Summer is the perfect time to do a mid-year review of your business. What’s going well? What are the challenges for the rest of the year and the years ahead?
It’s also a great time to take a look at the business practices that keep your enterprise running smoothly and help secure your financial future. I use these mid-summer months to brush up on my accounting skills, review my business’ cash flow and balance sheets, plan for my next round of quarterly taxes and assess my retirement plans. If you’re due for a mid-year review, here are a few things you may want to focus on.
Review basic accounting practices. Even the best photographer, the most creative designer or the most in-demand wedding planner may still struggle with the basics of accounting. Without a fundamental understanding of accounting tools and practices and a thorough knowledge of cash management, your business venture may be short-lived. What to do? Become better acquainted with the cash moving in and out of your business.
- Do the negative cash-flow numbers for employee salaries, wholesale suppliers, utilities, creditors and leases all add up?
- Do the positive numbers from accounts receivable fall in-line with your expectations?
If your positive-to-negative cash flow is low or unpredictable, resolve to update your balance sheets more often and really understand the numbers behind them. It’s never a bad idea to get more intimately involved with the business of your business.
Silo business and personal expenses. Running our own shop, our business practices can sometimes get a bit informal. Recommit to keeping business and personal finances strictly separate and save yourself a lot of time, trouble and tax problems later. Fight the temptation to mix business and personal income when one or the other experiences a dry spell. Resolve to save six to eight months worth of cash to cover both business and household expenses in case of financial trouble on either side. Having this safety net will help keep your personal and business worlds separate.
Plan and prep for taxes. For the self-employed, properly projecting and paying taxes might be the most challenging thing we do. The active role we have to take in estimating and paying according to the quarterly schedule can be daunting, so enlisting the help of a qualified tax professional is usually an important part of any sound tax advice.
To save yourself a whopping tax bill and the fees associated with underestimating your liability, err on the side of caution when projecting business revenues. Review your previous years’ projections and see how they matched up with the actual numbers.
Were your projections spot-on or too conservative?
How did those old income estimates match up with your business’ growth projections for the same years—and most importantly, how can all of this data inform what you do next year?
Bulk up your retirement savings. Even if your business is just a part-time endeavor and you have a primary, employer-sponsored retirement plan, consider starting a self-employed or small business plan, too. If you already have an self-employed plan in place, review your contributions to make sure they’re in-line with your income and your projected financial needs in retirement. Besides boosting your savings, these plans offer tax deferrals that may help lower your tax liability now. Briefly, the four most common retirement plans for the self-employed are:
SEP IRA. A SEP (or Simplified Employee Pension) Plan, is a traditional IRA with much higher annual contribution limits (for 2012, this limit is $50,000 or 25 percent of the employee’s salary, whichever is smaller).
SIMPLE Plan. A SIMPLE (Savings Incentive Match Plan for Employees) Plan is essentially a compensation deferral plan, similar in structure to an employer-managed 401(k). A SIMPLE Plan requires employers to match anywhere from one to three percent. For 2012, the employee contribution limit for someone over the age of 50 is $14,000.
Solo 401(k). A Solo 401(k) or Single-Participant Plan is similar to a traditional 401(k), but with less administrative maintenance. Typically Solo plans are available only to a business-owner and his or her spouse. Annual limits vary depending on age and type of contribution (salary deferral contributions and profit sharing contributions).
Keogh Plan. Keogh Plans are divided into two types—a defined contribution plan and defined benefit plan. Contribution limits typically mirror the SEP IRA annual limits.
It’s easy to get lost in the day-to-day operations of our businesses and lose sight of the basic financial machinery that keeps things running. So whether it’s time for a mid-year review or just time to slow down and take a look at how the financial gears of you business are turning, the four areas we’ve discussed will get you started.
Kentin Waits is a freelance writer and marketing specialist based in Portland, Oregon. His work has been featured in US Airways magazine and top-rated blogs such as Wise Bread, the Consumerist, and MSN SmartMoney. When he's not writing, Kentin runs a small online antiques business.
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