Episode 103: Bookkeeping Strategies and Business with Greg Higdon
This week I sat down with bookkeeper, Greg Higdon to discuss the importance of having a bookkeeper and what working with one can do for your business.
Greg Higdon is the Founder of Grow the Books, a bookkeeping company for small businesses. With over 13 years of experience in education, he teaches his clients so they are empowered and armed with a clearer understanding of what their numbers mean for their business decisions. When he isn’t balancing books and helping clients you can find him roasting coffee, drinking coffee, and reading about coffee.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
The importance of understanding your profit and loss statement
What a bookkeeper can do for you
The difference between gross and net income
How bookkeeping plays a part in your taxes
The tax challenges you’ll face if you don’t keep up with your books
Bookkeeping issues Greg tends to see when they come to him for help
Some of the terms on your income statement and what they mean for your business
The benefits of giving your business income and expenses subcategories
How to know how much your business should be spending in marketing, personnel, sales, etc.
How often you should be reviewing your profit and loss reports
Comparing hiring out versus doing your own books
What to look for when hiring a bookkeeper
If you want to do your books on your own, do this to make things easier on you
One of the fun parts of being a financial planner is getting to field and answer questions from clients and readers all around the country. In these Work Your Wealth episodes I’ll be taking time to address and answer questions I’ve come across from readers and clients throughout my career. Today I’m talking about the 5 business lessons I’ve learned and sharing some details (and numbers) behind our company.
Get Uncomfortable Fast
Connect with People Outside of Your Industry
Delegate and Learn to Let Go
Find Your Three Pillars
Find Your Blue Ocean
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
Workable Wealth is celebrating a birthday!
Where Workable Wealth started and what it has grown into
Tools WW leverages to help clients along the way
Why WW believes in being accountability partners for its clients
Why you should be comfortable with being uncomfortable
How leveraging social media helped Mary Beth get uncomfortable
The importance of connecting with people outside of your industry
A crucial step to being successful in scaling and growing
The structure of and who is on the Workable Wealth team
Have you found your “three pillars”
The role mentorship has played in the growth of Workable Wealth
Why a mentor who challenges you is a perfect mentor
Workable Wealth wouldn’t be where it was today without masterminds
How Mary Beth’s “business bestie” helped her find time for her
Why your blue ocean doesn’t have to look like everyone else’s
A new product WW is looking to roll out in the coming months
For most of us, the first dollar made is always special. Some of us even frame that dollar bill and hang it in a place of honor along with degrees, certifications and plaques. But for business owners, there’s often another milestone that gets forgotten: the first dollar you actually pay yourself from the business that you created. Paying yourself from your own business is an important step in setting up a healthy, functioning enterprise. After all, what’s the point in starting a venture that won’t ultimately benefit you? Unfortunately, many business owners don’t put much thought into that process – at the cost of their own misfortune. There are plenty of considerations to take on before you write yourself a check, and a few you probably wouldn’t think of. Here are some items to take into account as you reap the benefits and cash in on your hard work.
Pay yourself based on last month’s earnings. Projecting your income is difficult for new business owners, who may still be finding clients and getting used to the market cycle of their industry. You can remedy that by basing this month’s salary on last month’s earnings. This way, you won’t be forming your spending habits based on the current month, which is still in flux.
Don’t forget to deduct taxes. One common mistake that new business owners face is forgetting to set aside money for taxes each month. Depending on how your business is structured, you’ll want to set aside between 30 – 35% of your net business income (after expenses) on a monthly basis into a separate bank account. This will ensure you have the funds on hand to pay quarterly estimates. Pay yourself after you’ve set aside for taxes or ensure a portion of the taxes are factored in to being withheld from your paycheck if you’re also doing payroll.
Pay yourself a set amount. This is my method of choice. Instead of zeroing in on a percentage of income to pay yourself, simply choose to give yourself a salary and decide on an amount to be paid at the same time each month. To do this, you can schedule automatic transfers from your business account to your personal checking account. Any excess funds can build up in your business account and act as a buffer when times slow down. You can modify the amount if you find yourself earning more or less over time.
Your salary depends on how your business is structured. Sole proprietors have the most freedom in how they’re paid. You can transfer money every time your invoice is paid or once a month. Those with other business structures may have strict rules on how they’re paid, especially s-corps or corporations. Make sure to consult an accountant to verify that you’re paying yourself correctly per government regulations.
Change your tax structure and get paid differently. While many business owners start as sole proprietors, they may decide to change their business entity once they become more established. Some structures require that you pay yourself a fair market wage and then receive any remaining profits, which will be taxed at a lower rate. This can save you money on taxes, but can also get more complicated. Consult a tax professional who can tell you what forms to file and how much of a salary to draw.
Keep separate bank accounts. Having separate bank accounts is a must for any business, no matter if you’re working alone or with a small team. A business account provides proof to the IRS that you have a business and not just a hobby. When it comes to getting your paycheck, you can schedule automatic transfers from your business account to your personal account or do it manually every time a client pays you. You should also use a business credit card for all expenses and use a personal credit card for your regular spending. This will also help you divide your expenses when tax time comes.
Consider business and personal goals. When it comes to determining how much money you’d like to or need to take home from your business, be sure to consider your personal lifestyle expenses along with the goals you have for your business. Can you reduce your take-home pay while you invest in team growth and putting systems in place? Can you reduce your personal lifestyle expenses and goals while you build your business? What are you hoping to achieve in your personal and professional life in the next year to three years? Are you setting aside for those things? Be sure to consider how outside factors can influence your pay and adjust where necessary.
As you may know, the world of entrepreneurship comes with a variety of pluses and minuses. Many people strive to build their own businesses in order to set up a passive income stream and flexible work life arrangement that allows them to balance time with family alongside time following passions. The potential downside to venturing down your own path is needing to learn how to adequately handle the lack of stability or ongoing recurring revenue that a typical employee / employer relationship would set you up with. Having a variable income makes it harder to budget (but it can be done) and also means you have to be even more proactive in setting aside money for retirement, because there isn’t an employer looking over your shoulder who will set it up for you.
When it comes to saving for your future self, where do you start and which is the best option on for you? Read on for an overview of three retirement accounts that are great options for entrepreneurs.
The Solo 401(k):
What it is: A Solo 401(k) is a traditional 401(k) that covers a business owner with no employees or that person and his or her spouse.
Pros: With a Solo 401(k), you can shelter more at a lower income level than with a SEP IRA. In addition, if needed (although not recommended), you have the option to borrow from your balance (up to a limit). There’s also the ability to take advantage of the Roth option through employee deferrals.
Cons: If you’re working a day job while starting your business on the side – this account may not be your best bet if you’re already stocking away into a 401(k) plan. Once you have over $250,000 in the plan, you’ll need to file an annual Form 5500, so beware that there is some paperwork involved. Be sure to check on the fees involved with set up at your custodian.
Max 2014 Contribution: With a Solo 401(k), a business owner can make elective deferrals up to 100% of earned income up to an annual maximum contribution of $17,500 in 2014 and employer non-elective contributions of 25% of compensation, with total contributions not to exceed $52,000 for 2014.
Contribution Deadline: Your 401(k) must be set up by December 31st and funded by your tax return due date in order for contributions to apply for that year.
Simplified Employee Pension (SEP) IRA:What it is: A SEP IRA is a retirement account that allows for a contribution up to 25% of each employee’s pay (and 25% of your net self-employment income).
Pros: These accounts allow for a lot of flexibility as there is no requirement that you need to contribute each year, which allows you to evaluate on an annual basis as to whether or not the funds are available and how much you can reduce your taxes by.
Cons: If you’re in a business that is growing and taking on employees, this plan can get expensive as it must include all eligible employees over the age of 21, who have worked for the employer in 3 of the last 5 years and received at least $550 in compensation throughout the year. Also, there’s no Roth option for a SEP IRA.
Max 2014 Contribution: Annual contributions are limited to the smaller of $52,000 or 25% of compensation. Contribution Deadline: New plans can be set up and contributions made by the due date for filing your federal income taxes for the year.
Savings Incentive Match Plan for Employees (SIMPLE) IRA:
What it is: A SIMPLE IRA is a retirement plan designed for and available to any small business with 100 or fewer employees.
Employer is required to contribute each year either a matching contribution of 3% of compensation or 2% nonelective contribution for each eligible employee (meaning the employer contributes even if the employee doesn’t).
Pros: Easy to set up
Cons: If withdrawals are made from the plan within the first 2 years, the 10% penalty is increased to 25%.
Max 2014 Contribution: An employee can contribute $12,000 in 2014.
Contribution Deadline: Plans must be set up by October 1st of the year in which created and all employee contributions must be made by December 31st.
No matter which account you choose, get started with saving for your future today. Start small and automate – you’ll be on your way in no time!
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