a car after as few as one missed payment.

Some BHPH lots require you to make a trip to the lot with your payment. Depending on how the financing is structured, you may be required to make weekly or bi-monthly payments. If you have a checking account and the lot offers automatic payments, sign up for them so you won't have to worry about it.

At most BHPH lots, you won't pay any less if you pay the loan off early. Ask about this when you buy the car. If the lot is reporting to the credit bureau and you won't save any money by paying the loan off early, just keep making the payments on time. All those payments will reflect well on your credit score.

November 22, 2019