Many people dream of starting a business. For most, finding funding and managing the financial side of a business can seem daunting. However, it doesn’t have to be overwhelming. With a step-by-step plan, you can take your idea from dream to reality—and remain financially sound. Here are six essential steps to managing your small business finances.
1. Choose a Business Structure and Register
The type of business entity you choose affects your personal liability, in the event something goes wrong, and how you file your taxes. There are five types of companies. On one end of the spectrum is a sole proprietorship, in which you own the business outright, but you also assume all its debts and liabilities. Corporations (there are S, C, and B types) lie at the other end of the spectrum, where the business is separate from your personal liability both financially and legally. Once you have identified the structure that fits your business model, you’ll need to file articles of incorporation and operating agreements for your business to be official. In New Mexico, this is done through the Secretary of State’s office.
2. Establish Federal and State Tax ID
Businesses have their own tax structures, liabilities, and methods of filing. To comply with regulations, you’ll need to have federal and state tax identification numbers. At the federal level, this is referred to as an Employer Identification Number (EIN), which applies even if you don’t have employees, or a Tax Identification Number (Tax ID or TIN). After registering for your New Mexico Business Tax Identification Number, you’ll receive additional IDs for other types of taxes that may apply to your business. For most businesses, that means having an identification number for and filing gross receipts tax.
3. Fund Your Business
In the process of writing your business plan, you’ll identify your start-up costs (in other words, how much funding you’ll need to get your business off the ground). This should include both hard costs, such as purchasing equipment or leasing a brick-and-mortar space to run it, and soft costs, such as paying yourself during the start-up phase before your business turns a profit. Some entrepreneurs can self-fund these expenses, sometimes through savings, while others must seek out other funding streams such as business loans, grants, investor financing, or crowdfunding.
4. Open a Business Bank Account
Before you can hit the ground running with your business, you’ll need a business bank account. Some beginning entrepreneurs are tempted to use their personal bank accounts. However, funneling your business expenses through your personal account makes things more complicated in a two critical ways: 1) it’s more difficult to separate business expenses and personal expenses for accounting and tax purposes, and 2) blending the two makes you personally financially liable for your business. Plus, business banking accounts, including those at State ECU, have business-focused functions and benefits such as integration with accounting software, the ability to complete wire transfers, and more.
5. Invest in Accounting Help
If you’re the DIY type, you may want to manage your business’s books yourself. In this case, accounting, billing, and payroll software will be your best friends. If you’d rather focus on the business not bookkeeping, plan on hiring a professional to keep you on track.
6. Maintain Your Business Credit
Your business accumulates credit just as you accumulate personal credit. Maintain this credit by paying off all your debts as soon as possible, including paying off business credit cards monthly. For loans, only accept terms (interest rates and length of payment) that are viable for your business to repay consistently and on time. If your business credit suffers, it will be difficult to access additional funding in the future or make purchases to grow your business
7. Save for Tax Payments
Many businesses need to file and pay taxes on a quarterly basis. Don’t let these payments take you by surprise. Set funds aside each month to put toward your taxes to ensure you can pay on time and in full.
8. Pay Yourself
Founders and owners are usually the last ones on the list to get a payout. When you’re chasing a dream, it’s easy to put everything you make back into the business. Many small- to medium-business founders neglect to pay themselves, particularly in the beginning. However, not paying yourself isn’t sustainable. You need to compensate yourself to keep the business going.
New Mexico Small Business Resources
The information here only scratches the surface of small business finances. For more assistance, contact these local organizations and programs that help small business owners.
- CNM offers start-up accelerators and other training programs to help entrepreneurs launch and scale their businesses. Trainings cover business start-up, sales and marketing, and accessing capital.
- Santa Fe Business Incubator’s program includes those for early-stage entrepreneurs to assess market potential for their idea and for more experienced business owners to connect to a Trusted Advisor Network, which could result in mentorship or investment.
- WESST helps women and people of color start and grow small businesses with group classes, one-on-one consultations, and access to capital. It hosts a network of U.S. Small Business Administration Women’s Business Centers.
- New Mexico Small Business Development Center offers business planning services, and training in everything from human resources to bookkeeping. The network is also connected to the International Business Accelerator (IBA) located in Santa Teresa, New Mexico. It runs the Procurement Technical Assistance Center, which guides businesses through the process of contracting with government agencies.
We hope this list of essential steps to managing your small business finances inspires you to pursue your dream—or perhaps realize you should keep daydreaming for now. Whatever path you follow, we’re here for you.