Keeping on top of your finances is critical to the success of your business.
Staying on top of the numbers is critical to the success of your small business.
You might think you have a solid understanding of how your business is running, but if you aren't keeping a close eye on your finances, you can't be crystal clear on whether your business is thriving or on the brink of failure.
Many entrepreneurs don't have a financial background, but it is critical that they learn sound financial strategies quickly so they can stay on top of things from the start. That means staying on top cash flow and expenses, knowing your profit margin, following proper accounting methods, knowing your credit score (and how it affects your business), understanding financial statements, and having a proper system in place to track all of your business accounts.
As the vice president of corporate strategy and international expansion for the accounting software provider FreshBooks, Matt Baker understands just how important financial management is for small businesses.
Baker is a money strategist and business coach who helps entrepreneurs solve their most challenging problems. In his role at FreshBooks, Baker helps millions of entrepreneurs grow their business and get paid faster.
We recently spoke with Baker about the importance of sound financial habits, what those habits should be and the biggest financial missteps small business owners make.
Build smart financial habits
Q: What are the most important financial habits that small business owners should practice?
A: First and foremost, small business owners need to make sure they have enough cash reserves on hand – especially those who are just starting to make the leap to self-employment.
Even if you establish a solid client list or book of business on day one, chances are you won't see your first paycheck for at least 30 days. In fact, in FreshBooks' 2019 Self-Employment in America Report, we learned that 28% of Americans who want to become self-employed are afraid to make the jump because they don't have the cash to invest.
In addition, small business owners and freelancers should understand the tax implications of leaving the traditional workforce and becoming self-employed. When you go it alone, you are your own employer; there's no payroll administrator or HR department on hand to deduct all of the taxes that come out of each paycheck.
If you're not filing quarterly tax payments or setting money aside to account for the cost, you are going to be left holding one very large lump sum bill come tax day in April.
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Q: How often should business owners review their financial status?
A: When you become a small business owner, you should treat your business finances the same as your personal finances. Chances are you have a good idea of how much money you have in your checking and savings accounts and what your current credit card balance is.
Because you are your own boss when you become self-employed, your business finances are no different. It's ultimately up to you to track how your balance sheet is shaking out. To stay on top of your finances and ensure you're in the black, weekly and monthly financial reviews are imperative.
Q: What strategies do you recommend implementing to turn good initial financial practices into long-term positive habits?
A: One of the keys to being a successful small business owner or freelancer is establishing a routine that sets you up for continued success.
In addition to weekly and monthly financial reviews so you can stay on top of your books, there are a number of other ways to get into a groove. These include maintaining a budget, paying quarterly tax payments or setting aside the proper amount for tax day, proactively reducing debt, and maximizing tax write-offs and deductions.
According to FreshBooks' 2019 Self-Employment in America Report, 24 million American workers said they want to be self-employed by 2021. If they're going to be successful, they'll need to adopt sound financial practices.
Avoid these small business financial mistakes
Q: What are the biggest financial missteps small business owners commonly make?
A: According to our survey, just 47% of small business owners maintain a budget, and just over half, or 52%, adequately save for tax season.
Failing to maintain a budget prevents entrepreneurs from making informed decisions and identifying problems before it's too late. Not staying on top of your taxes often leaves you holding a bill on tax day that you either can't afford or that is going to blow a hole in your finances.
Q: What are the negative effects of not adopting sound financial habits?
A: The biggest negative impacts are not making sound decisions or identifying problems in a timely fashion.
If you fail to stay on top of your finances, you'll never get a proper handle on how much work you can or should take on; how much income you should set aside for yourself, your bills, and your taxes; or if you can even afford to invest in the tools and equipment you need to properly service your clients and run your business.
These issues have a snowball effect, and they really hurt a small business – or even lead to failure.
Q: What technology can small business owners use to improve their financial habits?
A: Although it's pretty easy to keep tabs on your personal finances with an app or your bank's website, you'll likely need an accounting tool to properly manage your small business's books.
At FreshBooks, we offer an easy-to-use, intuitive, cloud-based accounting platform designed specifically for small to midsized service-based businesses and freelancers.
If you take the time to invest in an accounting software application that works for you, you can avoid the headaches and pitfalls associated with the financial mistakes we've discussed.
Q: What piece of technology can you not live without?
A: It has to be my phone. It's an immediate connection to more content and applications than I can make sense of. Without my phone, I'm merely human. With my phone, I'm a cyborg. I know the temperature, time, my bank account balance and what's trending in social news. I can talk to almost anyone on the planet. I can hire a car, rent a scooter, buy a coffee or play music.
The other piece of tech I couldn't give up would be a washing machine. I've lived without one before, and I would never do it again. It's such a convenient technology. If you don't have a washing machine, you either have to wash clothes by hand (which is hard work) or lug your clothes to a laundromat (which is time-consuming). Washing machines are so underappreciated. They work so hard and get no love.
Q: What is the best piece of career advice you have ever received?
A: I had a professor by the name of Bob Bontempo who talked about how to be happy. He said happiness was due to the number of positive outcomes, not the size of those outcomes, which is why someone who wins the lottery may not experience happiness from that day forward. Instead, you'd rather win a smaller amount but do so a few times a year.
In your career, you want to set yourself up for consistent and frequent positive outcomes. And that's something you can control. For me, it's the sort of advice that demonstrates how to enjoy the journey, not the destination.
Q: What's the best book or blog you've read this year?
A: I recently reread some of Jack London's work. The Call of the Wild. White Fang. The Iron Heel. Very entertaining. Those stories are over 100 years old now. Lots of wilderness and wolf dogs and Native Americans.
Q: What's the biggest risk you've taken professionally? Did it pay off?
A: The biggest risk I ever took professionally was deciding not to pursue a career in the automotive industry. I grew up in suburban Michigan, so almost everyone I knew worked in the auto industry, but I didn't want to do that – I actually thought I would do a Ph.D. and then become a professor or a teacher. To that end, I taught English in Europe for a few years when I was in my 20s.
In 2005, I decided to get into the tech world and joined Google on the sales and operations side. Before coming on board, I had never known that kind of work existed. Doctors, police, lawyers – growing up, you know about those jobs, but it was a big risk for me to try something totally new. I'm really glad I did.
Joining Google helped me see there were other pathways and possibilities for my career. I spent four years there building what is now Google for Work before taking another big risk – pursuing my MBA at Columbia. My family didn't really understand why I wanted to leave Google, which was growing at a massive rate, to go back to school and take out student loans.
But that experience led to my next adventure at McKinsey as a management consultant. All of my experiences so far in my career have given me a solid foundation for the role I have today at FreshBooks, where I get to do what I love the most – thinking about all the things that we're not doing that we could be doing someday soon.
By helping us carve out our strategy, I'm helping more of our customers – self-employed professionals, freelancers and entrepreneurs – successfully grow their businesses.
Q: As a leader, what's the biggest challenge you face?
A: The biggest challenge is communication. It's such a critical and hard-to-define skill. It varies in meaningful ways. Yet it's the essence of almost everything I do.
The beauty is that effective communication has a great harmonizing force. It can create shared meaning and commitment between two people or among dozens. For me, it's always a work in progress.