Exploring Types of Loans
Taking out loans can be helpful for a number of expenses. However, it is important to use them responsibly so you don’t end up with unnecessary and expensive debt.
Personal, business and mortgage loans all have different terms, interest rates and qualifying criteria. But knowing your loan options can help you find the best one for you.
Personal Loans
There are many different types of personal loans available, each with its own APR range, loan amount and payoff timeline. Many lenders also offer multiple personal loan options, such as secured and unsecured, to meet unique borrower needs and budgets.
For example, a debt consolidation personal loan can help consumers pay off high-interest credit card balances and reduce their overall monthly payments by consolidating multiple bills into one. And a home improvement personal loan can help homeowners finish home renovation projects that can increase the value of their home and make energy-efficient upgrades.
When exploring personal loan options, look for a lender that considers your credit score, debt-to-income ratio and financial profile holistically when making approval decisions. This can improve your chances of getting a personal loan, even if you have lower than ideal credit. You can find lenders that do this, like OneMain Financial, online or at your local bank. This type of lending can be less stringent than traditional auto or mortgage loans and may provide an alternative option when your credit score doesn’t qualify you for other loan programs.
Business Loans
Many financial institutions offer business loans and lines of credit, from large commercial banks to local lenders and credit unions. These are typically designed for businesses that have been in operation for multiple years and have established a solid credit history. These financing options tend to come with lower interest rates than personal loans but may require a longer application process, Detweiler says.
Business loans are usually installment credit, in which borrowers receive a lump sum of money and pay it back in fixed payments over time. They are generally reserved for more established businesses and often have a specific purpose listed on the application, Detweiler notes.
Often, business loans are secured by collateral, such as equipment or property, which the lender can seize in the event of a default. Lenders also might request a detailed business plan and financial statements. Some lenders might also ask for a personal guarantee and require that a borrower have good or excellent credit to be approved.
Mortgages
Mortgages are one of the most common types of loans, and they come in a variety of flavors. For instance, some are government-backed or insured, while others feature more flexible loan terms and qualifying criteria. Other differences include whether the mortgage is for a primary residence, second home or investment property.
Debt consolidation loans are a good way to pay off high-interest credit card debt and make your monthly payments more manageable. They can be secured or unsecured, and they may have fixed or variable interest rates.
A personal line of credit is a revolving type of financing that gives you a set amount of money to borrow from time to time. You’ll receive a monthly bill with a credit limit, pay a minimum payment and pay interest based on the outstanding balance. Personal lines of credit can be open-ended or closed-ended, and some lenders offer a hybrid solution like a HELOC. Open-ended lines of credit can be tapped again and again, while closed-ended loans require you to apply and be approved for each draw.
Lines of Credit
A credit line offers a flexible way to borrow cash. It’s similar to a credit card, but it may offer a lower interest rate and has a higher credit limit. Like personal loans, some lines of credit require collateral, but others are unsecured.
A business credit line can be a useful financing option for entrepreneurs. You can draw on it as needed, but you’ll need to repay any money you withdraw each billing cycle. This helps keep your balance low and your credit score high.
A debt consolidation loan can help you pay off your outstanding balances in a single payment each month. You’ll have a single monthly payment instead of several, and you can save on interest charges by paying down your highest-interest debt first.
Read MoreA Guide to Small Business Loans – Finding the Right Financing Option
Business loans are one of many ways that small businesses finance their operations. Finding the right lender for your business can be a challenge, but understanding your options is essential.
Make sure your company has tax returns and financial statements prepared by a certified public accountant (CPA) before applying for financing. Lenders review these documents to assess your company’s profitability and financial stability.
1. Bank Loans
Bank loans are the most ideal debt-based financing option, offering competitive interest rates and long terms. However, they are difficult to obtain for newer businesses without established credit or solid business revenue and require a personal guarantee.
Those who can offer solid collateral and good credit may be able to qualify for business lines of credit, which are a revolving source of funding that works similar to a credit card, allowing the borrower to draw on a pool of money as they see fit (while paying only for what is used). Business line of credit offers more flexibility than traditional term loans, making it an excellent option for day-to-day expenses or as a “just in case” emergency fund.
If you’re looking for startup or small-business loans, there are many options out there, including nonprofit microlenders and online lenders. It’s important to compare loan offers, APR, terms, qualifying criteria and fees before deciding on the best business financing solution for your needs.
2. Lines of Credit
Unlike traditional term loans, which require a lump sum that you pay back over time with interest, business lines of credit let you borrow funds repeatedly until your balance is zero. These financing products are typically unsecured (they don’t require collateral like a mortgage or vehicle loan) with limits of $100,000 or more.
Lines of credit are most commonly offered by credit unions and small banks. They may also be available from lenders that focus on a particular type of business or industry. They have more flexible terms than payday or pawn loan options, including lower interest rates.
You’ll need to meet a lender’s requirements for eligibility, which may include providing a business plan and cash flow details. Some lenders allow you to link your bank accounts directly and qualify online, while others offer more in-person applications or phone consultations. You’ll have to make timely minimum payments and pay interest on what you borrow, just as you would with a credit card.
3. Equipment Financing
If you need a new backhoe, credit card processing software or six-speed blender for all those sales guys who do Crossfit after work and can’t function without their morning protein smoothies, there’s a business loan out there that can help you finance it. Just remember that any big investment should be part of a thorough capital budgeting exercise and that you may want to consider alternatives like invoice factoring, merchant cash advance or angel investing first.
With equipment financing, you present the lender with a quote for the equipment you want to purchase; they run through your business and personal financial profile to see if you qualify; and then front you up to 100% of the cost of the equipment in return for a lien on that specific piece of equipment as security for the debt, along with monthly payments and interest rates that vary by lender.
Qualifications for this type of financing can be strict and terms can be long, but you can find lenders online, with local banks, and through the Small Business Administration’s 7(A) loan program.
4. Crowdfunding
Crowdfunding is a way for small business owners to seek funds from a large group of people, rather than individual investors. There are many different types of crowdfunding, and each has its own benefits and risks. For example, equity-based crowdfunding involves selling shares of your business to investors, while debt-based crowdfunding requires you to pay back the money you raise.
In reward-based crowdfunding, business owners give backers a product or service in exchange for their contributions. Other forms of crowdfunding include donation-based, in which business owners ask for donations to cover startup costs or launch a project without incurring debt or offering shares or equity; and loan-based, in which businesses seek funding from individuals who are interested in lending their own money.
No matter which type of financing you choose, it’s important to research your options thoroughly. Xero’s guide to business loans and financing can help you find the right solution for your business. Click here to get started.
Read MoreThe Impact of Tax Reforms – What You Need to Know for the Coming Year
Tax changes affect growth by influencing incentives. For example, lowering marginal tax rates can increase the financial reward for work and savers.
Likewise, changing deductions can distort how investment capital is deployed. For example, some studies show that a long wait for a company to recover capital expenses reduces investment.
1. Inflation Adjustments
Inflation adjustments ensure that income tax brackets, exemption amounts, and deductions rise with inflation (as measured by the chained consumer price index). Without them, people would be pushed into higher tax brackets by rising income alone instead of by an increase in real prices.
The IRS makes these adjustments yearly before the start of the tax year. Whether they will be large or small depends on the pace of inflation over the coming year.
Tax reforms are designed to progressively raise enough revenue for public investment in the economy, while encouraging work and saving, eliminating barriers to inter-state migration, and enhancing global competitiveness of American companies. But they can also cause unintended consequences. These can include higher income inequality and greater compliance costs.
2. Tax Brackets
In addition to inflation adjustments, the IRS is increasing income limits for its seven tax brackets. These new levels could reduce the number of Americans paying taxes in a given bracket. But that number doesn’t necessarily indicate the percentage of their income they will owe in taxes. After all, earnings are taxed progressively and the actual percentage they pay depends on where they fall in the brackets, after deductions and credits are accounted for.
A more accurate measure of a person’s effective tax rate is their total tax liability divided by their gross income. Another potential reform is eliminating tax breaks that encourage immediate consumption, a policy that distorts economic decision-making. It takes people longer to pay their taxes because they have to save for them, which also reduces domestic investment opportunities.
3. Taxpayer Credits
Tax credits can have major impacts on individuals and families. These can cover large expenses such as mortgage interest and charitable contributions, as well as smaller items such as energy-saving adjustments or credit for post-secondary education tuition.
Standard economic theory suggests that these credits encourage labor force participation, as filers must work to qualify for the benefits. However, the elimination of refundable credits like the EITC may reduce this effect.
The tax cuts and other changes are expected to increase after-tax incomes by 1.1 percent on a conventional basis, with the bottom quintile seeing a larger increase in after-tax income than the top 1 percent. On a dynamic basis, adding in the effect of greater economic growth increases these numbers. Changing various aspects of the reform could achieve different distributional effects.
4. Deductions
Deductions are expenses that reduce a taxpayer’s gross income, which reduces the amount of taxes they pay. Taxpayers can choose to itemize deductions or take the standard deduction.
The TCJA limits the ability of companies to deduct interest payments, in part as a way of disincentivizing firms from investing in debt and toward equity. It also limits the deductibility of business investment costs and shifts tax treatment for foreign-sourced profits to prevent firms from shifting earnings offshore.
Changing the availability of deductions could affect decisions by households that itemize, particularly those with top statutory tax rates above 15 percent. For example, eliminating the deduction for mortgage interest and property taxes would reduce the cost of purchasing a home and reduce current homeowners’ wealth, potentially causing them to spend less on other goods and services.
5. Other Changes
Many of the changes made in 2022 will help taxpayers save money by preventing “bracket creep,” which would otherwise push inflation-adjusted incomes into higher tax brackets. In addition, these tweaks will help reduce the need for specialized accounting of corporate and pass-through business income taxes by replacing them with a distributed profits tax that requires only the same type of reporting that is already maintained in regular bookkeeping systems.
But these changes also raise revenue and decrease preferences that enable high earners to avoid taxes. Reducing top tax rates, removing preference for employer-provided health care and retirement savings, eliminating the deduction or interest on student loans and expanding the standard deduction could generate $3.5 trillion in new revenue over 10 years, as could lowering the corporate income tax rate and changing the international tax system.
Read MoreTax Planning Strategies for Real Estate Investors
Real estate investors can reduce their tax liabilities by maximizing deductions and conducting smart property purchases. Having thorough and accurate bookkeeping is essential for identifying and capturing deductions and credits.
One advanced strategy is to accelerate depreciation deductions through a cost segregation study. This can be done in a few years and may not suit all investments.
Depreciation
Depreciation strategies are an important tool for real estate investors, as they can help reduce taxable income and increase cash flow. However, it’s critical to consult with tax professionals before implementing any depreciation strategy.
For example, many real estate investors take advantage of Section 179 expensing and bonus depreciation, which can significantly reduce their tax liability. Similarly, many investors use the straight-line method of depreciation, which allows them to claim an equal amount of depreciation each year for the property’s useful life.
However, the tax savings from these deductions can be more significant if the investor uses a depreciation strategy such as cost segregation, which allows the investor to separate components of the property with shorter recovery periods. This can result in faster depreciation deductions and higher cash flow in the early years of ownership. Additionally, some real estate investors choose to invest in their properties through self-directed IRAs or retirement plans, which offer tax advantages and benefits.
Property Taxes
Real estate investments offer a host of tax benefits that can help reduce your overall tax liability. These include depreciation, the personal property exclusion, 1031 exchanges, and self-directed IRA investments. These strategies can save you money on taxes and increase your returns on investment.
To take advantage of these strategies, you should leverage modern real estate accounting software like Landlord Studio to keep accurate and up-to-date records. This will allow you to accurately report your rental expenses and reduce your taxable income at year-end.
Investors should also be aware that short-term capital gains are taxed at higher rates than long-term ones. Therefore, it is advisable to invest in properties that will appreciate over a longer period of time. This will enable you to reap the benefits of appreciation while keeping your tax liability low. Moreover, you can use other strategies to lower your effective tax rate such as using passive loss rules and maintaining accurate record-keeping.
Capital Gains
Real estate investors often face high capital gains taxes. However, there are several strategies that can help reduce these tax liabilities. These include waiting to sell a property for a long period of time (qualifying for long-term capital gains), leveraging depreciation deductions through cost segregation studies, choosing properties in opportunity zones, and itemizing expenses.
Another strategy that can minimize capital gains taxes is using an advanced tax technique called a 1031 exchange, which allows you to roll your real estate investment profits into a new property with a lower rate of tax. This is accomplished by following the rules of section 1031 of the IRS code.
Lastly, anyone who flips properties should make sure they are forming a strategy to avoid dealer classification, which triggers an extra 15.3% tax on the profit from each sale. To do so, they must demonstrate investment intent and show that each sale is part of a larger plan for future investments.
Interest
Real estate investors can minimize tax liabilities by utilizing a variety of strategies. These strategies include depreciation, using a 1031 exchange, and investing in a self-directed IRA or retirement plan to gain potential tax benefits.
Keeping detailed financial records helps to make tax time less stressful. It allows you to review deductions and credits that may be available and can also provide insight into future liabilities.
Real Estate Investors may be able to claim rental property expenses and use cost segregation studies to maximize tax savings. Additionally, renting properties to long-term tenants provides passive income and can create rental losses that reduce taxable profits.
It is important for real estate investors to consider capital gains taxes when selling properties. This can be mitigated by conducting a 1031 exchange and using the home exclusion to exclude some of the gains from taxable income. By understanding these tax-advantaged strategies, new and experienced investors alike can minimize tax liabilities.
Read MoreTax Credits and Deductions Maximizing Opportunities for Savings
Tax credits differ from deductions because they reduce actual taxes owed dollar for dollar. These tax breaks are a great opportunity for small businesses and individuals to lower their income tax bills or increase their refunds.
Deductions are “above the line,” meaning they reduce your taxable income before your tax bill is calculated. However, tax credits are subtracted from your tax liability after the calculation.
1. Home Mortgage Interest Deduction
Home mortgage interest deduction reduces the amount of taxable income by deducting the homeowner’s interest payments from their federal tax bill. This benefit increases household wealth, and higher homeownership translates into greater consumer spending that boosts the economy.
But the mortgage interest deduction is largely used by higher-income households, and it encourages homeowners to take out larger loans and keep their home equity high. Larger mortgage balances and high home equity increases the risk that households could be stuck with mortgage debt they cannot pay if house prices decline.
Rather than scaling back or reforming the mortgage interest deduction, converting it to a credit would provide more help than today’s deduction for lower- and middle-income households while trimming subsidies for higher-income households. This approach would also reduce the deficit without jeopardizing economic growth or housing market recovery.
2. Child Tax Credit
Raising children is expensive, and even families with low incomes can have expenses like food, utility bills, clothing and education costs. Tax credits can help cover these expenses and encourage saving.
The Child Tax Credit, which is partially refundable, helps most families with children. Its benefits are correlated with health outcomes including lower food insecurity, reduced income volatility and better health.
Families can claim the CTC if their Modified Adjusted Gross Income (MAGI) is less than $200,000 for single filers and $400,000 for married filers. To qualify, children must meet age, relationship and support tests as well as citizenship and residency requirements. If you’re receiving the credit, consider stashing it in a no-fee savings account such as Marcus by Goldman Sachs High Yield Online Savings, Synchrony Bank High Yield Savings or Varo Savings.
3. Education Credits
For those who have a child in college, there are two tax credits that help offset tuition and fees. These are known as the American Opportunity Credit and the Lifetime Learning Credit.
The credit differs from deductions because it reduces taxes dollar-for-dollar, while deductions only reduce the amount of income that is subject to tax. The value of a tax credit can also increase or decrease with the taxpayer’s marginal tax rate, which rises as income increases.
The key to getting the maximum benefit from these credits is careful planning and record-keeping. A qualified tax professional can provide guidance on these and other credits. In addition, the accumulated earnings of a 529 plan may be tax-free when distributions are used to pay education expenses, boosting the benefits further.
4. Energy Credits
A tax credit reduces a filer’s tax liability dollar-for-dollar, while a deduction lowers taxable income by deducting an amount from the gross income. Tax credits are more valuable than deductions, particularly for low- and middle-income households, according to the Urban-Brookings Tax Policy Center.
For example, the bill extends and enhances the nonbusiness energy property credit for up to 30% of the cost to install efficient windows, doors, skylights, water heaters and furnaces in homes, as well as an electric vehicle charging station credit. It also adds battery storage as a new credit for renewable solar installations.
It also expands the renewable electricity production credit to pay 2.6 cents per kilowatt-hour for power generated by wind, solar, geothermal, small wind, biomass, microgrid controllers and combined heat and power properties.
5. Other Credits
There are several other tax deductions that can be useful, including contributions to traditional individual retirement accounts and above-the-line deductions like property taxes, says Josh. Eligible taxpayers can claim these deductions whether they itemize or take the standard deduction. The benefit of these above-the-line deductions is that they lower a filer’s adjusted gross income, which may help save money on Medicare Part B and Part D premiums, as well as other tax-deductible expenses.
In terms of saving money, a credit is more valuable than a deduction, according to financial experts. That’s because credits reduce a filer’s tax liability dollar for dollar, while deductions’ value depends on a person’s marginal tax rate, which rises as income increases. Keeping track of eligible expenses throughout the year and minimizing taxable income are key for maximizing tax benefits.
Read MoreUnderstanding Different Types of Taxes
Learn about taxes on what you earn, what you buy, and what you own. Some are paid directly to the government. Others are collected on your behalf by businesses.
Many states have consumer excise taxes in which sellers bear the legal burden for collecting and remitting sales tax. In contrast, property taxes are a major revenue source for local governments.
Income Tax
A tax is a fee that citizens or corporations pay to an authority. The purpose of taxes is to fund public services such as roads, national defense and education. Types of taxes include income, sales, capital gains, property, excise and inheritance.
The most familiar of these is the federal and many state income taxes that you see deducted from your paycheck. Those taxes help to fund public services such as Medicare and Social Security.
Individual income taxes are levied on wages, salaries, investments and other forms of personal income. In most states, the tax is progressive and rates increase as income rises.
A sales tax is a consumption tax that can be levied at the federal, state and local levels on goods and services. This can be in the form of a value-added tax (VAT), a goods and service tax, a state or municipal sales tax, or an excise tax. Sales taxes can be regressive, meaning that lower-income individuals and households pay a greater percentage of their income in taxes than higher-income residents.
Sales Tax
Sales taxes are a type of consumption tax that is levied by state and local governments on the retail sale of goods and services. They are a key source of revenue for many states, and can also be levied at the county and city level in some jurisdictions.
Most states operate under consumer excise or destination sales tax models, in which the primary responsibility for paying the tax rests with purchasers of taxable goods and services. Sellers serve primarily as collection agents, and don’t have the option of absorbing the tax.
The tax is often applied to items purchased from outside a state’s boundaries, in order to prevent shoppers from avoiding sales taxes through various shopping strategies. It is also a major contributor to the cost of shipping and handling charges. Keeping up with the rules and rates can be challenging, especially as a business grows. But it’s essential to understand these taxes in order to ensure compliance and visibility into a company’s costs.
Property Tax
The property tax is levied by your local government based on the value of your home or other real estate. You may pay this tax directly or it is often included in your mortgage payment. Property taxes also apply to other types of real estate and tangible personal property like tools and equipment.
Property taxes conform to the “benefit principle,” meaning that the taxes you pay should correlate to the benefits you receive from the services your tax dollars fund. These benefits can include public education, fire protection and police and other vital government services.
Your state or local governments set and administer property tax rates, policies and payment terms that can differ from one area to another. You can find more information about property tax rates and other laws at your local government website. You can also call your county or city tax assessor for more details about how property taxes are administered in your area.
Other Taxes
There are many different types of taxes imposed by federal, state, local and special-purpose government jurisdictions. In general, these taxes are based on the type of income you earn or the value of the property and land you own. Some are progressive, meaning that as your taxable income increases, so does the tax rate.
Another popular type of tax is the sales tax, a consumption tax based on the retail price of many goods and services. Some states also have a use tax, which is a similar tax on the storage, use or consumption of taxable items purchased outside the state without paying sales tax.
Local governments rely heavily on property taxes, which are levied on real estate and tangible personal property like machinery and equipment. This is often a classic ad valorem tax, where the property is assessed based on its “highest and best use.” Some jurisdictions tax business personal property as well. For example, many businesses have to pay a property tax on their office furniture and equipment.
Read MoreNavigating Tax Season – Essential Tips for Individuals and Businesses
During this tax season, the right tools can help make the process easier and less stressful. For example, keeping a detailed log of business expenses throughout the year allows individuals and businesses to maximize deductions while also providing a clear starting point for preparation.
In addition to establishing sound accounting practices, utilizing resources like Odoni Partners can support financial planning and compliance, ensuring a successful, seamless tax filing. Learn more about these and other essential tips for navigating tax season below.
1. Stay Organized
When it comes to tax season, the best way to avoid a stress-inducing boatload of documents is to stay organized. A key part of this is to create a file for any tax documents you receive throughout the year. This can be a physical document folder or a digital one like a spreadsheet or budgeting software program.
Then, whenever you get receipts or other tax-related documentation, place them into this file. You can make this a monthly task, and this will help you feel prepared for tax season rather than going on a wild goose chase for all of the crucial paperwork.
Another great tip is to keep a calendar of important tax dates. This will ensure you don’t forget any filing deadlines that can result in penalties.
2. Be Informed
When it comes to taxes, it pays to be informed. That means keeping up with your state-specific filing requirements, as well as tax credits and deductions you might be eligible for. You’ll also want to consider whether any major life changes have occurred over the past year — like a move, a divorce, or the birth of a child — which can alter your filing status.
If you’re running a business, keep track of your receipts and financial records to accurately determine which deductions are valid. This could be as simple as downloading your business credit card statements or creating a spreadsheet to track annual expenses. When you receive your refund (if applicable), make a plan to spend that money wisely, either by paying down debt, boosting your emergency savings fund, or saving toward a financial milestone, like buying a home.
3. Be Prepared
If you’re a business owner, keep detailed records of your business expenses. Whether it’s from receipts, business credit card statements or bookkeeping software, having all the information at your fingertips will save time at tax filing time and prevent errors that could delay your refund.
If you’re a single taxpayer, be sure you have all the documentation you need before your filing deadline, which is April 15 (unless it falls on a weekend or holiday). Make a list of all your paperwork and if you can, file early and e-file to reduce processing delays. And if you’re expecting to owe money, learn more about tax payment options and filing for an extension. This will prevent late filing penalties and interest charges.
4. Be Flexible
Tax season can be grueling for business owners, especially those who work with clients. Clients often wait until the last minute, there is never enough staff and it feels like you’re working 24/7. This is when burnout looms and it’s essential to take steps to avoid it this year.
The key to minimizing your tax burden is planning ahead. Make sure you’re getting the most out of your deductions by ensuring that all expenses are being properly documented throughout the year. Also, if you’re on the itemize-or-not borderline, consider bunching deductible expenses in one year and deferring income in another.
Finally, it’s important for business owners to remember that tax season is a great opportunity to promote services like financial guidance and investment strategies. This can help you build trust and loyalty with your clients and establish a long-lasting relationship.
5. Take Advantage of Extensions
If you’re unsure that you’ll be able to file your federal tax return by this year’s deadline, it’s worth filing for an extension. Depending on the type of extension you choose, you may not have to pay your tax liability until later.
Keep in mind, however, that a filing extension only gives you more time to file, not more time to pay, so it’s best to estimate the amount you will owe and submit an estimated payment as soon as possible to avoid late-payment penalties.
If you’re self-employed, getting a filing extension also allows more time to contribute to a solo 401(k) or Simplified Employee Pension (SEP) account. However, contributions to these accounts must be made by the original filing deadline, which is this year April 18. Organizing these records now can make it easier and less stressful to do your taxes later.
Read MoreFinancial Planning for Entrepreneurs Mapping Out Your Business Future
Entrepreneurs are always working to ensure that business aspects like cash flow and budgeting are in order. However, personal financial planning often takes a backseat, and this can have negative implications down the road.
A well-developed financial plan should include strategies for tracking expenses, establishing clear company goals, and investing wisely. In addition, entrepreneurs should work with a financial advisor and keep up to date on tax regulations.
1. Cash Reserve
As your business grows, it’s important to have some cash reserve available to pay for unexpected expenses. Having this cushion can help you avoid having to interfere with other savings accounts or take on debt, which can delay your growth goals.
It’s recommended that businesses keep three to six months worth of expenses saved in a cash reserve. To determine the right amount for your company, analyze past earnings and expenses using a full-year cash flow statement. You may also want to consider establishing a line of credit in addition to your cash reserves, since this could allow you to maintain a smaller reserve balance while still providing emergency access to funds.
2. Financial Goals
Setting financial goals is a great way to ensure that your business is on the right track. It also encourages accountability and discipline.
One of the first financial goals that entrepreneurs should try to achieve is getting their business to cash flow positive. This is important because it means that they are generating more revenue than they are spending.
Another financial goal that entrepreneurs should set is to forecast their cash flow on a regular basis. This will help them get a better understanding of their company’s finances and how much money they have available to invest. They should also make sure that they are staying compliant with all of the applicable regulations and laws.
3. Budgeting
Entrepreneurs need to have a financial plan for their businesses as well as their personal finances. By creating a budget and tracking their financial goals, they can improve their original standing and increase their growth prospects.
Using a budgeting system can help entrepreneurs get a clear picture of their cash flow, and identify areas where they could save money or direct more towards savings and debt reduction. Adding up all of their sources of income and subtracting automatic deductions for things like 401(k), savings, insurance and more can reveal an accurate picture.
Having an understanding of their finances can help them make better business decisions, and maintain stability during challenging times.
4. Investing
Entrepreneurs can use financial planning to make well-informed choices on finance, investments, and resource allocation. This can lead to improved business performance and long-term success.
Investors can also invest in their own financial knowledge by enroling in courses or workshops, reading books and blogs, or even seeking out advice from a financial adviser (there may be a fee for this service). Expanding your knowledge will help you manage your finances better.
Another important aspect of financial planning is investing for retirement. Unlike employees, entrepreneurs do not have access to employer-sponsored retirement accounts or benefits. Hence, it is imperative that they start saving and investing at an early stage.
5. Insurance
Entrepreneurs often pump their personal savings and assets into the business to help it grow. It’s essential that they engage in financial planning to save for retirement and protect their personal wealth.
A crucial part of financial planning is insurance. Since emergencies and health problems often occur without warning, it’s better to be prepared in advance.
Financial planning also involves budgeting and forecasting. By creating a budget, entrepreneurs can manage expenses and allocate resources effectively. Moreover, by tracking their spending habits, they can identify areas where they can save money. In addition, working with a fee-only CFP® professional can help them navigate complex tax issues and wealth management considerations.
6. Working with a Financial Advisor
Many entrepreneurs pump their personal savings and assets into their business to fuel growth, but they also need to engage in financial planning on a personal level to save for retirement, cover health-care expenses and more. Working with a financial advisor can help with both.
Financial advisors can recommend a variety of investment strategies, insurance solutions and other products that may be beneficial to your situation, including annuities and life-insurance policies. They can also provide guidance on tax strategies and rebalancing your portfolio.
Evaluate your financial plan regularly to make sure you are on track to achieve your goals. Ready to start a conversation with a financial advisor? Compare vetted advisors matched to your needs.
Read MoreThe Importance of Budgeting in Business
Effective budgeting is a crucial step in maintaining financial control for a business. It can help businesses estimate revenue, expenditure and expected profits.
Monitoring the variance between actual and budgeted data helps a business understand where changes can be made to improve the company’s bottom line. This can help businesses secure loans from banks and investors.
Identifying Problem Areas
While it is essential to prevent budget creep and uncontrolled overage, it can also be helpful to recognize the times when a strategic splurge may be warranted. Having a clear understanding of actual expenses, ROI and customer information can help you decide whether an expense that is off-budget should be avoided or is the beginning of something better.
A business budget is a financial document that estimates income and expenditures for a specified period. It is an important tool for businesses as it provides a roadmap for accomplishing business goals and objectives. A good budget is accurate, realistic and clearly identifies the specific revenue targets and expense limitations for each functional area and manager in the organization on a monthly basis.
Some strategies for sticking to a business budget include prioritizing spending needs, involving employees in the process, and using technological tools for efficiency. It is also helpful to compare actual income and spending with the budget on a regular basis. This can help you spot trends and potential problems.
Identifying Potential Issues
A well-formed budget is a roadmap to help you achieve your business goals. It also enables you to monitor the financial health of your business, including cash flow and profits.
A budget allows you to compare actual results with expected results and identify areas where adjustments are necessary. For example, if your sales or customer acquisition costs (CAC) are higher than planned, it may be time to invest in marketing programs and other efforts to increase your ROI.
By regularly reviewing and adjusting your budget, you can prevent unnecessary expenditures and ensure that you have enough money to cover operating expenses. In addition, you can identify potential issues like declining sales or a cash flow shortage and take corrective action before they become critical. By comparing budgets from previous periods, you can see whether you are meeting your business objectives. You can also compare your budget to that of your competitors. This gives you a competitive advantage as you make strategic decisions.
Identifying Potential Solutions
Creating an effective budget requires number-crunching and attention to detail, but it is well worth the effort. It can help you identify potential solutions that can mitigate risks, such as cash flow shortages or declining sales, and keep you on track to meet business goals.
For example, if your budget shows that revenue will decline significantly in the month of August versus what you expected, this gives you an opportunity to prepare by building up reserves. Similarly, if your income increases significantly in the run up to Christmas but you were not expecting it to, then this provides an opportunity to revise budgets for future periods to better plan for the increase in sales and expenditure.
Using historical information and your business plan, you can create a budget that can provide you with the right level of accuracy. This allows you to track actual expenses and sales against your budget, which can help to detect any problems early on.
Identifying Potential Opportunities
Lenders or investors may be more likely to consider lending your business money or investing in it if it has a history of producing well-documented and detailed budgets. In addition, a well-prepared budget gives you the data to back up any financial decisions that you make.
The information that a budget provides also allows you to identify potential problems such as declining sales or cash flow shortages in advance and take proactive measures such as cutting unnecessary costs or reallocating resources to correct the problem before it gets worse.
A business that doesn’t develop and follow a budget is effectively flying blind and will have a much harder time meeting its financial goals. A budget identifies current available capital, estimates expenditure and anticipates incoming revenue, giving businesses the necessary information for making sound financial decisions. Participative budgeting, a method that allows the input of multiple people in the company, can facilitate more informed and accurate decision-making.
Read MoreUnderstanding Financial Ratios Key Metrics for Evaluating Business Performance
Financial ratios use numerical values derived from financial statements (balance sheet, income statement and cash flow statement) to analyze business performance. They are an essential tool for quantifying business performance.
The quick ratio, also known as the acid test ratio, sums a company’s current assets (cash, marketable securities and accounts receivable) and divides it by its current liabilities. Inventory is excluded from the calculation.
Profitability Ratio
Profitability ratios provide insight into a company’s current state and the future potential for growth. They can help entrepreneurs formulate concrete ways to improve profits and attract investors.
For example, net profit margin reveals how much after-tax profit is made for every dollar of assets owned by a business. Companies with higher margins than their competitors are considered more efficient, flexible and able to take advantage of opportunities as they arise.
Ratios can also be used to compare performance over time or against industry benchmarks. It’s important to run them on a regular basis, taking into account seasonality and other temporary fluctuations.
Cash Flow Ratio
A company with enough cash or cash equivalents to cover its short-term debt and liabilities is considered financially strong. It’s a more conservative measure than other liquidity ratios, as it only considers cash and cash-equivalent holdings (excluding accounts receivable).
Lenders often use this ratio as part of their lending criteria and should be evaluated on a monthly basis. It’s also useful to compare the ratio against industry and competitor averages. This is especially helpful for identifying industry seasonality. The cash ratio can be improved by turning over inventory more quickly, reducing working capital and lowering payment terms with customers.
Working Capital Ratio
The working capital ratio illustrates a company’s ability to convert its current assets into cash. A higher ratio indicates more cash-on-hand, but it can also mean that the company is hoarding money rather than reinvesting it in its business. A comparatively low ratio can indicate that the company could have trouble paying its bills or taking advantage of new business opportunities that require quick cash.
To gain perspective on your company’s current liquidity, compare your ratios against those of similar companies in your industry. Use these comparisons to identify trends and improve your business’s efficiency and flexibility.
Days Payables Outstanding
The Days Payable Outstanding metric measures the average time it takes for your business to settle its payables with suppliers. Ideally, your business should be able to use its current assets and cash equivalents to cover all of its short-term debts.
Depending on the nature of your business, you may have different payment terms with your suppliers. For example, a clothing store might need to keep inventory short and have fast turnover, while airplane manufacturers have high-value inventory that requires long periods of time for production.
Using industry benchmarks and calculating your own ratios over time helps you gauge whether your business is on track for success. You can also compare your company to its peers in the same industry and identify areas for improvement.
Accounts Receivables Ratio
The accounts receivable turnover ratio is a measure of how quickly a company turns its invoices into cash. It can be a good indicator of efficient collections practices and quality customers who pay their debts promptly.
This ratio is not without its limitations, however. It’s important to clarify how the ratio is calculated because some companies use total credit sales instead of net credit sales, which inflates results.
Additionally, the turnover ratio can vary greatly throughout the year due to seasonality and other factors. This makes it important to look at the ratio over a long period of time.
Quick Ratio
This financial ratio divides a company’s quick assets — cash and liquid investments such as marketable securities and accounts receivable — by its current liabilities, which are any immediate debts that the business must pay. The calculation excludes prepaid expenses and inventory, which can take a significant amount of time to convert into cash. The quick ratio is used by investors, suppliers and lenders to assess a company’s ability to pay its debts on time.
However, this metric is not without limitations and requires context and qualitative factors when making comparisons between companies in different industries.
Days Working Capital
The Days Working Capital (DWC) ratio is a measure of how long it takes for the company to turn its initial investments in working capital into revenue. It indicates if the company is efficient in managing its inventories, collecting its receivables and paying its payables.
This financial metric differs from the current ratio because it only considers assets that can quickly be converted into cash, including cash and cash equivalents, marketable securities and accounts receivable. The quick ratio excludes inventory and prepaid expenses, which might not be easily converted into cash.
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