Running your own creative small business is no small feat. You might be a one person show or have a small team of people, but either way, all-of-the-things are your responsibility. And getting it all right is impossible.
Oh, you didn’t know? No one has all-the-things figured out. It’s true. Each and every one of us have our own set of strengths and weaknesses, things we love to do and things we don’t, areas of business that come naturally and ones that we have to work really hard at. That’s why we’ve got to be in this together!
5 Big Misconceptions About Your Business Finances
1. Owing money at tax time is a bad thing or your CPA’s fault.
When you owe money at tax time, that means your business generated a profit and a profit means your sales were higher than your expenses. A lot of business owners I talk to want to spend all their profit on equipment or other not-so-necessary expenses before the year-end so they don’t owe any tax. The problem with this thinking is that people end up forgetting why they went into business in the first place! You didn’t work all those long hours just to end up being no better off financially than you were at the beginning of the year, did you? Let’s start to think about owing tax in a different way. Set aside funds throughout the year to pay in each quarter or just have ready when you file your annual taxes. This will make the year-end payment a little easier to handle and will help you fight the urge to spend away the profits on things you may not need.
2. You only need a budget when money is tight.
A budget isn’t something you use or put in place when you’re just getting started or when money is tight. A budget is giving your money a purpose and plan. It doesn’t matter if you’re barely making the bills or bringing in millions every year. If you don’t put a budget in place for your money, you can easily overspend causing financial hardships in your business and personal life. I recommend setting an overall budget for the year then breaking that down by month. You should reevaluate your budget, at the very least, every month to make sure you’re on track or if you need to make some adjustments. A business bringing in $30,000 a month can just as easily be in jeopardy from mismanaged funds as one bringing in $5,000. It’s all about your budget and diligence to follow it.
3. Sales tax and Income tax are the same thing.
These two taxes are easy to get mixed up, but they have a few distinctions to help you keep them separate in your mind. Let’s start with sales tax. This is a tax that your state manages and is assessed to your customers (not you) on taxable products and services (check with your state to see what qualifies). As the business owner, you are simply the collector of the tax. You’ll hold on to it until your sales tax return is due and then you’ll pay it into your state. Income tax is a tax you pay on the federal and state level, with the exception of the few states who don’t have an income tax. They are collecting tax from you, the business owner, based on how much income you made for the year.
4. You need a business degree to be good at business and understand your finances.
This is so far from the truth, it hurts. Sure, it all education helps but, at the same time, everything is learnable. My secret weapon is learning from those who’ve done it before me then putting my own spin on things. None of us know everything, so it’s important to invest time and money into education for the parts of business that are the most difficult for you. You don’t need to be an expert to be the kind of business owner you need to be. You just need the right information, skills, resources, and tools for your business. And that’s one of the reasons why I created Know Your Worth®. If finances are the subject that you struggle with, Know Your Worth® is the resource that you’ve been dreaming of.
5. My business isn’t big enough to worry about setting up a bookkeeping system.
Even if you just have one client right now, putting a bookkeeping system into place is important. It doesn’t have to be a fancy program and in fact, a well-structured Excel spreadsheet will serve most businesses just fine. When you get into the habit of recording your income and expenses on a regular basis, it sets you up for success later on in your business when you have more transactions. If you put this off until your business is booming, you won’t have much time to spend on figuring out the best bookkeeping process for your business. Then you’ll likely put off your bookkeeping until your taxes are due, which can be very stressful.