Navigating the financial landscape is paramount for small businesses to thrive, but there are ample opportunities for errors that can hinder success. In this article, we’ll go over key strategies that small businesses can implement to sidestep common mistakes and achieve financial stability.
Prudent Budgeting
Effective budgeting is the foundation of sound financial management for small businesses. By creating a comprehensive budget that accounts for both fixed and variable expenses, you can gain better control over your finances and allocate resources strategically. Regularly review and adjust your budget to reflect changing circumstances and priorities, track expenses, and review financial reports to ensure that your business remains on track financially.
Build an Emergency Fund
Unforeseen expenses and economic downturns can pose significant challenges for small businesses. Building an emergency fund provides a financial safety net, which will help to weather unexpected storms without jeopardizing business operations. Aim to set aside a portion of business revenue each month into a dedicated savings account, gradually accumulating a reserve that can be tapped into during times of need.
Monitor Cash Flow Closely
Keep a close eye on your cash flow by consistently monitoring incoming and outgoing funds. This helps to identify financial red flags early on, such as cash flow issues, decreasing profitability, or unforeseen expenses, so you can combat these issues before they get out of control. To optimize cash flow, implement strategies to accelerate receivables and delay payables where possible. Additionally, consider leveraging digital tools to streamline invoicing, payment processing, and financial reporting.
Diversify Revenue Streams
Relying heavily on a single revenue source can leave your business vulnerable to market fluctuations and industry disruptions. Diversifying your revenue streams can help mitigate this risk and create a more resilient business model. Explore opportunities to expand your product or service offerings, target new customer segments, or expand to adjacent markets to diversify your income sources.
Negotiate Favorable Term
Effective negotiation can result in significant cost savings and improve your bottom line. Whether it’s negotiating with suppliers, contractors, or landlords, don’t hesitate to advocate for your business’s interests. By securing favorable terms and agreements, you can reduce expenses and enhance profitability.
Invest in Technology
From accounting software to customer relationship management (CRM) systems, investing in technology tools can help automate repetitive tasks, improve decision-making, and empower your team to work more effectively. Invest in technologies that will address your business’s specific needs and produce tangible benefits.
Seek Professional Guidance
Don’t hesitate to seek guidance from experts like accountants, financial advisors, and business consultants. These professionals can offer valuable insights, expertise, and strategic advice tailored to your specific business needs. Whether you’re seeking guidance to optimize tax strategies, create a growth plan, or navigate complex financial regulations, their assistance can be instrumental in helping to avoid pitfalls and ultimately achieve financial success.
Small businesses are not immune to the effects of broader economic shifts. As highlighted by the pandemic, major global and domestic events have the potential to profoundly influence businesses across the board, regardless of size. In 2024, larger economic conditions and fluctuations could have a significant impact on small businesses. Read on as we delve into four hurdles that have the potential to affect small businesses this year.
Economic Uncertainty
The previous year presented challenging economic hurdles for businesses of all sizes. Surging inflation significantly affected businesses, leading to spikes in overhead expenses and interest rates. Although recent data from the Office for National Statistics (ONS) indicates a gradual decline in monthly inflation rates, they still surpass the government’s targeted 2%. Small businesses will likely feel a greater impact compared to more established businesses, given their absence of cost-saving benefits from economies of scale, which typically provide some breathing room during challenging economic climates.
Political Tensions
Election years can introduce some unpredictability and prompt a certain level of economic insecurity. Businesses and investors may hesitate to make significant decisions until they have clarity on the direction of future policies, which can lead to a slowdown in economic activity. Additionally, campaigns and debates that focus on economic issues can contribute to market volatility.
International Instability
Ongoing geopolitical pressures, such as the conflict in Ukraine and the hostilities between Israel and Hamas, can affect international trade and the overall U.S. economy. These tensions, as well as others around the globe, have the potential to spark trade conflicts and disrupt the international movement of goods and services, potentially resulting in shortages of raw materials and production delays. This, in turn, can escalate import and export expenses, contributing to overall price hikes.
Is a Recession Happening?
This has been the question posed by businesses and consumers since late 2022. A lingering uncertain economic forecast could make companies hesitant to invest in bigger expenses, such as new research, equipment, or real estate. While the Federal Reserve’s incremental interest rate hikes have helped to suppress inflation, whether or not we’ll come out of this economic rollercoaster with a “soft landing” is still a question mark. Small businesses should still be preparing for the possibility of a recession this year.
As of January 1, 2024, a series of Social Security changes took effect, influencing both the benefits received by beneficiaries and the eligibility criteria. Whether you’re currently a beneficiary or in the process of applying this year, you’ll want to be aware of these significant changes. In this article we’ll go over the most important points to know.
New Year, Bigger Checks
Annually, the Social Security Administration (SSA) implements a cost-of-living adjustment (COLA) to ensure beneficiaries can keep up with rising expenses. The adjustment considers the percentage shift between average prices in the third quarter of the present year and the third quarter of the preceding year.
The COLA for 2024 is 3.2%, so monthly payments for recipients increased by that amount beginning in the new year. According to the SSA, that’s an average monthly increase of about $50.
When it comes to the timing of your payment, it still depends on your date of birth, adhering to Social Security’s standard payment schedule. Typically, if your birthday falls within the first through 10th day of the month, your payment will be processed on the second Wednesday. For those with birthdays between the 11th and 20th day of the month, payments are scheduled for the third Wednesday. If your birthday occurs after the 20th day of the month, you can expect your payment on the fourth Wednesday.
New Year, High Social Security Taxes
Because the Social Security tax wage base also increased by 5.2%, wealthy taxpayers could be subject to higher taxes. The Social Security tax wage base for 2024 is $168,600, which is up from $160,200. This means that some workers will be paying about $521 more in Social Security taxes than they would have paid if the wage base didn’t increase. Additionally, self-employed workers are taxed at 12.4%, meaning they could owe an extra $1,041.60.
Full Retirement Age and the Earnings Test
There are two significant factors to be mindful of when it comes to Social Security benefits: full retirement age (FRA) and the earnings test.
While you can begin receiving benefits as early as age 62, you become eligible for full benefits upon reaching the FRA, determined by your birth year.
For instance, if you were born in 1962, you would reach your FRA at 67 years old. However, if you were born in 1964, your FRA would be 67 years and 8 months, requiring an additional eight months of patience compared to those born in 1962. This illustrates how FRA varies based on the year of birth, impacting when individuals become eligible for full Social Security benefits.
As for the Social Security earnings test, this becomes relevant if you’re still working and earning income while receiving Social Security and have yet to hit FRA (it’s also why many experts suggest holding off until FRA).
Essentially, surpassing a specified income threshold triggers the SSA to withhold a certain amount above that limit. In 2024, for workers who won’t reach FRA the entire year, the earnings test cap is $22,320. This means $1 in Social Security benefits will be withheld for every $2 in earnings that exceed $22,320. For workers who will reach FRA at some point during the year, the earnings test cap is $59,520. This means $1 in Social Security benefits will be withheld for every $3 in earnings that exceed $59,520.
Keep in mind, this is just a temporary hold. Once you hit FRA, your benefit checks will factor in those temporary withholdings. Also note that earnings from investments or payouts from retirement plans, for instance, are not considered in the earnings test.
Navigating the complex landscape of taxes as a self-employed professional can be overwhelming, but implementing effective tax strategies can help you shift from paying an excess of taxes to retaining more of your income. In this article, we’ll explore some key tax strategies that will help you keep more of your hard-earned money.
Choosing the Right Business Structure
Selecting the appropriate business structure is foundational to optimizing your tax situation. Sole proprietorship, partnership, limited liability company (LLC), S corporation, and C corporation each have distinct tax implications.
For many self-employed professionals, an LLC offers a balance of liability protection and tax flexibility. It combines a corporation’s limited liability aspects with a sole proprietorship’s simplicity, allowing for pass-through taxation while safeguarding personal assets.
On the other hand, an S-Corp can be advantageous for self-employed individuals aiming to minimize self-employment taxes. By structuring income into a reasonable salary and distributions, S-Corp owners can potentially save on taxes. Furthermore, the flexibility in offering fringe benefits, which can include health and life insurance, retirement plan contributions, and other perks makes an S-Corp structure a strategic choice for tax optimization and fostering business growth.
Itemized Deductions vs Standard Deductions
Understanding the differences between itemized deductions and standard deductions is crucial for self-employed professionals. While the standard deduction provides a fixed reduction in taxable income, itemized deductions can potentially yield greater tax savings if you have significant qualifying expenses. Common deductible items include business-related travel, home office expenses, and professional development costs. Carefully tracking and documenting these expenses can contribute to substantial savings during tax season.
Maximizing Retirement Accounts
Taking advantage of various retirement accounts can reduce taxable income and secure a financial future. Contributions to Individual Retirement Accounts (IRA) and Simplified Employee Pension (SEP) IRAs are tax-deductible, providing an immediate benefit. Solo 401(k) plans, designed for self-employed individuals, allow for higher contribution limits, enabling professionals to save more for retirement while minimizing their tax liability.
Understanding Constructive Receipt
The tax concept of constructive receipt states that income is taxable when it’s made available to you, even if you haven’t physically received it. Self-employed professionals can optimize tax planning by strategically timing invoices and income recognition. For instance, deferring income to a later tax year can help minimize current tax liability. Keep in mind that effectively leveraging this flexibility requires maintaining precise records and compliance with tax regulations.
Investing in Real Estate and Rentals
Incorporating real estate rental properties into an overall tax strategy offers diverse opportunities for tax benefits and savings. Property owners can capitalize on depreciation deductions, enabling them to deduct a portion of the property’s cost annually. This deduction can substantially lower taxable income, effectively reducing the overall tax liability.
Health Insurance Plans and Premiums
Health insurance premiums for self-employed professionals are generally deductible, reducing taxable income. Alternatively, S-Corp owners can generate significant tax savings by establishing a group health insurance plan, allowing the S-Corp to cover premiums through payroll. The utilization of Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) provides additional avenues for entrepreneurs to reduce taxable income, offering tax-free contributions, growth, and withdrawals for qualified medical expenses.
At some point in your employment journey, you’re going to find yourself at a crossroads – whether you voluntarily quit a job for a new position or face an unexpected layoff. Amidst the emotional and logistical challenges of these changes, one crucial aspect that requires attention is your 401(k) plan with your former employer. Here’s how to manage your 401(k) plan when employment changes.
Assess Your Options
When you leave your current job, you need to evaluate your available options for your 401(k). Typically, these are your main options:
Leave it be: In some cases, leaving your 401(k) with your former employer may be a viable option, especially if you’re content with the plan’s performance and fees. This option is often convenient and allows you to maintain the tax-advantaged status of your retirement savings. However, you won’t be able to make additional contributions, and you’ll need to manage the account independently.
Roll it over into your new employer’s plan: If your new employer offers a 401(k) plan and allows rollovers, transferring your 401(k) to your new employer’s plan would allow you to consolidate your retirement savings, making it easier to manage. Be sure to research the fees and investment options of the new plan before making a decision.
Roll it over into an Individual Retirement Account (IRA): Transferring your 401(k) funds to an IRA provides more control over your investments and may offer a broader range of investment options compared to employer-sponsored plans. IRAs are not tied to your employer, offering flexibility and portability. Be mindful of fees and investment choices when selecting an IRA provider.
Cash Out: While it’s possible to cash out your 401(k) when you leave a job, it’s generally not advisable. Cashing out comes with tax consequences, including penalties for early withdrawal if you’re under 59 ½. Additionally, you’ll miss out on the potential long-term growth of your investments.
Convert it to a Roth IRA: If you’re willing to pay taxes upfront, you can convert your traditional 401(k) into a Roth IRA. You will pay income taxes on the amount converted, but qualified withdrawals in retirement are tax-free. This option may be beneficial if you expect to be in a higher tax bracket in the future.
Understand Tax Implications
When contemplating what to do with your 401(k), it’s important to understand the tax implications that could be triggered. Cashing out, as mentioned, may trigger taxes and penalties. On the other hand, transferring your funds without a direct rollover may result in mandatory withholding. To avoid unexpected tax bills, consider consulting with a financial advisor who can offer guidance based on your personal situation.
Stay Informed About Deadlines
The different options available for your 401(k) are all subject to different deadlines. Missing these key deadlines could limit your choices. Some plans may require you to take action within a certain timeframe, so it’s imperative to stay informed about these deadlines to make the most informed decision possible.
Seek Financial Advice
Navigating the management of a 401(k) plan on top of a job transition can be stressful. A financial advisor will be able to offer valuable insights tailored to your specific circumstances. They can help you weigh the pros and cons of each option and guide you toward a move that aligns with your long-term financial goals.
