Steps to Achieving Financial Security
By Maggie Potter
What do you think of when you think of financial security? For many people, it’s a number: “I’ll be secure when my business reaches $100,000 in sales. I’ll be secure when we reach our first million.” The truth is that financial security isn’t necessarily a number: It’s more about planning than selling.
You don’t need to be wildly successful to be financially secure. Instead, you need to be ready. To do that, you must have a clear view of your current financial position and what potential emergencies and opportunities could appear. Then, you need a plan to protect yourself.
Achieving financial security is more about organization and diligence than about securing new clients or increasing your sales. Here’s how you can become financially secure without doubling your business.
Get to Grips with Small Business Tax
Are you overpaying in tax? Would you know if you were? Nine in ten small business owners overpaid in tax by an average of $11,638 whether they filed on their own or paid an accountant. Every small business owner could benefit from an extra $10,000, so your first step is to make sure you’re paying what you owe and no more.
The figure above came out before the big tax overhaul in 2017, which aimed to slash small business tax even more. So the time to figure out your true tax liability is now. It helps to start by reading the Tax Cuts and Jobs Act of 2017 (TCJA) and looking for new potential credits and deductions. Remember that the TCJA allows for a 20% deduction of qualified income and greater use of pass-through funds, which directly impacts solo-preneurs.
The TCJA isn’t a salve for big tax concerns. Instead, it created more opportunities for you to strategize to save on taxes. So instead of just cutting a check to the government every quarter, you should be creating a solid tax strategy to maximize your cash flow. Your tax strategy will also help you avoid any hiccups that could lead to filing your taxes late and incurring hefty penalties you can’t afford.
Plan for All Eventualities (Including Opportunities)
Keeping an emergency fund is critical for personal finance. You know that you need at least six months’ worth of money to pay your mortgage, bills, and incidentals in the event something disastrous happens and you lose your income. The same is true for your business. No matter what business you’re in or how razor-thin your profit margin is, you need an emergency fund.
An emergency fund doesn’t just cover big, unpredictable problems. It can also help mitigate cash flow problems or even allow you to take advantage of a big opportunity that comes up at the last minute.
How much do you need to set aside? In this case, your emergency fund should cover your premises, payroll, and essential purchases—the stuff that makes your day-to-day operations functional. If your business also doubles as your sole personal source of income (for freelancers and solo-preneurs), you should also include your personal budget, too.
The amount you need also depends on the flexibility and the unique challenges of your business. How long does it take you to land and onboard a new client? How quickly do current and new clients pay their invoices? How lean can you run your business without sacrificing quality? These are all important questions—and you need to plan for them. Some business owners find themselves comfortable with five months of savings. If you have employees and wait long periods between invoices, you may need a year’s worth of cash.
Keep Your Paperwork Organized by Going Paperless
Do you know what the value of your assets is? Or what your liabilities are? How much do you spend each month on bills? If you don’t have the answers to these questions—or can’t find out in a few minutes—then you have work to do before you can achieve financial security.
Organizing your paperwork and especially your financial documents will save you time and money as well as help you fine-tune your end-of-year finances. Thankfully, it’s easier than ever today because not only do many service providers now use e-billing, but small business accounting software has come a long way from basic bookkeeping to full-on document management.
A paperless office will go a long way toward helping you achieve a fuller picture of your finances. You can scan and digitize any important paperwork and use digital copies and secure e-signatures for the rest of your documents. The best news is that digitization will even help you decrease turnaround time, so you’ll see your money sooner.
Financial Security is a State of Mind
It doesn’t matter whether you earn $1,000 or $1 million a year: If you’re not organized, you’re not financially secure. (Though, of course, earning a $1 million never hurt anyone.) Financial security isn’t a hard-and-fast number; it’s a state of mind that you can only achieve by organizing your finances and creating a strategy tailored to your business.
By identifying a strong tax strategy, saving for emergencies and opportunities, and keeping a close, organized eye on your finances, you can become financially secure—even in your first year of business.