4 Financial Planning Tips for Small Business Owners

Financial planning is essential for anyone who wants to achieve financial independence. The goal of financial planning is to help you reach your financial goals, whether that be retiring by a certain age or having the money to open a new business. For small business owners, financial planning is especially important because you need to ensure you’re planning for your business as well as yourself.

Here are four tips to keep in mind:

1. Establish personal & business financial goals.

Because the purpose of financial planning is to help you reach your goals, you need to decide what you’re trying to obtain. It’s best to make these decisions with your family or business partners.

First, get with your family and decide what short-term and long-term goals you have for your finances. Do you want to buy or build a home? Do you want to go on a nice vacation every year? Are you planning to save for college for your children? When do you want to retire and what will retirement look like? How much money will you need for retirement? Once you set your priorities, you can begin to plan for those goals.

For your business, you’ll still need to set goals. How big do you want to grow? Do you want to get to the point where your business provides a passive income? While these goals are a big part of business financial planning, you also need to take into account how you’ll run your business. Are you setting aside money for taxes? What will happen when you (or a partner) leave the business? Do you have funds to pay your employees?

Determining what you want from your life or business can help you and a certified financial planner determine what steps you need to take to reach those goals. We’ll focus on business financial planning for the rest of this article, but talk with a financial planner to determine how you can meet all of your goals.

2. Set up a safety net.

Owning a business is a risky endeavor. Changes in the market can affect your business and leave you powerless. In order to brace for these changes, it’s smart to set up a safety net. With your financial planner, determine how much money you should set aside for your safety net.

One of the best ways to build a safety net is to diversify your income. This way, if one aspect of the market crashes you don’t lose everything. Typically small business owners have their money tied up in their own business, but you need more than that to build a safety net. Learn about different investments (stocks, real estate, precious metals, securities, etc.) so that you have multiple income streams. When you diversify your portfolio, you carry less risk.

3. Plan for your retirement.

Retirement planning is an essential aspect of financial planning, especially for business owners. Just because you love what you do doesn’t mean you want to do it until the day you die.

People who work for someone else often have retirement benefits through their job, but business owners don’t have that luxury. They have to plan for retirement on their own, which is why it needs to be on your radar. There are many different retirement options (401k, IRAs, etc.). Speak with a financial planner about which option is best for you. You’ll also want to look into the best way to fund your retirement plans. Since you don’t have your employer contributing, learn how you can contribute the maximum amount.

4. Plan for your current business needs.

As a small business owner, you have a lot of financial responsibilities. You aren’t just responsible for making money; you’re responsible for taxes, employee wages, business assets, and the list goes on. Here are a few things to keep in mind when you’re planning for your business:

Taxes

Taxes should always be at the forefront of your mind when it comes to business finances. You should always be setting aside at least 25% of your income for taxes. You also need to make sure you’re paying estimated quarterly taxes.

Different business entities (sole proprietor, S corp, LLC, etc.) all have different tax responsibilities. Make sure you know what your business entity requires. An accountant can help you determine how much you need to be setting aside for taxes according to your business type and can help you strategize how to maximize your tax return. If you have questions, reach out to our team at Vyde USA. We specialize in helping small businesses save time and money on their accounting, bookkeeping, and taxes.

Business Costs

When you are planning finances for your business, you need to factor in the cost of doing business. Every business has expenses, whether that be the expense of creating a product, employee wages, rent, equipment, etc.

It’s important that you find a way for your revenue to outweigh your expenses. Without that, you’ll never have a successful business.

Succession Planning

Setting up a succession plan, which includes strategizing around how to develop and grow future leaders in your company, should be a part of your financial planning. Although it doesn’t directly relate to finances, it can carry a lot of liability. You’ll want to make sure that your business has a succession plan for a number of scenarios: business partner leaving the business, death of a business partner, retirement, expansion, etc. No matter what the situation is, you’ll want to have a plan in place so that your business doesn’t suffer. Learn more about succession planning in this informative post.

There are a lot of other aspects of financial planning that small business owners should consider. It’s best to go over these with a professional to ensure you don’t overlook anything crucial.

How Many Years Can I Claim a Loss on My Business?

How many years can I claim a loss on my business?

If you're wondering, "How many years can I claim a loss on my business?" then you're probably reaching a point where you've been claiming too many losses on your taxes. The Internal Revenue Service (IRS) only allows your business to be in the negative for a certain number of years before it declassifies it as a business. We'll teach you the rules regarding business losses and help you determine if you can still claim your business on your taxes.

How many years can I claim a loss on my business?

The IRS will only allow you to claim losses on your business for three out of five tax years. If you don’t show that your business is starting to make a profit, then the IRS can prohibit you from claiming your business losses on your taxes.

After you claim a loss for three of the five years, the IRS will classify your business as a hobby. Hobbies are not tax deductible so you won’t be able to claim any of your expenses on your taxes. This declassification is called the Hobby Loss Rule.

How can I prove my business is more than a hobby?

If you want to continue claiming your business on your taxes, you need to show the IRS that it’s more than just a hobby.

First, you’ll have to show that you are running your business as a business, not as a hobby. You should meet these three criteria:

Have a business plan.
Show that you have plans, or at least intentions, to turn a profit.
Present business records that show you understand how to report business income accurately.

The IRS will also consider the following factors to determine if your business should qualify as a business or hobby:

Have you made a profit in the past?
Do you live off of the income made from the business?
Were your losses beyond your control?
How much time do you put into the business? Are you spending enough time to make it profitable?
Did you change your business methods in an effort in increase profits?
Do you have the knowledge to run a profitable business?

Your business should be able to positively answer at least a few of these questions. It takes more than just one to be considered a business.

What do I need to know about still claiming my business after it’s been classified as a hobby?

First, you need to understand that if you try to claim a loss on your hobby (even if you consider it a business), it could trigger an audit by the IRS. You need to determine if you want to still claim losses on your business after it’s been classified as a hobby. Typically, you can determine this by going through the questions we outlined earlier.

The best way to show the IRS that you’re a serious business owner is to keep records. Most people don’t keep records regarding their hobbies, so this simple tip can help prove that your intention is to run a profitable business.

Just because you feel like your business is more than a hobby doesn’t mean the IRS will agree. It’s best to talk with a professional accountant to assess the auditing risk associated with claiming your business on your taxes again.

Casino players across Australia are always on the lookout for the best gaming experience, which not only includes a wide variety of games and stellar customer service but also fast payouts. Encountering delays when withdrawing winnings can dampen the excitement of online betting. Recognizing this, casinoau10 has taken the initiative to compile a comprehensive list of Australian casinos that stand out for their quick payout processes. This curated selection ensures that players can enjoy their winnings with minimal waiting time, enhancing the overall gaming experience.
Whether you’re a fan of slots, table games, or live dealer options, finding a reliable casino with fast payouts is crucial. To discover the top-notch casinos that guarantee swift transactions, visit https://casinoau10.com/fastest-paying/. Here, you’ll find a guide tailored to cater to the needs of Aussie players seeking efficiency and reliability in their gaming ventures.

Ready for a dinkum Aussie experience? Give Fair Go casino a spin! This online casino brings the best of the Outback directly to your screen. Enjoy a massive collection of pokies from top providers, generous welcome bonuses for new players, and ongoing promotions galore. Fair Go takes a no-nonsense approach with fast deposits and withdrawals, Aussie-friendly payment options, and 24/7 customer support available for any questions or a quick yarn. Fair dinkum, mate, this casino embodies the true blue Aussie spirit!

Get a taste of the high life at Uptown Pokies casino. Offering a sleek, sophisticated ambiance, Uptown Pokies is all about thrilling pokies action, massive jackpots, and a touch of class. Discover a vast gaming library with top-notch titles and exciting new releases. New players are greeted with an eye-popping welcome package, and regular promotions keep the good times rolling. Enjoy secure transactions, excellent customer support, and immerse yourself in a world of opulent entertainment at Uptown Pokies.

Step into the realm of exclusivity with Inclave casinos Australia. These carefully curated casinos cater to discerning players seeking personalized experiences and exceptional service. Enjoy a handpicked selection of high-quality games, exclusive VIP benefits, and the assurance of responsible gambling practices. While details about specific Inclave casinos may be limited, the allure lies in the promise of tailored rewards and bespoke luxury only available to members of this select circle.

If you need additional tax or accounting help, reach out to our team at Vyde. We work with small business owners to save them time, stress, and money on their taxes and stay on top of their finance.

FAQs about Claiming Business Losses on Taxes:

How many years can I claim a loss on my business?

The IRS allows you to claim business losses for three out of five tax years. Afterward, it may classify your business as a hobby, making it ineligible for tax deductions.

How can I prove my business is more than a hobby?

Demonstrate you’re running a legitimate business by having a business plan, showing profit intentions, and maintaining accurate business records. Factors like past profits, time investment, and business knowledge also influence the IRS’s assessment.

What happens if my business is classified as a hobby?

Once labeled a hobby, claiming business losses triggers an IRS audit risk. To avoid complications, consider the questions outlined earlier to assess if your business qualifies, and keep meticulous records to demonstrate your seriousness.

Can I still claim losses after my business is classified as a hobby?

Attempting to claim losses on a hobby may lead to an IRS audit. Evaluate the risks and, if determined, consult a professional accountant for guidance on proving your business’s legitimacy.

How can Vyde assist with tax and accounting concerns?

Vyde supports small business owners with expert tax and accounting services, saving time, reducing stress, and optimizing financial management. Reach out for personalized assistance and stay on top of your finances.

Interested in Learning More?

Schedule a free consultation with our team!

5 Commonly Missed Business Tax Deductions

Whether you know it or not, you could be leaving hundreds—even thousands—of dollars on the table by missing a few lesser-known small business tax deductions.
Entrepreneurs often miss some small business deductions they could qualify for because they didn’t keep accurate records throughout the year, or they shy away from the complications of itemizing each expense. Avoid overpaying taxes this year by making sure you’ve reviewed all small business deductions to see if you qualify.

5 of the Most Missed Tax Deductions for Small Businesses

Business-Related Meals and Entertainment. Just keeping receipts on a business trip isn’t quite enough. Business owners who have an especially wide network and social schedule often spend thousands of dollars on eating out and entertainment for/with clients throughout the year. Many don’t keep accurate records and aren’t sure if they can really classify the meetings as “business-related.” However, keep in mind, there is no hard and fast rule about how much of the meeting must be taken up by business talk. You can safely deduct 50% of your meals as long as you can show a new client lead or referral came from the meeting. If you haven’t been saving your receipts this year and think you may have missed deductions in this area, a bank statement will suffice.
Calculating Vehicle Expenses. Sure, $0.57 per mile driven can really add up when you take a road trip across the country to further your business. Most business owners find the Standard Mileage Rate to be more than fair, but it’s worth calculating vehicle expenses the hard way if you are really looking to save on your tax bill. Believe it or not, the “hard way” really isn’t all that hard. First, divide business-related by your total miles driven for the year. This will give you a percentage. Take that percentage and apply it to gasoline costs, car washes, new tires, oil changes—even a satellite radio fee or new seat covers. You can calculate “anything that is for the betterment of the vehicle.” Keep in mind that miles driven to and from the office each day do not count as “business.”
Home Office—The Hard Way. The IRS allows a simple home office deduction of $5 per square foot. Again, more than fair for some business owners, but others take the long route and find that it works to their advantage. Calculating your home office using the traditional method involves measuring the office square footage, and dividing it by the total square footage of the home. You can then apply that percentage to home-related expenses such as electricity, heating, mortgage payments, and home depreciation. Calculate your home office deduction both ways and find which works better for you.
Startup Costs. An often forgotten deduction comes in the form of expenses incurred before your business actually opened its doors. The great thing about startup costs is that there is really no limitation on how far back these expenses can be counted. If you took a continuing education class, bought a computer that is now used for work, took a future client out to dinner, you can count those as deductions. The IRS allows a deduction of up to $5,000 for the first year, and the rest amortized over the next 15 years.
Employee Expenses. If you reimburse clients for any business-related expenses, don’t forget to keep track. Other employee expenses include gas, meals, hotel accommodations, tips, baggage fees, etc. You can also deduct the cost of gifts given to clients, as well as wrapping and shipping costs associated with those gifts.

This is obviously not an exhaustive list of commonly missed tax deductions—pet moving expenses, the cost of quitting smoking, clarinet lessons (yes, all real!)—but these are certainly the most common for entrepreneurs and small business owners. If you need help knowing what is and isn’t tax-deductible and making sure you are within IRS regulations, our accountants can help. Reach out to us today!

Frequently Asked Questions:

1. How can I ensure I don’t miss out on small business tax deductions?

Maintain accurate records throughout the year. Review all possible deductions to maximize savings and avoid overpaying taxes.

2. What are the deductions related to business meals and entertainment?

Deduct 50% of business-related meal expenses if they contributed to new client leads or referrals. Bank statements can suffice if receipts are unavailable.

3. How do I calculate vehicle expenses for tax deductions?

Use the Standard Mileage Rate or calculate expenses based on the business-related percentage of total miles driven, including various vehicle costs.

4. What’s the process for claiming a home office deduction?

You can opt for the simplified $5 per square foot deduction or calculate expenses using the traditional method based on office square footage.

5. What are deductible startup costs, and how far back can they be claimed?

Startup costs incurred before business commencement can be deducted, with no specific time limit, up to $5,000 in the first year and the rest over 15 years.

How to Know If Your Small Business Needs An Accountant

We talk with clients everyday about their business and we love it. As accountants, we spend a lot of time with the books and we love the numbers and details, but we get that not everyone does.

Part of growing your business is knowing when to pull the lever to hire a professional rather than continue to DIY things yourself.

So when is the right time to hire an accountant? We’re glad you asked.

When You’re Deciding on Your Business Structure

Hiring an accountant when you’re first starting out might seem a little premature. But you’ll want the financial advice and wisdom that comes from a seasoned professional as you figure out the type of business structure, or entity, that you need to set up for you business.

An accountant will be able to provide you with the ins and outs of each business entity type and help you formulate which one will be best for you and your company in the long run. Additionally, they’ll be able to help you manage your money as you set out to establish yourself. If numbers aren’t your thing, we highly recommend at least sitting down with an accountant for an hour or two to hash out the starting details and a gameplan for your first year or so in business. Then at that point, you can reassess to see if outsourcing your finances to an accountant and bookkeeper is a better fit.

When Things Get Complex & You’re Ready to Delegate

So you’ve DIY’ed it so far and it’s been just fine. As you start to grow your biz and things become more complex you might find that you lack the time to keep a handle on your finances along with all the other aspects of your business.

Hiring an accountant as you enter this more complex stage is a great idea. They can help you move from a side hustle or brand new biz to a more complex one that’s investing in growth and the future. Don’t feel like it’s a statement about your ability to juggle it all, rather celebrate your success and hire that accountant to help you fast track to the next level.

When You Have To Deal With The Government

Everyone, and we mean everyone, feels that pit in their stomach when they hear IRS. Hiring an accountant when you have to work with the government, and even before, helps gives you peace of mind – and accountants are good for more than just managing an audit or keeping you safe from one. Accountants should also be able to help you with:

keeping you up to date with the most recent tax law
keep your company’s status updated in the gov’s company register
handle your payroll and ensure that dealings with employees are documented and done correctly
complete and file all legal paperwork and compliance documents for your business

When You’re Applying for a Business Loan or Looking for Investors

So your business is growing and you’re looking to expand even further. But it takes money to make money and the type of capital you’re looking for is going to have to come from a bank loan or an investor.

Banks and investors like to see that they’re going to get a good return on the money they loan out, and an accountant will be able to showcase that your company is a good bet. Accountants can help you prepare the paperwork for the loan, choose the right type of loan, and even pull together the records that you’ll need to show how impressive your business is so that you’re a shoe-in for getting that loan.

Have additional questions about hiring an accountant? We’d love to chat.

FAQs about Hiring an Accountant for Your Business:

When is the right time to hire an accountant for my business?

It’s advisable to consider hiring an accountant when you’re deciding on your business structure or when your business operations become too complex for you to manage effectively on your own.

What role does an accountant play in deciding on a business structure?

An accountant offers valuable financial advice regarding different business entity types, helping you understand their implications and choose the structure that aligns best with your business goals and financial situation.

When should I involve an accountant in dealings with the government, such as IRS matters?

Hiring an accountant when you need to engage with government agencies, including tax authorities like the IRS, provides peace of mind and ensures compliance with tax laws and regulations. Accountants also assist with tax law updates, payroll management, and legal paperwork.

How can an accountant assist in securing business loans or attracting investors?

Accountants play a crucial role in preparing loan applications and financial documentation for investors. They help showcase your business’s financial health, choose the right financing options, and ensure compliance with regulatory requirements, increasing your chances of securing funding.

What additional services can I expect from an accountant beyond financial management?

Besides financial management, accountants offer expertise in tax planning, payroll administration, compliance management, and financial forecasting. They serve as valuable advisors, helping you navigate complex financial decisions and optimize your business’s financial performance.

How to Make Sense of Your Small Business Financial Reports

Even though we’re accountants, we get that financial reports aren’t at the top of every small business owner’s to do list. Most small businesses run on slim budgets and personnel staff of one or just a few. But whether you keep your own books or employ the services of a bookkeeper or accountant, understanding the numbers can help your small business just as much as it could help a large corporation. So lets cover some basics so that you’re ready to make sense of it all and succeed with your business.

Know the Key Terminology

It goes without saying that understanding the terminology will help a ton in understanding your financial reports. We cover quite a bit of it here on the blog but you can also easily find it just by searching the term on the internet. Our best advice, read through this post and the one we link to down below. Search definitions for any words you don’t know, and jot down definitions in a notebook or sticky and put it with your financial paperwork. If you’ve got a bookkeeper or an accountant on hand – ask them. You’re more than likely paying for their services, so schedule a time that you can pick their brain, or ask for an entry-level crash course to the financial reports that they’re creating for you. No matter how you go about it, you can always come back here and look for those key accounting terms explained – we have a word of the week posted here on the site and you can learn about the first one, income statement, right here.

Be Consistent in Reviewing Your Financials

There is absolutely no reason to make sense of your financial reports if you’re not going to read them – on a regular basis. So right now, before you even dive into your first report, pull out your phone or your work calendar and set a monthly meeting for you and your books. Consistently reviewing the financial reports will help you create long term strategies to grow your business or expand your product line or services. We promise the time you commit to reviewing your financial reports monthly will be well worth it.

Looking to learn more about what your financial reports really tell you? You can read all about it here.

FAQs about Small Business Financial Reports

Why are financial reports important for small businesses?

Financial reports provide insights into the financial health and performance of your business, guiding strategic decision-making and growth.

How can I understand the key terminology used in financial reports?

Search online resources for definitions, ask your bookkeeper or accountant for guidance, and explore educational posts and resources provided by accounting professionals.

Why is consistency crucial when reviewing financial reports?

Consistent review of financial reports enables you to track progress, identify trends, and make informed decisions to drive business growth and expansion effectively.

What benefits can regular review of financial reports offer to small businesses?

Regular review helps in identifying areas for improvement, adjusting strategies, and setting long-term goals to enhance business performance and profitability.

Where can I learn more about interpreting financial reports for my small business?

Explore comprehensive resources and educational materials provided by accounting professionals to gain a deeper understanding of financial reports and their implications.

What Are Costs of Goods Sold?

We work with small business owners and entrepreneurs. Some are seasoned, others are just growing their side hustle. Their skills are varied and they have a wide variety of talents. We often get asked to explain the ins and outs of financial reports and have found that providing our favorite clients with a working knowledge of accounting terms is helpful. With that end in mind, we’re sharing that expert knowledge with you. So if you’re looking to get a better grasp on your small business books, want to understand your financial reports so you can make better business decisions, or even are just starting out and want to do it right… you can check out our word of the week and start expanding your working financial knowledge.

What Are Cost of Goods Sold (COGS)?

The Cost of Goods Sold (COGS) is is simply the amount it costs to produce your product or provide your offered services. You may have even heard your bookkeeper or accountant refer to COGS as the cost of sales or services. COGS include both the material and labor expenses that go into production of each good or service sold, so be sure not to leave either piece out.

COGS don’t include indirect expenses like utilities for your building, your marketing expenses, or shipping fees – it’s merely the cost of what it takes to make your product – we’re talking raw material and direct labor on this one. Here’s a simple formula that will give you COGS:

COGS = Beginning inventory + Purchases During the Period – Ending Inventory

Beginning inventory is whatever is left over from the previous accounting period (usually monthly).

Purchases during the period is on the direct labor or raw materials that were paid for during the accounting period.

Ending Inventory is whatever product you haven’t sold by the end of the accounting period.

We mention monthly accounting above, but your particular business could run accounting periods either monthly, quarterly or by calendar years. Make sure you know and take that into account as you’re figuring you’re COGS.

How Does Knowing Your Cost of Goods Sold Help?

To be able to know if you business is turning a profit, you’ll need to know your COGS. Additionally, knowing your COGS can help you better determine the pricing structure for your products or offered services. You’ll also be able to use the number you have for COGS to help you figure out your business’s gross profit or the amount your business earns from your products and services before taking out taxes and other expenses.

If you’re not already tracking the numbers you need to computer your cost of goods sold, it’s time to start. Doing so will help you figure out your COGS as well as help you make your business incredibly profitable.

Frequently Asked Questions (FAQs)

1. What is included in the Cost of Goods Sold (COGS)?

COGS includes the direct costs associated with producing your product or providing your service. This encompasses expenses like raw materials and direct labor. However, it does not cover indirect expenses such as utilities, marketing, or shipping fees.

2. How do I calculate COGS?

To calculate COGS, use the formula:
COGS = Beginning Inventory + Purchases During the Period – Ending Inventory

Beginning Inventory: The amount of inventory left over from the previous period.
Purchases During the Period: Costs of raw materials and direct labor incurred during the current period.
Ending Inventory: The value of inventory that remains unsold at the end of the period.

3. Why is knowing my COGS important for my business?

Knowing your COGS is crucial because it helps you determine your business’s profitability. By calculating COGS, you can better set pricing for your products or services, assess your gross profit, and make informed financial decisions to enhance profitability.

4. How often should I calculate my COGS?

The frequency of calculating COGS depends on your accounting period, which could be monthly, quarterly, or annually. Regularly updating your COGS helps you maintain accurate financial records and make timely business decisions.

5. What should I do if I’m not currently tracking my COGS?

If you’re not tracking your COGS, it’s important to start as soon as possible. Begin by documenting your beginning inventory, tracking purchases, and updating your ending inventory. This will help you compute COGS accurately and manage your business finances more effectively.

How To Tell If You Need Help With Marketing

You’ve got a small business. You’ve got a great product or service. You may even have a pretty steady cash flow and are doing ok growing your business. But what do you know about marketing – and even better, what are you doing about it?

Knowing when you need marketing help for your small business or side hustle is a pretty complicated decision. And there are a lot of options for what type of help you may need – a consultant, a little research online and time set aside to put your findings in action, or hiring a full-on marketing person to help you grow your business.

So how do you know if you need marketing help and what kind? We’re glad you asked.

Social Media? Why Would I Need That?

We’re joking – slightly. You probably do know what social media is. But do you have business channels on all the major social platforms for your business? Are you posting regularly and interacting with your followers? What about building a community amongst potential buyers/clients?

Even if you don’t sell your product online, it’s probably pretty obvious that you want to have a foothold in the online world because people turn to the internet for information and they turn to social media channels for recommendations from friends and other trusted sources. Having your business show up in a professional way on the major social media platforms makes it easier for them to find you and for their friends to recommend you. Being consistent in your posting and interactions on those platforms tells potential clients that you’re on top of things, that you’re invested in your clients, and that you, your product, and your services are a good pick.

I Don’t Have Time for That

We hear you. Figuring out what type of marketing help you need is only half the battle. Keeping up with it all is the other half and it’s almost impossible to do sometimes along with running your business. Many small businesses hire a part-time or contracted marketing person or social media manager. You may even find that there are virtual assistants that will maintain your accounts at a fair price.

Our recommendation is that you take a few minutes to research what you might need online. Then start looking for those experts we mentioned above and their cost. Based on your needs, you’ll be able to find something that fits your budget and saves you time. Make sure you understand what you’re getting and how it will help – whomever you hire should be able to explain all that, if they can’t they’re probably not a good fit.

Marketing Plans, Mission Statements, Logos are Not Your Thing

Not every small business owner is a creative – we’re accountants, so we totally get that. But having the creative/marketing side of things is a need for your business. Marketing plans and mission statements are a way of keeping your eye on the prize and are essential if you’re looking for investors to help you grow your business.

When it comes to logos, brochures, websites, and more – DIYing it may take more time than it’s worth. Hiring a marketer doesn’t necessarily mean they can accomplish all these tasks themselves, but it does mean that they’ll have connections with those who can and that they’ll have a good understanding of what you’ll need and what it should cost.

What other questions do you have about marketing? Tell us in the comments below.

What Are Expenses?

Business expenses include any money you use to buy something for your company. There are 2 types of business expenses that you may want to track for your financial reports:

overhead costs – are items you pay that probably don’t fluctuate all that much, rent, utilities, insurance, etc.
operating costs – these costs can fluctuate more easily, and are directly related to running your business including, raw materials, supplies, inventory, etc.

When it comes to business expenses, the best thing you can do is track them all. If you’re spending money from your business bank account, then you need to have a receipt, invoice or make a note in your business ledger for that transaction. You can always go back later and decide which type of expense it is, but knowing where the money is going is key to understanding your financial standing.

How Does Knowing Your Expenses Help?

So once you know what an expense is, and you maybe have even categorized them, it’s time to talk about why knowing your expenses can help your bottom line. You’ve probably heard that saying “knowing is half the battle…”, well it applies here. If you know where your money is going you’ve got a good bird’s eye view of the inner workings of your business. If you’re finding that you’re not making as much profit each month, you’ll want to look at your expenses? Have the cost of raw materials gone up? If you’re looking to strategize and have a surplus of funds for things like rent, etc. you’ll be able to look back at your total expense, and then break that cost up into monthly payments so you’ve got a strategy that doesn’t drain you of cash all at once.

What Are Liabilities?

Simply put, liabilities are any existing debt that you owe to another business, organization, vendor or employee. That mortgage you have on your storefront – a liability. The tab you keep with your top vendors – yep, another liability. The money you’ll be paying your employees at the end of this pay period- yet another liability.

Liabilities make buying items for your business easier, because you don’t have to pay the amount in full immediately. And although that makes things easier on your business finances, it’s important to know who you owe, how much, and what you owe it for so you don’t get in over your head.

How Does Knowing Your Liabilities Help?

Keeping track of your liabilities will help keep your business functioning. As we mentioned before, a business owner that just dives in without keeping records of who they owe, how much, and what they owe it for, will usually end up in a financial mess.

Sorting liabilities can be done by categorizing them in 2 ways – short and long term liabilities. Long term liabilities include:

loans that last more than a year
mortgages
accrued expenses
deferred taxes

Some examples of short-term liabilities are:

employee wages
accounts payable
supplies or raw materials
invoices from vendors
utilities for your building or production site

When you know and track your liabilities you’re able to get a good grasp on your business’s profitability and that can guide you on making further purchases for your business. Additionally, with clearly outlined liabilities you’re able to move forward in the process of securing additional money for your business by applying for a bank loan or signing with an investor. Most banks and investors want to see your liabilities and are more likely to lend money or invest when they know how far in you are and that you’re committed to and consistent in paying back your debts.

Frequently Asked Questions

1. What are liabilities in the context of a small business?

Liabilities in a small business context refer to any existing debts or financial obligations owed to others. This includes items such as:

Mortgages on business property
Vendor accounts payable for purchases
Employee wages to be paid
Loans and accrued expenses

Understanding these liabilities helps you manage and track your financial obligations, ensuring you don’t overextend your business finances.

2. How can tracking liabilities benefit my small business?

Tracking your liabilities provides several key benefits:

Financial Control: Helps you maintain a clear overview of what you owe and manage cash flow effectively.
Informed Decisions: Assists in making better business decisions based on your financial obligations and available resources.
Loan and Investment Opportunities: Banks and investors often require a detailed account of your liabilities to assess your financial health before extending loans or investing.

By keeping a detailed record of your liabilities, you can avoid financial pitfalls and plan for future growth.

3. What is the difference between short-term and long-term liabilities?

Short-term liabilities are obligations due within one year, such as:

Employee wages
Accounts payable (e.g., invoices from vendors)
Utilities and supplies costs

Long-term liabilities are debts that extend beyond one year, including:

Mortgages
Long-term loans
Deferred taxes
Accrued expenses

Categorizing your liabilities into short-term and long-term helps manage and prioritize your financial commitments effectively.

4. Why is it important to categorize liabilities in my financial reports?

Categorizing liabilities helps in several ways:

Clarity: Provides a clear picture of what debts are due soon versus those that are long-term.
Cash Flow Management: Helps in planning for upcoming payments and managing cash flow.
Financial Planning: Aids in budgeting and financial planning by understanding when and how much you need to pay off your obligations.

Proper categorization allows for better management and strategic planning of your business finances.

5. How can understanding my liabilities help me secure a business loan or investment?

When applying for a business loan or seeking investment, understanding and documenting your liabilities can:

Demonstrate Financial Responsibility: Shows that you have a handle on your financial obligations and are committed to managing your debts.
Improve Loan or Investment Approval: Lenders and investors review your liabilities to assess your financial stability and risk level. Clear and well-managed liabilities can increase your chances of approval.

What Are Operating Costs?

Operating costs can fluctuate, but knowing what they are and tracking them month to month can do a lot when it comes to running your business. So what are operating costs?

Operating costs are one of two types of business expenses. These costs are are closely related to making products and performing services and can include:

cost of shipping your products to a distributor or the shipping you pay to receive your raw materials
cost of your raw materials
manufacturing supplies (equipment or materials used to produce the product or service)
labor of employees (or your time if you’re a solopreneur)

How Does Knowing Your Operating Costs Help?

Just knowing your operating costs isn’t enough. As mentioned before, these costs can fluctuate and tracking it over time can help you see trends and plan for the upcoming year. In addition, understanding operating costs can help you determine the price for your product or service. Charging too little could mean that your profit would be small; or worse, that you’re operating with a deficit meaning you’re not making any profit at all. Plus, knowing and tracking your operating costs can help you claim some of them as a deduction come tax time – meaning you’re not only doing good business, but you’re being smart about it.

Resources

Author: Jake Snelson

1. Establish personal & business financial goals.

2. Set up a safety net.

3. Plan for your retirement.

4. Plan for your current business needs.

Taxes

Business Costs

Succession Planning

How many years can I claim a loss on my business?

How many years can I claim a loss on my business?

How can I prove my business is more than a hobby?

What do I need to know about still claiming my business after it’s been classified as a hobby?

FAQs about Claiming Business Losses on Taxes:

Interested in Learning More?

5 of the Most Missed Tax Deductions for Small Businesses

Frequently Asked Questions:

When You’re Deciding on Your Business Structure

When Things Get Complex & You’re Ready to Delegate

When You Have To Deal With The Government

When You’re Applying for a Business Loan or Looking for Investors

FAQs about Hiring an Accountant for Your Business:

Know the Key Terminology

Be Consistent in Reviewing Your Financials

FAQs about Small Business Financial Reports

What Are Cost of Goods Sold (COGS)?

How Does Knowing Your Cost of Goods Sold Help?

Frequently Asked Questions (FAQs)

1. What is included in the Cost of Goods Sold (COGS)?

2. How do I calculate COGS?

3. Why is knowing my COGS important for my business?

4. How often should I calculate my COGS?

5. What should I do if I’m not currently tracking my COGS?

Social Media? Why Would I Need That?

I Don’t Have Time for That

Marketing Plans, Mission Statements, Logos are Not Your Thing

What Are Expenses?

How Does Knowing Your Expenses Help?

What Are Liabilities?

How Does Knowing Your Liabilities Help?

Frequently Asked Questions

What Are Operating Costs?

How Does Knowing Your Operating Costs Help?