Profitable small businesses do a great job of protecting their profits. With some careful planning and intention, you can too! Here are the seven things that all profitable small businesses do.
Let’s dive in.
1. Separate your bank accounts
Keeping your business and personal bank accounts separate is one of the simplest things that all profitable small businesses do.
You can do this by opening a business checking account at any bank of your choice. Your DBA (if you have one), Operating Agreement, business formation documents, Employer Identification Number (EIN) and personal identification could all be required depending on the bank. That’s why it’s always a good idea to call and check with them before you arrive. Also, be sure to plan for how much money you want to deposit into the new bank account to get it started.
Even after opening a business bank account, you may accidentally use the wrong account from time to time. Trust me, mistakes happen. At first, mistakes will happen a lot. Just be sure to keep your documentation if a mistake happens so that your books will have a clear explanation for the issue. That way you can rest easy knowing that your tax deductions are still intact. Keep in mind though that if audited, the IRS doesn’t like to see this happen very often.
2. Watch your cash
Did someone say Murphy’s Law? Well, that law is alive in well in my life, and I bet it is in yours too! Because of this lovely law, profitable small businesses monitor their cash regularly so they always know what they have to work with. This is especially important for newer businesses and those that have a lot of large withdrawals. Taking too much cash out of the business could potentially put you in a bind. That’s something you want to avoid if at all possible.
It’s a good idea to leave anywhere from two weeks’ worth of operating expenses to 25% of profits in the business bank account just to be safe. The actual amount will vary depending on your business though.
For example, seasonal businesses may leave more cash in the business during the off-season to make sure that operating costs are covered. Home-based businesses with few expenses may take a little more cash out than a business that pays for an office space. Businesses expecting a large purchase in the coming weeks may want to leave a nice cash cushion until the purchase is complete.
Regardless, it’s always a good rule of thumb to monitor your cash at least weekly, or you can be really neurotic and monitor it daily like me!
3. Keep your documentation
Your documentation equals possible tax deductions. Did someone say cha-ching? This is one of the best ways to become a profitable small business, and it’s easy too!
Keeping your documentation means that you can take advantage of numerous tax deductions and write-offs that could give you a more advantageous tax position. We all want to save money on our taxes. It would be a shame to miss a possible deduction because the documentation is missing.
What do you need to keep?
For starters, you should always save your receipts. You can take a picture of them, scan them into Google Drive or your Desktop or save the actual receipts. Use an app like HubDoc, ReceiptBank or QuickBooks Online to make your life easier. Just choose a method that works for you, and stick to it! That way you’ll have all the backup you need if you get selected for an audit.
You should also keep you bank statements, purchase and sale documentation, business financial statements, tax returns and notes from business meetings, especially if they took place during a meal or travel situation. Keeping your documentation will help you breathe easier and get you one step closer to audit-proofing your business. Who doesn’t want that?
4. Plan for taxes
One of the biggest headaches you can run into is not planning for taxes. That can turn a profitable small business into a business that no longer exists very quickly. The IRS is not very friendly when it comes to not getting paid so it’s important to always have a plan.
I recommend that small business owners keep around 25 – 30% of their profits in a separate business bank account. This ensures that you always have the funds to use when your tax payments are due.
If that sounds amazing, then you’re absolutely right! It’s awesome to be able to rest easy knowing that you have the cash to pay your tax bill. Not only that, but you can avoid potential penalties by paying on time and staying in compliance.
Since estimated tax payments are due quarterly from small business owners, be sure to speak with a tax professional to help you setup a plan for your unique tax situation.
You can also checkout this post on the Beginner’s Guide to Self-Employed Taxes.
5. Consider your business structure
Choosing the right business structure for your business is a great way to protect your business profits, but it’s important to make the right choice for your intended business.
In the early stages, it may be possible to operate as a sole proprietorship or a general partnership. There is no cost or paperwork required for these (at least in most states) so you can start your business right away. That’s great early on, but you also have to deal with unlimited liability. That could mean a huge problem for you if your business gets hit with a lawsuit.
If you do choose to incorporate your business, then you will most likely choose between an LLC, partnership or corporation. My favorite of these is an LLC because you have ownership flexibility and limited liability. That’s true as long as there’s a clear line of separation between the business owners and the LLC.
No matter what you choose, your business structure is completely up to you and what will fit best with your unique business. Keep in mind that each state has different requirements for business types so be sure to do your research.
6. Consider purchasing liability insurance
A professor once told me that if you run a business, you’re going to get sued at least once. I don’t know if he’s right, but it does seem like a possibility nowadays. That’s why having liability insurance is critical to keeping profitable small businesses profitable.
Which kind of insurance should you have? Well, that depends on your business and what you sell, but small businesses who want to succeed must be prepared. There are many different forms of insurance so you need to choose what’s best for your business.
Professional Liability Insurance will help you if you provide a service and make a mistake. Product Liability Insurance will help you with product injuries. Cyber Risk Insurance helps in the event of a security breach, and Office/Home-Based Business Insurance helps in the event of an office location injury.
These are just a few types of available liability protections so it’s important to speak with an insurance professional about your business. You may be just fine with a General Business Liability Policy, or you may need something more specific. Just be sure that the policies you purchase cover you as you expect them to.
7. Budgeting is key
Whether it’s for personal reasons or for your business, keeping a budget is super important to meeting your financial goals. It is really easy to lose control of your business spending and wonder where your money is going. Trust me, I’ve been there. It’s also really easy to fall behind on your sales and other financial goals. That’s why profitable small businesses maintain a budget that helps them revisit their goals to evaluate how the business is performing and where it needs to improve.
To create a budget for your business, use your prior year information to try to determine your budget goals for the current year. For example, use June 2019 as a baseline for June 2020. (Excel is a great tool for this!)
Try to make your budget goals specific, measurable and realistic while also being challenging. For example, your budget for June 2020 may show your budgeted sales as 3 – 5% higher than June 2019. Your expenses overall may increase by 3 – 5% as well, or you might want to set a budget goal to reduce your expenses by a certain percentage. That may require finding a new supplier, implementing better workflows or going all in on one product instead of a dozen. Tracking your budget will help you make those types of strategic decisions.
What if you’re just starting out?
It’s perfectly fine to use estimates. Just be flexible as it may take some time to find your norms. You could also do some research into your specific industry. Make phone calls, stop in at local shops, conduct surveys, join Facebook groups, etc. to try to speak with people doing what you do. There’s room for everyone so it doesn’t have to be cutthroat.
Also, be sure to remember any large purchases or needs that you anticipate when creating your budget. Surprises are never fun so use your budget to make things predictable.
Wrapping it up
Well, there you have it! If you want to be a profitable small business, then you have to protect your business. That requires careful planning and continuous monitoring to make sure you achieve your business and financial goals.
Note: This blog post is meant for educational and informational purposes only. Please contact a tax or accounting professional if you have specific questions before taking any further action. Also note that this list may not be exhaustive depending on your business situation.
