Everything You Need to Know About Finance and Investing in Under an Hour
Uses a lemonade stand example to provide an overview of the financial aspects of a business (revenue, profits, valuation, growth, pricing, balance sheet, income statements).
Concentrates on investing, including the following key points
In the example, the owner starts with $750, with $250 of that coming from a loan.
Here's an income statement tracking the healthy growth of the lemonade business. By year five, the company has seven stands, supported by an increased margin on products, and makes a profit of $2,311 (earnings before tax).
With some compound interest examples, he highlights the importance of starting early so your money can grow early over time).
He tweaks return assumptions to show how long-term outcomes are impacted by changes in how much your investments return.
Save $10,000 and earn 10% each year, you would have $602,000 after 43 years.
Earn 15% per year, you would have over $4 million after 43 years.
Importance of not losing money as drawdowns can have significant negative effects on returns.
A business owner can take money from a lender, who profits from interest on his loan, or an equity investor, who buys shares in the company. An equity investor stands to make much more money than a lender due to the level of risk involved — if the company doesn't make money, neither does the investor.
What are keys to successful investing?
Invest in companies that are listed on the stock market (liquid, well-known).
Avoid investing in start-up businesses where prospects are not well known.
Invest in businesses that you understand.
Invest at a reasonable price.
Invest in company that could last forever.
For instance, an investor makes a small amount of interest from government bonds because the risk is low — the US government is more secure than any corporation. An investor makes a large amount of interest from loans to business owners because the risk is high.
What kind of businesses last forever? (Examples: Coca-Cola, McDonalds, candy business).
Equity is a "residual claim" because debt must be paid off before investors can profit. Shareholders may make money from company profits called "dividends."
When a company has grown significantly, its owner can sell it for a typically large sum of money, in exchange for control of the business and a shot at future profits.
Sell a product that people need.
Sell a unique product (not a commodity).
Elicit brand loyalty that consumers are willing to.
Find a company with limited debt.
High barriers to entry.
Immune to extrinsic factors.
Has low reinvestment costs.
Generate high amounts of cash flow.
Avoid businesses with controlling shareholders (one shareholder holds majority of company stock).
Instead of growing a business further, an owner can pay himself dividends to put cash in his pocket rather than in the company.
At a moment of strong growth, the business owner can either share profits with a private investor or go public.
When a business files for an initial public offering (IPO), its owners offer a portion of it to the general public, which raises cash, and the company gets listed on an exchange. It requires being transparent and, in the US, reporting to the Securities and Exchange Commission.
When are you ready to start investing?
When you have money you won’t need for 5-10 years.
After paying off credit card debt and student loan debt.
Have 6-12 months of emergency funds set aside.
Psychology of investing.
How to withstand volatility.
Be financially secure.
Don’t get spooked by short-term fluctuations.
Do your own research.
Invest at a reasonable price.
If you don't have the time or desire to invest in individual stocks, you can invest in mutual funds, large pools of funds managed by a professional investor.
Mutual fund companies.
Pros.
Portfolio diversity, even for small investment amounts.
Managed by professional investor.
Cons.
Choice: Over 10,000 to choose from.
Research is required to pick a good manager.
You can also outsource your investing to a money manager.
Reputation for integrity.
Easily explain investment strategy (“the two minute test”).
Has a value approach.
Long-term track record.
Consistent approach.
Invests own money in the fun.
Financial reports, also called financial statements, demonstrate a company's financial position over a specific period of time. Most businesses and organizations provide financial reports to their Boards of Directors, shareholders and investors on a monthly, quarterly or annual basis. They are reviewed to identify trends, successes and problems within a company's finances. These reports are often prepared by accountants or financial teams, but they are not complicated to read. Read a financial report by paying attention to the balance sheet, income and cash flow.
Steps.
1. Identify the time period covered by the financial report. Usually, the top of the report or statement lists the time period.
2. Look at the balance sheet. The balance sheet lists the assets and liabilities of the company.
Take a look at how the balance sheet is set up. In some reports the assets will be listed on the right, and the liabilities on the left on other reports the assets will be listed first and on top, and the liabilities below after the assets.
Read the assets. Assets include cash, investments, property and other things owned by the company that have value. The assets are listed in order of liquidity. The most liquid assets, such as cash, are presented first.
Review the liabilities. Liabilities are debts or obligations that the company owes to others. These include rent, payroll, taxes, loan payments and money owed to other vendors or contractors.The liabilities and equity section are combined to produce a balance with the asset component. The equity section gives a break down of the value of money invested and re-invested in the business.
Notice the difference between current liabilities and long term liabilities. Current liabilities are things that need to be paid off within a year. Long term liabilities will take more than a year.
A balance sheet must always balance that is, the sum of assets must be equal to the sum of liabilities and equities. If that is not the case, it is usually the first sign of a badly reported financial Statement.
3. Look at the income statement. This will show you how much money the company earned over the specified period of time. Any money that was spent in earning that income will also be reflected.
Read the top line, which should say "sales" or "gross revenue." This reflects the amount of money the company made by providing its products or services, before any expenses are deducted.
Look at the cost of goods sold. This is the negative figure directly below the revenue/ sales figure. This figure represents the direct expenses incurred by the business in making the revenue/ sales figure.
The Gross profit which is the difference between the sales/revenue figure and the cost of goods sold represents the profit made by the business before operational expenses are deducted. This figure is always a positive number, if it is negative, it means the business is not viable.
Review the operating expenses. These include the costs of doing business, such as salaries, advertising, salaries and miscellaneous expenses.
Notice the depreciation line. This reflects the cost of an asset over the amount of time it can be used by the company.
Check the operating profit, which is the amount of money the company made after the operating expenses are deducted, the operating profit is the Gross profit figure less the total operating expenses figure.
Look at the amount of interest that was earned and paid. These are called Finance costs if interests are paid or Finance income if interests are earned. A business inures finance costs when it has borrowed money at an interest like wise a business earns Finance/ Interest income when it has lent money at an interest or invested in money market securities. .
Check the amount of income tax that was subtracted.
Read the last line of the income statement. This reflects the net profit or loss.
4. Look at the cash flow statement. This will tell you how much cash the company has available. It will also track the money coming in and out of the company during the specified time.
Read about the operating activities first. This section analyzes how the company's cash was used in order to reach its net profit or loss.
Check the investment activities. This part of the cash flow statement shows any income from investments or assets that were sold.
Look at the financing activities. This tracks what the company did to pay back or acquire things such as bank loans.
5. Review any narratives. Accounting professionals will often provide a paragraph that provides an overview of the financial report.
6. Look through supporting documentation if you have questions. There are usually back-up or supporting documents available, such as receipts and invoices, that help explain transactions.
Tips,
Remember that all of your financial reports will be included in audits and tax preparations. Ask your accountants if you have any questions or feel unsure about what you are reading.
Schedule an independent audit at least 1 time per year in order to make sure your financial reports and statements are consistent and accurate.
Whether you’re planning to expand an existing business or just now getting one off the ground, a small business loan can give you the financial support you need. Not all businesses can get a small business loan, so you need to take special care when applying for one. Make sure your credit history is as strong as possible, and search for lenders. Lenders will want to see numerous financial documents, so gather them ahead of time. Although getting a small business loan takes a lot of work, it is possible.
Part 1 Improving Your Credit Profile.
1. Pull your personal credit score. Most lenders will look at your personal credit history, even when you apply for a business loan. For this reason, obtain your credit score and check whether it’s high enough to qualify for the best interest rates. Generally, you’ll need a score above 680. You can get your credit score in the following ways:
Check your credit card statement. Many credit card companies now give their customers their FICO score.
Buy your FICO score for $20 at myfico.com.
Use a free website, such as CreditKarma.com or Credit Sesame.com.
2. Obtain a copy of your personal credit report. Errors on your credit report can pull down your credit score. In the U.S., you can get a free copy of your credit report each year from the three major Credit Reporting Agencies (CRAs). Don’t contact the CRA’s individually. Instead, visit annualcreditreport.com or call 1-877-322-8228. All three credit reports will be sent to you.
3. Remove inaccurate information from your credit report. Highlight any errors and contact the CRA that has the wrong information. Common errors include accounts listed that don’t belong to you or accounts inaccurately listed as in default.
You can contact the CRA directly through its website. If the inaccurate information appears on more than one credit report, you only need to contact one CRA, which will alert the other two.
It can take up to 60 days to remove inaccurate information.
4. Improve your credit score. Paying down your balances is the fastest way to improve your credit score. Tackle high-interest debts first, such as credit card debts. Send every monthly payment on time and pay at least the minimum. You should see a slow but steady improvement in your credit score.
Avoid taking out a new credit card, which will temporarily hurt your score. Instead, you can ask for an increase in the credit limit on one or more cards.
Unfortunately, there’s no quick fix for improving your credit score, and you should avoid any company promising to improve your score fast. These companies are often scammers.
5. Build your business credit. Lenders will also look at your business credit profile. Start building your business credit history by obtaining a D-U-N-S number from Dun & Bradstreet. You can get it for free by registering at their website.
Your creditors should report your payment history to Dun & Bradstreet. If not, list them as trade references. Dun & Bradstreet will then follow up and collect payment information.
Your business credit report will contain information about court judgments or liens against your business. You can boost your business credit by paying off any liens and judgments.
Part 2 Identifying Loans and Potential Lenders.
1. Determine the type of loan you need. There are several types of business loans you can get. You should identify the type you need before talking to a lender. Consider the following options.
Line of credit. You can draw from a credit line whenever you’re short of cash. For example, you might need money to make payroll or pay a vendor. You then pay back what you drew on your credit line. A line of credit is a lot like a credit card.
Installment loan. You can get an installment loan to expand operations. You pay it back in equal monthly installments over one to seven years.
Equipment loan. You get a loan to buy equipment, and the lender takes a security interest in the equipment until the loan is paid back. If you default on your loan, the lender seizes the equipment.
2. Stop into banks. Some banks are hesitant to lend to small businesses, but you still should stop in and talk to a loan officer. Discuss your business and ask for the bank’s requirements. You should stop in at least a month before you intend to apply.
Visit banks you’ve done business with as well as banks with whom you have no prior relationship. However, local community banks are more likely to lend to a small business than a large national bank.
3. Check with credit unions. Credit unions have increased the number of business loans they make, so they are a good option for small business owners. You’ll need to become a member of the credit union before you can apply for a business loan, but setting up an account shouldn’t be too burdensome. Credit unions typically offer better rates and lower fees than traditional banks.
4. Research online lenders. Online lending has exploded over the past few years and is a good option if your credit isn’t perfect. You can find online lenders at different aggregator sites, such as LendingTree and Fundera.
There are many online scammers, so thoroughly research online lenders. Look up the business with the Better Business Bureau and Google the company to check for complaints. Only do business with an online lender that has a street address.
5. Research government-backed loans. In many jurisdictions, the government will guarantee loans. This means they agree to pay back a certain percentage of the loan if the borrower defaults. Because of this guarantee, you generally get more favorable interest rates and repayment terms.
In the U.S., the Small Business Administration (SBA) guarantees small business loans. It’s most popular loan program is the 7(a) program which guarantees up to $5 million in loans. 7(a) loans can be used to build a new business or expand an existing one.
Even though the SBA guarantees the loan, you still apply with a bank. Talk to the bank about whether it is experienced with SBA loans and ask if it is part of the SBA Preferred Lender Program (PLP).
6. Ask friends or family for a loan. The people who know you the best might be willing to loan your business money. Approach your friends and family in the same manner you would a bank. Provide them with a copy of your business plan and your financial documents.
You can agree to pay interest, which will show that you are serious about repaying the loan. In the U.S., the interest rate shouldn’t be higher than the maximum allowed in your state, but it should be at least the federal funds rate, which you can find at the IRS website.
Also draft a promissory note and sign it, which will make the loan official.
Part 3 Gathering Required Information.
1. Create a personal financial statement. Every owner who owns at least 20% of your business should create a personal financial statement. Financial statements contain information about your assets, such as cash, mutual funds, certificates of deposits, and real estate. They also identify all liabilities owed to lenders, creditors, and the government.
2. Pull together business financial documents. Lenders will want to see your business balance sheet, profit and loss statement, and cash flow statement. If you need help creating these documents, consult with an account.
Ideally, your financial statements should be audited by a certified public accountant. Ask another business owner if they would recommend their CPA, or contact your nearest accounting society to obtain a referral.
3. Collect other required information. Lenders want a complete picture of your business, so they will require plenty of paperwork. Gather this ahead of time so that the application process goes smoothly. Get the following.
Personal tax returns for the past three years.
Recent personal bank statements.
Business tax returns for the past three years.
Recent business bank statements.
Resumes for each owner and member of management.
Business leases.
Articles of Organization (if an LLC) or Incorporation (if a corporation).
Franchise agreement (if applicable).
4. Show you have the necessary down payment. Generally, you need a cash down payment of 20%. If you hope to borrow $100,000, then you should have $20,000 in cash. Make sure that you have bank records showing the necessary down payment.
5. Draft a business plan. Your business plan lays out where your business is headed in the next few years and how you plan to get there. Lenders want to see a solid business plan before they will make a loan. Your business plan should identify your target market, marketing plan, management, and financial projections.
Some lenders want your business plan to contain specific information. Stop into the bank before applying and ask about their specific requirements.
Business plans can be hard to write. In the U.S., you can get help at your nearest Small Business Development Center, which you can find at https://www.sba.gov/tools/local-assistance/sbdc.
6. Document any collateral. Some lenders won’t give you a loan unless you pledge assets as collateral. Collateral protects lenders since they can seize the assets if you default on your loan. Common forms of collateral include inventory, heavy equipment, accounts receivables, and your home.
You should document the location and condition of the collateral. If possible, hire an appraiser to value the collateral.
Part 4 Applying for Your Loan.
1. Fill out your application. Each lender’s application will be slightly different. However, most will ask your reasons for applying for the loan, as well as the identity of your management team. Also identify any suppliers you will be buying assets from.
Each lender will pull your credit report, which will ding your credit score. However, all credit pulls in a two-week window will count as a single pull, so plan accordingly.
2. Wait to hear back. You should hear back within two to four weeks. If you want, you can call once a week and ask for an update on your application status. The lender might need more documentation, so provide it as quickly as possible.
About 80% of applicants for small business loans are rejected, so don’t be surprised if you get turned down. Ask any lender who rejects you to explain why. For example, you might need to save a larger down payment or draft a better business plan.
If no lender will give you a loan, consider other forms of funding, such as getting a business credit card.
3. Review the loan terms. Any lender that approves you should provide a term sheet which contains the details of the loan—the loan period, the annual percentage rate, and fees. Make sure you are comfortable with the terms.
You probably will need to personally guarantee the loan. This means that if you stop making payments, the lender can come after your personal assets, such as your car or home.
4. Close on the loan. Sign the term sheet or commitment letter and return it to the lender. The lender will then schedule a closing, which usually happens 45-60 days later. If your loan is guaranteed by the SBA, you’ll work with the loan officer to gather the necessary documents to submit. At the closing, you will review and sign a variety of documents before receiving your loan proceeds.
FAQ.
Question : Where can I find investors for small business?
Answer : If you're in the U.S., contact your nearest Chamber of Commerce or Small Business Development Center. They might know of local investors who are interested in small businesses.
Question : Are there any charities the will help me start a business?
Answer : You should start looking into crowdfunding websites. If people like your product or service, they'll donate money. Sometimes you can give the donators your product/service at a discounted price as an incentive.
Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.
Method 1 Arranging for a Loan.
1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.
Equity capital is the current market value of everything the company owns less any liabilities owed by the company.
Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.
2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.
To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.
Annual reviews are required to maintain your line of credit.
3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.
Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.
Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.
Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.
Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.
4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.
Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.
5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.
SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.
SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.
Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.
Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.
Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).
6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.
Each agency has its own application process. However many require the same basic documentation. Gather the following information.
A loan application form that details why you are applying for the loan and how you will use the money.
Your resume gives lenders information about your expertise in the field.
All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.
Your business credit report gives lenders information about your credit worthiness.
Be prepared to submit your business and personal tax returns for the past three years.
Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.
Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.
You may need to put up collateral, especially if you cannot provide strong financial statements.
Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.
7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.
Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.
Method 2 Applying for Grants.
1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.
2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.
SBA grants for non-profits are announced on grants.gov.
Businesses qualifying for specific initiative grants authorized by Congress will be notified.
U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.
3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.
4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.
Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.
Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.
Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.
Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.
Method 3 Finding Investors.
1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.
2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.
Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.
Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).
3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.
According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).
Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.
Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.
Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.
4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.
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.
Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.
Method 1 Arranging for a Loan.
1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.
Equity capital is the current market value of everything the company owns less any liabilities owed by the company.
Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.
2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.
To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.
Annual reviews are required to maintain your line of credit.
3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.
Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.
Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.
Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.
Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.
4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.
Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.
5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.
SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.
SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.
Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.
Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.
Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).
6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.
Each agency has its own application process. However many require the same basic documentation. Gather the following information.
A loan application form that details why you are applying for the loan and how you will use the money.
Your resume gives lenders information about your expertise in the field.
All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.
Your business credit report gives lenders information about your credit worthiness.
Be prepared to submit your business and personal tax returns for the past three years.
Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.
Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.
You may need to put up collateral, especially if you cannot provide strong financial statements.
Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.
7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.
Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.
Method 2 Applying for Grants.
1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.
2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.
SBA grants for non-profits are announced on grants.gov.
Businesses qualifying for specific initiative grants authorized by Congress will be notified.
U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.
3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.
4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.
Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.
Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.
Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.
Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.
Method 3 Finding Investors.
1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.
2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.
Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.
Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).
3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.
According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).
Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.
Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.
Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.
4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.
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.
How to Protect Your Finances Against Market Crashes.
Economic expansions don't last forever, and eventually, the country will enter another recession. When it does, you need to protect your investments so that you can weather the storm. Assess how exposed you are to stocks and decide whether to diversify your portfolio with safer investments. Also clean up your balance sheet by reducing your debts, which will allow you to survive the recession that accompanies a stock market crash.
Method 1 Changing Your Investments.
1. Check your current investment allocation. You might have no idea what your retirement fund is currently invested in. If not, log into your account and print out the current allocation of investments, which should include the following:
stocks or stock mutual funds, bonds,real estate,money market accounts.
2. Identify why you fear a market crash. The economy goes up and down with some regularity, and when the market crashes stocks suddenly become cheaper to buy. For this reason, you might not want to diversify your portfolio. Instead, you can leave your investments as they are.
However, you might want to reduce your exposure to risk if you are nearing your retirement age or have just entered retirement. A major stock market crash could seriously cut the amount of money you have to live on.
Your tolerance for risk might also have changed. If so, then you can diversify your portfolio so that you are comfortable with your investment mix.
It’s impossible to predict exactly when the next recession will hit, so you shouldn’t move money in and out of the stock market hoping to get out just before things turn south. For example, it looked like the U.S. stock market was about to crash in late 2015. Since then, the Dow Jones Industrial Average has increased more than 20%.
3. Consider holding money in a savings account. The easiest way to protect your investments is to get out of stocks and move the money to savings accounts. Consider the following options:
High-yield online savings accounts. These accounts will only earn about 1-2% annually, but this amount is higher than most banks offer. Your cash is liquid, so you can access it if needed. Furthermore, your deposit will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 USD.
Money market accounts. These accounts are like bank accounts but with potentially higher returns. You can write checks against the money market account. Open with your bank or with a company like Scottrade or TD Ameritrade.
Certificates of Deposit. Banks and credit unions sell "CDs," which you can buy for a set sum. You are prohibited from accessing the money until the CD matures, but you will earn interest on the investment.
4. Invest in bonds. Bonds are debt. Companies, as well as governments, issue bonds to raise money, and bonds are a safer investment than stock. Consider putting more of your investment into bonds, such as the following:
Municipal bonds. State and local governments issue bonds to raise money, and in return the bonds are exempted from income taxes. You can typically earn 3% annually on bonds. They are a low-risk investment, unless the city government is on the verge of bankruptcy.
U.S. savings bonds. These bonds are very safe. With a Series I bond, you get a fixed interest rate, and your return is linked to inflation. With the Series EE bond, you earn an automatic rate of return each month.
Treasury Inflation Protected Securities (TIPS). The U.S. government offers a fixed interest rate as well as inflation protection that’s triggered every time inflation increases.
Image titled Protect Your Finances Against Market Crashes Step 5
5. Consider annuities. An annuity is a contract with an insurer or financial services company. You make a lump sum payment, and in return you are provided with a fixed sum of money for a specific amount of time. There are several varieties of annuities, which can protect your investments in case of a market crash. For example, fixed-indexed annuities can protect your principal.
Annuities are safer than stocks, but they do have some risks. For example, the company you bought the annuity from could go bankrupt. In that situation, you will no longer be paid. You can protect yourself by doing thorough research and only buying an annuity from a company with the highest rating.
The value of an annuity can also erode with inflation, though you can buy annuities that will protect against inflation.
6. Find safer stocks. Not all companies are the same, and some are safer investments in a down economy than others. For example, you might want to get rid of low-grade stock, such as companies with a lot of debt or businesses in speculative fields like biotech that have not yet produced strong profits. In a market crash, the value of these companies will decline.
Instead, look to high-quality stocks which tend to hold up better. These companies have stable earnings and low debt.
Also consider stocks that pay dividends. Check if you can invest in a dividend exchange-traded fund.
7. Change your contributions. If you’re not yet in retirement, you should consider changing the allocation of your retirement contributions for the last few years before you stop working. Direct your contributions toward safer investments, such as those discussed above.
Changing your contributions will not change the allocation of investments already in your portfolio, so consider diversifying it.
8. Diversify your portfolio. When the market is good, riskier investments such as stocks perform well. But when the market crashes, you can expect stocks to perform poorly. Accordingly, you might want to diversity your portfolio and move some money out of stocks.
How much to move is up to you. However, you don’t have to get out of stocks entirely. Instead, you could reduce stocks to 30% of your portfolio, and have the other 70% in bonds or another safe investment. In a market crash, your losses will remain in the single digits, and you can move back into stocks after the market improves.
If you don’t know what to do, meet with a financial planner who can help you assess your risk tolerance and come up with a plan suited to your needs.
Method 2 Reducing Your Debt.
1. Identify all of your debts. In a market crash, you’ll need as much cash as possible to pay for living expenses. Accordingly, you want to decrease your debt load as much as possible now. Begin by identifying every debt you have, including any of the following:
student loan debt, credit card debt, home mortgage,car loan,personal loans.
2. Prioritize your debts. You need to make the minimum monthly payments on all debts. However, you should direct extra money to the debts you want to pay off the most. Accordingly, sit down and prioritize your debts.
For example, if you lose your job, then you can often delay payments on student loans, using either forbearance or deferment. Accordingly, you might not want to pay down your student loans first but instead focus on credit cards, which probably have a higher interest rate.
However, some debts are tied to an asset. For example, you can lose your car or home if you don’t make payment. Paying these debts off early could be a wise choice.
3. Create a budget. To free up money to contribute to debt payments, you’ll need to budget. Identify the following:
Your fixed expenses. These are bills that don’t change much month to month. Generally, fixed expenses are also for necessities, such as your rent or mortgage, health insurance premiums, car payments, and other debts.
Your discretionary spending. You can track your discretionary spending over the course of one or two months. Write down what you buy every day and note the price. Alternately, you can buy everything with a debit or credit card and then look at your monthly statement.
Reduce discretionary spending. You need your income to exceed your discretionary spending. To free up as much money as possible, reduce discretionary spending to the bare minimum by giving up gym memberships and cable TV. You can also cut out vacations, entertainment expenses, and meals in restaurants.
4. Refinance your mortgage. Mortgage rates are still low. If you have a high APR, then consider refinancing into a loan with a lower one. Avoid spending the money that you save and instead funnel it toward debt repayment.
To investigate a mortgage refinance, contact your current lender to check what rate they can offer you. Then compare their rates to others on the market.
5. Tackle credit card debt. You want a stable balance sheet when the market crashes, so you should reduce your debts as much as possible. In particular, you should pay down high-interest credit card debt. Identify a method of repayment so that you can wipe out these debts as soon as possible:
Debt avalanche. You pay the minimum monthly payment on all credit cards. Then you contribute extra money to the debt with the highest interest rate. Once you pay off that card, focus on the debt with the second highest interest rate.
Debt snowball. Another method is to pay the minimum on your monthly debts but then use extra to pay off the card with the smallest balance first. The debt snowball method is more expensive than the debt avalanche, but it can give you momentum.
Debt snowflake. This method is ideal for people who can’t budget extra money to pay down debt. Instead, you try to save a little bit of money every day and make multiple monthly payments to slowly chip away at your debt.
Method 3 Preparing for Emergencies.
1. Build an emergency fund. You’ll need money in case you lose your job or if any kind of emergency springs up. Generally, you should save at least six months of expenses. If possible, save up to twelve months of expenses.
Put money toward your emergency fund every month, even if that means you pay off debts more slowly.
If you are a retiree, then you should try to have two years of expenses saved. When the market declines, you should live off your savings instead of drawing income from your investments.
2. Buy insurance. Insurance protects you from any unforeseen accidents that will hammer you financially. In an economic downturn, you’ll need all the money you can get, and insurance will provided valuable protection in case an accident strikes. Consider the following types of insurance:
Health insurance. If your employer doesn’t offer it, you can buy it on the government exchanges. Depending on your income, you might quality for a premium subsidy and/or help with out-of-pocket expenses.
Automobile insurance. Your insurance will pay if you injure someone in an accident. Depending on the insurance, you might also be covered if someone without coverage injures you.
Disability insurance. If you are disabled before you reach retirement, you’ll need income to support you. Your employer probably offers disability insurance. If not, you can shop on your own.
Life Insurance. You can replace the income of a working spouse with a life insurance policy. Life insurance is particularly important if you have young children. Calculate how much life insurance you need at lifehappens.org.
Homeowner’s insurance. Your homeowner’s policy covers injuries that occur on your property, as well as any structural damage caused by natural disasters and other accidents.
3. Assess the stability of your job. In a market crash, many jobs will be wiped out as employers are forced to lay off workers. You need to assess whether your job is stable enough to survive a recession, or whether you should plan on getting a different job.
Look at how many people your employer laid off during the last recession. Were only a few let go? If so, your job might be secure. However, if your employer engaged in mass layoffs, then there’s no reason to assume it won’t happen again.
You can also pick up some freelance or part-time work now. That way, if the market crashes, you’ll still have some income coming in.
Tips.
Consult with a personal financial counselor to help plan, protect, and control how your finances and money in the future.
How to Protect Your Finances Against Market Crashes.
Economic expansions don't last forever, and eventually, the country will enter another recession. When it does, you need to protect your investments so that you can weather the storm. Assess how exposed you are to stocks and decide whether to diversify your portfolio with safer investments. Also clean up your balance sheet by reducing your debts, which will allow you to survive the recession that accompanies a stock market crash.
Method 1 Changing Your Investments.
1. Check your current investment allocation. You might have no idea what your retirement fund is currently invested in. If not, log into your account and print out the current allocation of investments, which should include the following:
stocks or stock mutual funds, bonds,real estate,money market accounts.
2. Identify why you fear a market crash. The economy goes up and down with some regularity, and when the market crashes stocks suddenly become cheaper to buy. For this reason, you might not want to diversify your portfolio. Instead, you can leave your investments as they are.
However, you might want to reduce your exposure to risk if you are nearing your retirement age or have just entered retirement. A major stock market crash could seriously cut the amount of money you have to live on.
Your tolerance for risk might also have changed. If so, then you can diversify your portfolio so that you are comfortable with your investment mix.
It’s impossible to predict exactly when the next recession will hit, so you shouldn’t move money in and out of the stock market hoping to get out just before things turn south. For example, it looked like the U.S. stock market was about to crash in late 2015. Since then, the Dow Jones Industrial Average has increased more than 20%.
3. Consider holding money in a savings account. The easiest way to protect your investments is to get out of stocks and move the money to savings accounts. Consider the following options:
High-yield online savings accounts. These accounts will only earn about 1-2% annually, but this amount is higher than most banks offer. Your cash is liquid, so you can access it if needed. Furthermore, your deposit will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 USD.
Money market accounts. These accounts are like bank accounts but with potentially higher returns. You can write checks against the money market account. Open with your bank or with a company like Scottrade or TD Ameritrade.
Certificates of Deposit. Banks and credit unions sell "CDs," which you can buy for a set sum. You are prohibited from accessing the money until the CD matures, but you will earn interest on the investment.
4. Invest in bonds. Bonds are debt. Companies, as well as governments, issue bonds to raise money, and bonds are a safer investment than stock. Consider putting more of your investment into bonds, such as the following:
Municipal bonds. State and local governments issue bonds to raise money, and in return the bonds are exempted from income taxes. You can typically earn 3% annually on bonds. They are a low-risk investment, unless the city government is on the verge of bankruptcy.
U.S. savings bonds. These bonds are very safe. With a Series I bond, you get a fixed interest rate, and your return is linked to inflation. With the Series EE bond, you earn an automatic rate of return each month.
Treasury Inflation Protected Securities (TIPS). The U.S. government offers a fixed interest rate as well as inflation protection that’s triggered every time inflation increases.
Image titled Protect Your Finances Against Market Crashes Step 5
5. Consider annuities. An annuity is a contract with an insurer or financial services company. You make a lump sum payment, and in return you are provided with a fixed sum of money for a specific amount of time. There are several varieties of annuities, which can protect your investments in case of a market crash. For example, fixed-indexed annuities can protect your principal.
Annuities are safer than stocks, but they do have some risks. For example, the company you bought the annuity from could go bankrupt. In that situation, you will no longer be paid. You can protect yourself by doing thorough research and only buying an annuity from a company with the highest rating.
The value of an annuity can also erode with inflation, though you can buy annuities that will protect against inflation.
6. Find safer stocks. Not all companies are the same, and some are safer investments in a down economy than others. For example, you might want to get rid of low-grade stock, such as companies with a lot of debt or businesses in speculative fields like biotech that have not yet produced strong profits. In a market crash, the value of these companies will decline.
Instead, look to high-quality stocks which tend to hold up better. These companies have stable earnings and low debt.
Also consider stocks that pay dividends. Check if you can invest in a dividend exchange-traded fund.
7. Change your contributions. If you’re not yet in retirement, you should consider changing the allocation of your retirement contributions for the last few years before you stop working. Direct your contributions toward safer investments, such as those discussed above.
Changing your contributions will not change the allocation of investments already in your portfolio, so consider diversifying it.
8. Diversify your portfolio. When the market is good, riskier investments such as stocks perform well. But when the market crashes, you can expect stocks to perform poorly. Accordingly, you might want to diversity your portfolio and move some money out of stocks.
How much to move is up to you. However, you don’t have to get out of stocks entirely. Instead, you could reduce stocks to 30% of your portfolio, and have the other 70% in bonds or another safe investment. In a market crash, your losses will remain in the single digits, and you can move back into stocks after the market improves.
If you don’t know what to do, meet with a financial planner who can help you assess your risk tolerance and come up with a plan suited to your needs.
Method 2 Reducing Your Debt.
1. Identify all of your debts. In a market crash, you’ll need as much cash as possible to pay for living expenses. Accordingly, you want to decrease your debt load as much as possible now. Begin by identifying every debt you have, including any of the following:
student loan debt, credit card debt, home mortgage,car loan,personal loans.
2. Prioritize your debts. You need to make the minimum monthly payments on all debts. However, you should direct extra money to the debts you want to pay off the most. Accordingly, sit down and prioritize your debts.
For example, if you lose your job, then you can often delay payments on student loans, using either forbearance or deferment. Accordingly, you might not want to pay down your student loans first but instead focus on credit cards, which probably have a higher interest rate.
However, some debts are tied to an asset. For example, you can lose your car or home if you don’t make payment. Paying these debts off early could be a wise choice.
3. Create a budget. To free up money to contribute to debt payments, you’ll need to budget. Identify the following:
Your fixed expenses. These are bills that don’t change much month to month. Generally, fixed expenses are also for necessities, such as your rent or mortgage, health insurance premiums, car payments, and other debts.
Your discretionary spending. You can track your discretionary spending over the course of one or two months. Write down what you buy every day and note the price. Alternately, you can buy everything with a debit or credit card and then look at your monthly statement.
Reduce discretionary spending. You need your income to exceed your discretionary spending. To free up as much money as possible, reduce discretionary spending to the bare minimum by giving up gym memberships and cable TV. You can also cut out vacations, entertainment expenses, and meals in restaurants.
4. Refinance your mortgage. Mortgage rates are still low. If you have a high APR, then consider refinancing into a loan with a lower one. Avoid spending the money that you save and instead funnel it toward debt repayment.
To investigate a mortgage refinance, contact your current lender to check what rate they can offer you. Then compare their rates to others on the market.
5. Tackle credit card debt. You want a stable balance sheet when the market crashes, so you should reduce your debts as much as possible. In particular, you should pay down high-interest credit card debt. Identify a method of repayment so that you can wipe out these debts as soon as possible:
Debt avalanche. You pay the minimum monthly payment on all credit cards. Then you contribute extra money to the debt with the highest interest rate. Once you pay off that card, focus on the debt with the second highest interest rate.
Debt snowball. Another method is to pay the minimum on your monthly debts but then use extra to pay off the card with the smallest balance first. The debt snowball method is more expensive than the debt avalanche, but it can give you momentum.
Debt snowflake. This method is ideal for people who can’t budget extra money to pay down debt. Instead, you try to save a little bit of money every day and make multiple monthly payments to slowly chip away at your debt.
Method 3 Preparing for Emergencies.
1. Build an emergency fund. You’ll need money in case you lose your job or if any kind of emergency springs up. Generally, you should save at least six months of expenses. If possible, save up to twelve months of expenses.
Put money toward your emergency fund every month, even if that means you pay off debts more slowly.
If you are a retiree, then you should try to have two years of expenses saved. When the market declines, you should live off your savings instead of drawing income from your investments.
2. Buy insurance. Insurance protects you from any unforeseen accidents that will hammer you financially. In an economic downturn, you’ll need all the money you can get, and insurance will provided valuable protection in case an accident strikes. Consider the following types of insurance:
Health insurance. If your employer doesn’t offer it, you can buy it on the government exchanges. Depending on your income, you might quality for a premium subsidy and/or help with out-of-pocket expenses.
Automobile insurance. Your insurance will pay if you injure someone in an accident. Depending on the insurance, you might also be covered if someone without coverage injures you.
Disability insurance. If you are disabled before you reach retirement, you’ll need income to support you. Your employer probably offers disability insurance. If not, you can shop on your own.
Life Insurance. You can replace the income of a working spouse with a life insurance policy. Life insurance is particularly important if you have young children. Calculate how much life insurance you need at lifehappens.org.
Homeowner’s insurance. Your homeowner’s policy covers injuries that occur on your property, as well as any structural damage caused by natural disasters and other accidents.
3. Assess the stability of your job. In a market crash, many jobs will be wiped out as employers are forced to lay off workers. You need to assess whether your job is stable enough to survive a recession, or whether you should plan on getting a different job.
Look at how many people your employer laid off during the last recession. Were only a few let go? If so, your job might be secure. However, if your employer engaged in mass layoffs, then there’s no reason to assume it won’t happen again.
You can also pick up some freelance or part-time work now. That way, if the market crashes, you’ll still have some income coming in.
Tips.
Consult with a personal financial counselor to help plan, protect, and control how your finances and money in the future.
