Business Series Week: Financials

In today’s post, we’re talking about the most important part of this series. For without having our finances in place, we have no business right? We’re in it to make money! So, before I go any further let me get the disclaimer out of the way. LOL! First, I’m not a financial expert, everyone’s strategic plan will be different. I’m only sharing my opinions and tips. I highly recommend doing your homework and research so that you create the right plan for you and your business. So, with that out of the way, let’s get into today’s post, shall we?!

My first and most important suggestion is to ensure you have saved enough money OR you have a job to take care of your monthly bills while you’re growing your business. Even if you plan to apply for a business loan, you still need to be sure your bills are covered. This might sound like common knowledge, but you’d be surprised how many people have overlooked this because they want badly to be a business owner and they think they have a killer product or service that everybody will buy.

You can have a good product line or service but without a market, that’s all you’ll have…great products that sit on a shelf and a service that isn’t being used. If you won’t be working a job, then having at least two years of income in the bank at a minimum is good. But, I suggest having five years income saved. This gives you more time to establish a consistent income without having to worry about bills. If you are starting up, your first couple of years will be critical as far as longevity. I’ve seen quite a lot of start-ups call it quits after the first two years and I suspect it is, because they didn’t have the income while trying to work their business and they had to go back to a full-time job.

What Kind of Business are You?

I decided to put this section in this post even though it’s not directly about financials but it will affect it depending on how you file. Plus, I listed the pros and cons so to help you decide which business entity would best suit you.

Sole Proprietorship

Hubby and I chose this as our entity at least for now. It’s just the two of us and one of us (me) has a day job. The actual definition of sole proprietorship is a business that legally has no separate existence from its owner. Income and losses are taxed on the individual’s personal income tax return.

The sole proprietorship is the simplest business form under which one can operate a business. It is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name. Our business name is Ken McDougal Photography and so we can do business under that name…write and cash checks too.

Pros: The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. You can get started right away either working in a brick and mortal building or from home.

Cons: The disadvantage is that the owner is personally responsible for all the business debts. This means if we had financial troubles, creditors can legally come after us and we would have to pay back those debts out of our own monies. This entity works best for us because of the nature of our business. We work from home on computers and sell at the local art center. Hubby also sells from his website so there’s not a whole lot of risk involved with regards to debt. (Source: – Sole Proprietorship)


Definition: A legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships.

In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.

Pros: A big pro is that a partnership doesn’t pay tax on its income but “passes through” any profits or losses to the individual partners. At tax time, the partnership must file a tax return (Form 1065) that reports its income and loss to the IRS. In addition, each partner reports his or her share of income and loss on Schedule K-1 of Form 1065.

Cons: For limited partnerships, there’s a lot of filing and administrative to deal with because these limited partners wouldn’t be directly involved in the business. Another con is like the sole proprietorship, the general partners are personally liable for the partnership’s obligations and debts. A third con is that it is more expensive to set up because of the legal and accounting services required. (Source: – Partnership)


Definition: A form of business operation that declares the business as a separate, legal entity guided by a group of officers known as the board of directors.

While this post isn’t geared towards starting big companies but for small business owners. However, I thought it best to include this entity for the sake of information purposes.

A corporate structure is perhaps the most advantageous way to start a business because the corporation exists as a separate entity. You can incorporate your business by filing articles of incorporation with the appropriate agency in your state. Usually, only one corporation can have any given name in each state. After incorporation, stock is issued to the company’s shareholders in exchange for the cash or other assets they transfer to it in return for that stock. Once a year, the shareholders elect the board of directors, who meet to discuss and guide corporate affairs anywhere from once a month to once a year (Source: – Corporation).

Limited Liability Company (LLC)

Definition: A form of business organization with the liability-shield advantages of a corporation and the flexibility and tax pass-through advantages of a partnership.

The LLC arose from business owners’ desire to adopt a business structure permitting them to operate like a traditional partnership. Their goal was to distribute income to the partners (who reported it on their individual income tax returns) but also to protect themselves from personal liability for the business’s debts, as with the corporate business form. In general, unless the business owner establishes a separate corporation, the owner and partners (if any) assume complete liability for all debts of the business. Under the LLC rules, however, an individual isn’t responsible for the firm’s debt, provided he or she didn’t secure them personally, as with a second mortgage, a personal credit card or by putting personal assets on the line. Hubby and I have talked a lot about moving to this entity, because as you can see it’s a great away to protect personal assets plus check out the pros below. We’re not sure when we plan to do this as we’re still investigating it.

Pros: The LLC offers a number of advantages over subchapter S corporations. For example, while S corporations can issue only one class of the company stock, LLCs can offer several different classes with different rights. In addition, S corporations are limited to a maximum of 75 individual shareholders (who must be U.S. residents), whereas an unlimited number of individuals, corporations, and partnerships may participate in an LLC. There also comes some tax advantages too. Check the source above for more information on LLCs.

Cons: Owners of LLCs must meet the “transferability restriction test,” which means the ownership interests in the LLC are not transferable without restriction. This restriction makes the LLC structure unworkable for major corporations. For corporations to attract large sums of capital, their corporate stock must be easily transferable in the stock exchanges. However, this restriction isn’t as problematic for smaller companies, where stock ownership transfers take place relatively infrequently. Also, since LLCs are fairly new, federal and state governments are still looking at ways to tighten regulations since some promoters have used LLCs to evade securities laws (Source: – LLC).

Knowing what business entity works for you is important especially if you will be partnering with other people. You want to make the right decision that will benefit everyone.

Record Keeping, Taxes

If you can afford to hire a bookkeeper, that would be great cause then you can focus on other aspects of your business. If not, then I would use a software program like Quickbooks or similar. Also, filing your business expense receipts into folders by categories is key. As a business owner, you’ll want to keep accurate records and have them organized to make it easy when it’s tax time. I also recommend writing on each receipt the cost and what it was for plus the date. The reason is that sometimes over time the ink on the receipt wears off and you won’t be able to read it. This has happened plenty of times to me. I also keep no more than five years of records. I put each year’s paperwork into a box and with a Sharpie write the years on the outside.

When I got started, I hired a tax accountant which is HUGE! He ensures that I account for every expense. I highly recommend you hire a tax accountant who has your best interests at heart. I don’t understand all the tax laws and honestly I find it all way too complicated. So, knowing I have my accountant on my team who will answer questions for me and is aware of tax breaks and changes is beneficial.

I also love to use Excel to input my monthly income and convert that data to bar and pie charts. This way I can see which months were good and which ones I struggled. With pie charts, I can input sales by product line or type of service. This way I can clearly see if a particular product line should be altered or even replaced for lack of sales. It’s a good thing to study the health of your business so you know how well you’re doing.

Preparing a Business Plan

I wrote about how and why I created a business plan and you can read that post here. This helped me see on paper my goals for the future even though I hadn’t planned on applying for a loan. If you are, then a business plan is mandatory because you need to outline to the lender how much you want to borrow and how you plan to pay back the loan along with an approximate amount of sales you’re aiming to bring in.

Keep the Business Separate from Personal

When I first started working for myself, I made this mistake. Instead of putting the funds for my business in separate accounts, I threw everything into one account and used it to pay bills, buy supplies, etc. Well, not a good idea when it came to preparing the tax files for my accountant to go through. Now, we keep personal expenses in one account and I have a spreadsheet for that and the business goes in another. This way I can see right off what our company expenses and income are. I don’t even think it’s a bad idea to use separate banks. Why not? I think of the old adage, “don’t put all your eggs in one basket.”

Okay, let me wrap this up so that I don’t end up writing a novel, but to recap:

  1. Pick a business entity and be sure to file the name and obtain your business license. Most states have several types so be sure you get the right one so you’ll be legal.
  2. Have enough income to cover your bills either through employment or cash saved up for a few years.
  3. Hire a bookkeeper or purchase accounting software and keep really good records. Recommend hiring a tax accountant to file for you.
  4. Write a business plan. It doesn’t matter if you are applying for a loan or not, a business plan will help you stay on track with your goals, vision, and mission statement.
  5. Keep your business finances separated from personal. Recommend putting your monies in separate accounts or in different banks.
  6. Every quarter, at least, look at your monthly sales to see how well the business is doing. If you’re doing this more often, it will give you time should you need to make any changes to product lines, services, or even policies and procedures. All of which affects the financial health of the business.
  7. One thing I hadn’t mentioned that I will say here is don’t short change your skills and talents and don’t under charge for what you do. I researched the pay scales for the work I would be doing to decide on my hourly rate. I recommend you do the research as well and come up with a fair price for what you do and stick to that. There is value in our hard work and the right customers will pay it with no problems.

Thanks for taking time to read all this and I’m continuing my Business Series Week tomorrow talking about Training. So be sure to come back!