Our habits have the power to better any aspect of our lives – especially when it comes to finances. If you’re committed to achieving financial success, you have to ensure you’re applying the right habits in business.
Which habits should you adopt? The following list from Entrepreneur.com illustrates seven financial habits of successful small business owners, so you can learn from the best.
1. Regularly review finances
Every business has a natural ebb and flow, a rhythmical pattern of income and expenses. Sometimes it’s due to seasonality. Sometimes it’s due to the duration of projects and the contract terms. In any case, weekly and monthly financial reviews are an exercise in understanding the frequency and scale of your business operations and the extent to which your business may be growing or at risk due to clients who pay late.
2. Maintain a budget
A budget is simply an expectation for business results. At the beginner level, make a budget on the first day of the month to estimate how much income you’ll receive that month and how much you’ll pay out in expenses. Then review the budget compared to actual results at the end of the month. Rinse and repeat. You’ll get better at budgeting. And because of budgeting, you’ll make more informed decisions and identify potential problems before they occur.
3. Save appropriate amount for taxes
Money you set aside for taxes isn’t really your money. It belongs to the government. That’s why it’s best to set it aside immediately and not get it confused with your remaining business income. For federal taxes, the safe harbor rule is your friend. Set aside at least 90 percent of your prior year’s taxes, and you’ll be penalty-free. A common heuristic is that 30 cents of every dollar you earn from your clients is owed to the government.
4. Proactively reduce debt
Sometimes debt is good. You take on debt in the short-term to enable longer-term health and growth for your business. However, unnecessary debt is a drain on your business. And more importantly, once you have business debt, it’s important to make consistent payments, and proactively reduce the principal amount.
5. Pay yourself a salary from business earnings
The term “salary” may not apply to your business. You don’t have to send yourself a regular bi-monthly paycheck. Instead, you can pull money out of your business account at regular intervals to set aside your personal income. When you pay yourself, it forces you to think about your business and your personal income separately.
6. Establish an optimal business structure for liability and taxes
Common business structures are sole proprietorships, partnerships and corporations. Each structure has different legal and tax requirements. While more self-employed professionals are choosing to incorporate, a corporation might not be the best structure for your business. If you’re not sure which structure is best for your business, you may want to seek professional advice because of the expense involved in changing and maintaining a business structure.
7. Maximize tax write-offs and deductions
Take advantage of every tax benefit available to your business. If not doing so, it’s a disservice to your business. Write-offs and deductions reduce your taxable income and therefore reduce the amount you pay the government. I know from talking to many small business owners that tax planning can feel like “gaming the system,” but it’s important to remember that it’s perfectly legal and adopted by all large businesses. If you’re new to the game, you may want to seek out a tax professional as an investment in the future of your business.
Financial freedom won’t come overnight, but adopting these habits will put you on the fast track to success.
For more tips on financial management, head over to Entrepreneur.com.