Simple Fiscal

Helping Small Businesses Scale

burned 100 US dollar banknotes

The black metal box wasn’t a safe, per se, but for 15-year-old me, it protected my entire net-worth nevertheless.

The day I cracked three figures, I kept opening and closing my little black box, counting and recounting the cash inside, exhilarated that I had finally earned more than $100 from my lawn-mowing operations. I called up my friend Steve’s house (this was pre-cellphone days).

“Hello?”

“Get your bike, we’re going to Joe’s Card shop.”

“Be there in 5.”

We peddled our way to our favorite store, the one that sold sports cards and memorabilia. I blew all $100 on Topps and anything Steelers-related. Work hard play hard, right?

Fast forward a dozen or so years to the day I walked out of my cubical job for the last time and into the world of entrepreneurship. I had some cash in the bank (a real bank) and a good head on my shoulders, what could possibly go wrong?

What went wrong was my failure to master basic financial responsibility, a mistake that cost me well over $30,000 of debt and years of setbacks. A costly mistake that has given me priceless lessons and a newfound respect for what it means to make it.

Today we’re going to look at what it means to be fiscally responsible and how to apply those lessons to your small business.

What is financial responsibility?

First, let’s talk about fiscal responsibility. What is it? Is it any different than fiscal stability? Yes and No.

I’d argue that it’s your responsibility to be fiscally stable. Why? Because chances are you didn’t go into business just for yourself. You have people relying on you — employees, vendors, customers, even your family members supported by your income.

As a small-business owner, you made a promise to deliver, and to keep that promise alive, you must understand the underpinnings of financial responsibility.

Financial responsibility, at its core, is nothing more than distinguishing between wants and needs. You might be tempted to think, “Well that’s simple,” but here is a litmus test for your fiscal savviness: how much are you spending on interest a year?

Take all your debts and loans and add up the interest. Also, add up anything that you pay in monthly installments instead of the cheaper yearly installments. (No, yearly installments aren’t discounted, monthly installments are premiums.) That interest isn’t a need. It’s a want, a want for convenience rather than sticking to the core tenants of fiscal responsibility.

What percent of your income is spent paying for interest (convenience)? Is it over 10%?

If you didn’t pass the litmus test, don’t fret. Through a combination of tools, processes, and mindsets you can achieve fiscal stability focused on a strong and healthy future. Let’s dive into the five tenets below.

1. Budgeting

Entire book store shelves are dedicated to the art of budgeting and yet it’s a skill often neglected in our schools and delegated to those with little skin in the game. If you are a small business owner, creating a reliable budget that accurately predicts where your money will be spent for the coming months is imperative.

A budget should be proactive and inform your purchase decisions. Instead of looking at your bank account as one (hopefully) large pile of money, look at it as thousands (or millions) of little soldiers waiting for deployment. Some will fight on the beaches of rent. Others will storm the phone bill.

A budget is nothing more than a plan to stick to your needs.

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2. Pay Yourself First Mindset

Listen, when cash is tight and customers are slow to pay up, you might think that it’s best to deploy your dollar soldiers to the business’s immediate needs. Slow down, breathe.

Adopting a pay-yourself-first mindset is not selfish. It’s an investment. If you are a solopreneur or small-business owner, you are your business’s greatest asset. Investing in that asset has to be your main objective. By paying yourself first, it forces you to be frugal and make better financial decisions with what’s leftover.

I’ll be honest, this piece of advice is difficult for even me to follow. I’ve experienced lean times during my stint as a business owner and I regret not giving myself a bit of compensation for my efforts. I know for sure it would have motivated me to work harder.

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3. Better your tax burden

This is the one fiscally responsible thing I did do right when setting out on my own as a solopreneur. Sure, I signed up for an LLC to keep my personal assets protected but I took things a step forward: I elected to become an S-Corp.

I’ve been harping my praise for S-Corps in my most recent articles and here’s why: S-Corps help to legally restructure your tax burden so that it doesn’t all fall to you as the self-employed…employee. Here’s an example from my previous article to explain how:

Let’s say your business brings in $100,000 after expenses. If you were an LLC, all of this profit would be passed on to you, which means you’d be responsible for the entire 15.3% cut for Social Security and Medicare. $15,300 total.

Now, if you are structured as an S-Corp, you will need to at least assign yourself a salary. Whatever that salary is, that’s up to you. For simplicity’s sake, let’s assume you assign yourself a $50,000 salary. Of that $50,000 salary, you now only pay half of the 15.3% for a total of $3,825 on your W2. The business would be responsible for the other $3,825.

However, now that $3,825 counts as an expense which reduces the other $50,000 to $46,175. That $46,175 of profit is passed through to you as the owner of the S-Corp of which you’re only responsible for Federal and State taxes.

Instead of paying $15,300 in Social Security and Medicare taxes, you and the business only pay an amount dependent on how much salary you take.

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4. Use the right tools and systems

Do you have the right tools in place to issue invoices and get paid in a timely manner? Or are you haphazardly putting together Word Docs and waiting for checks in the mail? Not only that, are you stuffing receipts in shoeboxes and shipping them to your accountant at year-end?

We live in a fast-paced, digitalized age. Sure, antiquated and old-fashioned might be the aesthetic for the front of your coffee shop. But the back of your shop should be a streamlined operation.

Finance and accounting tools have come a long way in terms of simplicity. My accountant Alex manages all the bookkeeping in Xero but I handle all the invoicing and payments with PayPal and Invoice2Go. Everything syncs together nicely and nothing is ever lost because “I accidentally spilled coffee on it.”

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5. Plan for growth

It’s okay if you want to keep things small and comfortable. Your small business may very well be a means to an end. However, there will hopefully come a time when you need to start thinking about what’s next?

Whether you want to grow and expand or focus on iteration and quality, having the resources available to do so will make it all the easier. What do I mean by resources? I mean:

  • Having an accountant on hand who understands your business strengths and needs
  • Cash on hand
  • Good credit to secure debt at friendlier rates
  • An email list
  • Proper insurances purchased for worst-case scenarios
  • Rigorous and tested processes that can one day be handed off so you don’t have to keep doing the work

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Sink or Stable, what’ll it be?

Don’t get me wrong, venturing out into the world of entrepreneurship can be very exhilarating. But if you haven’t mastered the basics of financial responsibility, you’ll end up spinning your hamster wheel, desperately chasing the next buck. Be patient. Do your research. Learn.

And if you need someone to talk to, I know a good accountant.

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