When you are running a new business, many or all of the financial decisions rest on your shoulders. The ramifications of these decisions and the amount of time they consume can create a high-pressure situation. Planning for the financial future of your business is important, and savings are a key component of this planning. Having sufficient funds in savings can give you the peace of mind needed to successfully oversee the other aspects of running your business.
When drafting your business’s budget, it is necessary to account, as fully as possible, for all associated costs. Simply setting aside enough time to complete this task does not ensure success; a certain amount of uncertainty is unavoidable. Anticipated revenues are not set in stone, and unexpected costs can arise at any time. These ambiguities make it impossible to ever be completely sure of future profits.
The trickiest decisions involve your business’s financial future and security. When you can’t be sure if your profits will be sufficient to cover your operating costs, it is difficult to know how much money to set aside in savings each month. While it may seem illogical to hold any of your revenues back if it means going without desired equipment additions or upgrades, it could prove vital for the survival of your business.
Assessing how much you will need for taxes and how much it would take to recover from an emergency or other financial setback are two of the main considerations when determining how much to save.If you are new to business ownership, you are likely used to a percentage of your paycheck being conveniently and automatically removed for taxes. As a business owner, you need to figure out this sum by yourself.
Michal Cheney from U.S. News Money states that this can be a difficult adjustment.
“If you don’t set money aside to pay your taxes, you’re going to be hit with a fat tax bill and possibly penalties at the end of the year,” according to Cheney.
Taxes can be difficult to predict in the first few years of a business and the potential discrepancies between what you anticipated and end up owing can be much larger than typically occurs with personal taxes. Jan Roberg, of Roberg Tax Solutions, recommends putting 10% of each paycheck into an escrow savings account. Online savings accounts are a good option because they limit the temptation to use the money for other purposes.
Roberg explains that this is a good benchmark, even if it sounds low.
“Generally, self employment taxes are 15% of your income, and then you pay your regular tax rate on top of that. If you’re in the 25% tax bracket, the taxes on your business are 40%.”
The majority of people don’t pay this 40%, however. “In the beginning, most start ups lose money, so your business taxes might be zero,” says Roberg. “You could even reduce your other taxes by reporting a business loss.” Considering these facts, 10% is a good starting point. It is an achievable number that could end up saving your business.
Aside from taxes, it is important to save enough so you don’t go bankrupt due to unforeseen costs.
“Incorporate regular contributions to a business savings account to help back your company financially in a crisis,” states Jamie Simmerman, contributor to the Budget Tracker blog. “I know many small business owners who say that without a business savings plan in their budget, they never would have survived the economic downturn of late.”
There are varying recommendations regarding how much to save to cover potential crises, but it is generally suggested that it is best to overestimate how much you would need to get your business back on its feet. Talking to a financial advisor can help you pinpoint a good starting number.
Filed under: Business Banking, Cash Management Tagged: budgeting, Savings
