For the first time ever, there is data to clearly illustrate seven financial habits of highly effective small business owners. Based on a comprehensive study of 1,700 small business owners in the U.S., fewer than one in four owners of small businesses currently adopt all seven financial habits.
Those who follow the best practices consistently outperform other small businesses based on annual revenue and report higher levels of satisfaction with their decision to be a small business owner. These seven financial habits will equip small business owners with a new perspective to better help them prepare for the future, without sacrificing their client relationships, craft or team.
Get acquainted with fundamental financial routines.
The first two habits set a foundation for openness to financial information.
1. Regularly review finances -- 69 percent of small business owners do this.
Every business has a natural ebb and flow, a rhythmical pattern of income and expenses. Sometimes it’s due to seasonality. Sometimes it’s due to the duration of projects and the contract terms. In any case, weekly and monthly financial reviews are an exercise in understanding the frequency and scale of your business operations and the extent to which your business may be growing or at risk due to clients who pay late.
2. Maintain a budget -- 47 percent of small business owners do this.
A budget is simply an expectation for business results. At the beginner level, make a budget on the first day of the month to estimate how much income you’ll receive that month and how much you’ll pay out in expenses. Then review the budget compared to actual results at the end of the month. Rinse and repeat. You’ll get better at budgeting. And because of budgeting, you’ll make more informed decisions and identify potential problems before they occur.
Pay the government, lenders and yourself.
The next three habits develop money management discipline. A dollar of revenue isn’t a dollar of profit -- and neglecting this notion can dig a hole 10 feet deep for your business.
3. Save appropriate amount for taxes -- 52 percent of small business owners do this.
Money you set aside for taxes isn’t really your money. It belongs to the government. That’s why it’s best to set it aside immediately and not get it confused with your remaining business income. For federal taxes, the safe harbor rule is your friend. Set aside at least 90 percent of your prior year’s taxes, and you’ll be penalty-free. A common heuristic is that 30 cents of every dollar you earn from your clients is owed to the government.
Related: Here's Why a Little Financial Information is Very Dangerous
4. Proactively reduce debt -- 50 percent of small business owners do this.
Sometimes debt is good. You take on debt in the short-term to enable longer-term health and growth for your business. However, unnecessary debt is a drain on your business. And more importantly, once you have business debt, it’s important to make consistent payments, and proactively reduce the principal amount.
5. Pay yourself a salary from business earnings -- 49 percent of small business owners do this.
The term “salary” may not apply to your business. You don’t have to send yourself a regular bi-monthly paycheck. Instead, you can pull money out of your business account at regular intervals to set aside your personal income. When you pay yourself, it forces you to think about your business and your personal income separately.
Optimize business structure and tax planning.
The final two habits consider legal and tax considerations for the future of your business. You can’t escape liability and taxes but there is an optimal path for your business that will mitigate risk and put more money in your pocket.
6. Establish an optimal business structure for liability and taxes -- 64 percent of small business owners do this.
Common business structures are sole proprietorships, partnerships and corporations. Each structure has different legal and tax requirements. While more self-employed professionals are choosing to incorporate, a corporation might not be the best structure for your business. If you’re not sure which structure is best for your business, you may want to seek professional advice because of the expense involved in changing and maintaining a business structure.
7. Maximize tax write-offs and deductions -- 65 percent of small business owners do this.
Take advantage of every tax benefit available to your business. If not doing so, it’s a disservice to your business. Write-offs and deductions reduce your taxable income and therefore reduce the amount you pay the government. I know from talking to many small business owners that tax planning can feel like “gaming the system,” but it’s important to remember that it’s perfectly legal and adopted by all large businesses. If you’re new to the game, you may want to seek out a tax professional as an investment in the future of your business.
Related: From $0 to Millionaire: How 6 Entrepreneurs Went Broke, The Became Successful
There are more than 20 million small business owners in America not yet adopting all seven financial habits of highly effective small business owners.
What’s more, nearly 1 in 2 small business owners are engaging in any one of the financial habits. This means none of the habits are prohibitively difficult. The challenge is awareness and discipline that these financial habits matter.
Based on the success of many other small businesses, adopting these habits will lead to better business results and more satisfaction with your career choice. Whenever you get stuck, seek out help. Talk to accountants, bookkeepers, lawyers, tax professionals and software providers to help you on your journey. Use this list to ensure you stay focused on the habits that lead to better business results.