4 Rules of Finance for Every Small Business Owner

You've made up your mind about finally taking the plunge and transforming your passion into a business. You probably have some big ideas of how to expand your business, develop your brand, and forge potential partnerships. Great, that is definitely needed! Yet, there are some important decisions to make regarding your finances in order to drive and sustain your business. Consider it a foundation on which you can build your big ideas upon. Here are the four points to consider in no particular order:

Point 1 - Keep good financial records, have it be organized, and separated from your personal expenses.

I know this isn't the most glamorous or exciting thing to do but if done consistently, it will save you a ton of needless stress, headaches, and time that you could have spent on more productive things, like growing your business! Having good financial records start with keeping good receipts. A good receipt is legible, itemized (describes items purchased or services done), contains the date, and method of payment (credit card, cash, etc). Once you've kept your receipts, make sure to organize it by type of expense such as travel, equipment, supplies, insurance, meals & entertainment, training, rent, etc. If you've kept good receipts and put them in organized folders, this will make your bookkeeping so much easier if you are doing it yourself or better yet you can outsource it, your bookkeeper will thank you and even kiss you! Okay, maybe not kiss part but he or she would really appreciate and thank you for keeping receipts organized!

Point 2 - Don't be afraid to seek out advice from a professional; especially legal and tax.

Making sure your business is set up correctly and suits your type of business is vital to ensure you are protected legally and protected from any tax penalties that might occur if done on your own. Being slapped with an audit from the IRS takes away precious time, money, and mental resources away from your business. You might be thinking, "it's too expensive to hire an attorney or CPA right now". That may be true but if the extra money you spend at the beginning can potentially save you more money down the line from lawsuits or tax penalties, I would say it's worth it. Also, if the price is still a huge hurdle, there could be creative ways to navigate around it. Consider negotiating for a discount or offer to have your business provide some services that the attorney or CPA might be open to. For example, if you have a videography business, you can offer to make a commercial to help promote and expand the attorney or accountant's business while they provide vital legal and tax advice for your business.

Point 3 - Keep a budget/spending plan.

If the word "budget" sounds like a 4-letter word to you, feel free to replace it with "spending plan". Maybe that psychological shift can help you see the benefits of having a budget. According to the U.S. Small Business Administration, over 50% of small businesses fail in the first year and 95% fail within the first five years. To ensure you are not part of the statistic, having a budget and sticking to the plan is critical to ensuring the health of your finances of your business. Having a budget makes you the boss of your dollars. The dollars ask you for permission on where to go instead of having your dollars boss you around. Lastly, the budget helps reflect what you value and disciplines you to make choices based on those values. The budget helps in answering these important questions for your business such as: will this purchase help grow my business? Will I have enough to cover my monthly obligations? How much do I need to set aside to cover any unforeseen expenses?

Point 4 - Have an emergency fund of 3 to 6 months.

This is a good rule of thumb for both your personal and business finances; 3 months if your business has stable predictable income, 6 months if the income fluctuates from month to month. If you aren't sure what your monthly expenses will be, it's okay to have a guesstimate to start off. Once you start doing points 1 and 3 above, they will help make your guesstimate into a valid estimate. Having that emergency fund will help cover periods when business is slow and can be the difference between staying in business and going out of business.

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Johnson Lo is a Los Angeles native and has worked in accounting in a variety of industries ranging from music and cable television to healthcare and non-profits. He caught the personal finance bug after reading The Total Money Makeover by Dave Ramsey. Since then he's read a number of other personal finance books and blogs. He has a passion to share his experience in personal finances and desires to help those that want to build a solid foundation in their finances. In his free time, he enjoys all things Dodgers, watching movies, and binging on shows. His current favorite is Stranger Things. You can read more of his work at https://journeytofinancialfreedom2016.wordpress.com/blog/