You may love what you do and be filled with passion for every customer you serve as a self-employed business owner, but enthusiasm does not pay the bills. For that, you need a great product and good financial management. There is very little difference between a salary and profit when you run your own business. The net income of your business is also your savings, your down payment on a home and your retirement plan for the future. Manage it well.
Create a Business Plan.
When talking about financial management, it is the word “management” that is the most important. Knowing your finances means nothing if you do not do something beneficial with them. As a management tool, develop a business plan with a five year projection and an exit strategy. Business plans are the roadmap for your company and usually include a section on operations, marketing and budgeting. The budget helps you identify variable and fixed expenses, potential burgeoning markets and ways to leverage your earnings to expand your business. The Small Business Administration has some excellent resources to help you create a solid plan for your business.
Diversify Your Income Stream.
Because you are the sole proprietor of your company, the difference between you and your business is very thin. Do not be afraid to create more than one revenue stream. Base your income around your central skill. For example, if you are a salesperson, then sell houses, cars and lifestyle products from direct sales companies like Amway. If you are a writer, then start penning magazine articles, grants and blog articles for freelance sites like Upwork. At the beginning of your business’ lifecycle, you will need to do whatever it takes to make ends meet. At the end of the day, a dollar from one revenue stream is as good as four quarters from another.
Keep Track of Your Finances.
At some point in your business, the best forms of income will float to the top and prove themselves to be the most lucrative with the highest potential. If you do not have proper accounting procedures, though, it is easy for you to miss these trends. In the United States, most organizations use Generally Accepted Accounting Principles (GAAP) for their accounting. You do not need to be an expert at GAAP, but you should consult an accountant to help you set up your bookkeeping. This ensures that it is accurate and, most importantly, useful to your financial decision making process.
Know Your Ratios.
One of the reasons to do all of this tracking is to identify the health of your company and compare it to others in your industry. This is done with financial ratios. One of the best ratios for small businesses is the current ratio, which is your current assets divided by your current liabilities. Your current assets generally are the money you have in the bank and your liabilities are your bills. A current ratio that is more than the number one means that you can cover your bills. Less than one is a problem.
Ratios also are a good way to compare your business to others in the same sector. Morningstar.com calculates the ratios for most of the nation’s largest companies. Use ratios to flag potential issues before they have a chance to destroy your business.