Basic Financial Literacy For Small Businesses
Have you ever dreamed of owning your own business? Ever want to have a side hustle to get some pocket money? Maybe you discovered something and realize it could be profitable as a business. Well, I've been in that same boat too. Ever since I was a little girl, I grew up around my parents running a small business of their own. I've always admired the freedom and independence of a small business.
This core memory inspired me to run my own small business once I graduated college. However, making this dream a reality takes some research, hard work, and developing the right skills. I've gathered some resources and tips that I picked up from experience that I would like to share. The knowledge I am going to be sharing has to do with American taxes. I will try to keep this as simple as possible with concepts that can also be applied for those that are not based in the U.S. These are general, basic business principles and practices that apply to everyone.
The Benefits of A Small Business
Starting your own business seems scary at first. The key is to break down each step and make sure to accomplish each step. It doesn’t matter how long it takes. What matters is that you’re motivated and consistent to finishing each step. A business needs to generate profit, sustain itself, and it’s something you’re good at. You don't need to be exceptionally talented or some gifted genius in order to run a business. You just need to develop the right kind of skills. Fortunately, these skills can be attainable.
If you have an idea and it’s something that you’re good at, you must do some research on how it can be turned into a profitable business. It doesn’t need to be a new discovery. It can be an idea that improves something. It can be a product or a service. Products and services require skills. How you obtain these skills is up to you. The more time and effort you put into the product or service, the higher the quality of the product or service. You're in the business of selling these skills. What’s great about technology in the present times is you can sell digital products as well.
You can learn more about business by attending college to get a business degree, learn from online, or get some experience with a mentor. Through education you learn about all aspects of business and economy. The benefit of an idea succeeding is that it can generate profit that can surpass the salary of an average paycheck. There is no limit or cap at the amount of money you can make off of a small business. The potential for growth is high once you do research and figure out how to run a small business.
The Cons of Running A Small Business
If you like the comforts of a consistent paycheck and don't desire to have big responsibilities of a small business, then being an employee is the path for you. There's nothing wrong in not wanting to be your own boss. Not everyone desires that lifestyle. Running your own business can go from 9 to 5 to 24/7. It can be mentally, emotionally and physically draining especially if there’s slow growth or if your business is running on a loss. What’s stressful is if you end up owing large amounts of taxes and get in debt. These are the risks that you take on with a small business.
For example, say you have a business idea but don’t have the funds to invest in it. Getting approved for loans or investments doesn’t happen at the snap of a finger. This all depends on how you want your business to exist and the investments needed for it. What if your business requires a huge amount of funding that you don't have? What if you want to scale your business really fast? How will you do so without sacrificing a lot for it? If you’re in a partnership, what if there’s issues with partners not being able to work it out? What if you start off as a corporation and don’t generate profit? These are valid concerns to have. This is why doing research is important before you jump head first into your business.
Understand How A Small Business is Taxed (U.S.-related)
There are three main categories a business functions as:
A sole proprietorship
A limited liability partnership (LLP)
A corporation (C-corps)
Under these umbrellas are more specific entities that you can seek the counsel of your accountant to know more about. These entities are LLCs and S-corps. C-corps are what we generally think corporations are and they are taxed differently from an S-corp. These entities are for-profit which are different from non-profits (non-profits will not be covered in this post). You can consult with your accountant on how these structures are taxed (including retirement plans), how it operates and how it will effect your assets.
Another thing is to keep your business and personal finances separate. This means you should have a separate business checking account. To open one, you will need to provide your business name and your business tax identification number (EIN). You will also need an accounting software that manages your financial statements to keep track of everything. You can do your own bookkeeping or hire a bookkeeper. I’ll revisit this topic in a bit.
If you start off as a sole proprietorship, it’s okay to grow in revenue and eventually register your business as a new entity like LLC or S-corp. You don’t have to register as a corporation right away. It's best to generate profit first. Otherwise, you will deal with being taxed as that entity while not generating a lot of profit.
Business Entity Licenses
When you establish your business, you need to run through a checklist of registering your business and getting licensed for it. Whether your business is brick and mortar, a food truck, a suite, an e-commerce, or even a booth at a festival or convention, there are licenses and permits you must register to determine the jurisdiction on where you can operate your business. You can do your research or consult with your accountant on the steps you need to take for your business.
More information you can research into is trademarking a business name vs. DBA (doing business as) and registering for an employer identification number (EIN) through the IRS. These are all specifically U.S. legal requirements for operating a business. It might vary from country to country especially if you’re a U.S. citizen. For more information, I suggest reading this guide written by Forbes. They broken it down very well.
https://www.forbes.com/advisor/business/how-to-start-a-business/
Selling Platforms (E-commerce)
What are you selling? Are you service-based or product-based? You can actually calculate your profit margin by figuring out your break-even point.
Break-even point = Fixed cost / Contribution margin
Contribution margin = total sales revenue - cost to make product
E-commerce (electronic commerce): buying or selling products over the Internet (online). There is an an online transaction processing with electronic funds transfer and data collection systems. There are five types of e-commerce:
Business to business (B2B)
Business to consumer (B2C)
Business to government (B2G)
Consumer to business (C2B)
Consumer to consumer (C2C)
There are so many different industries and markets. You can research into the industry and market of your interest. By doing so, you can understand how the market is and conduct a SWOT analysis. There are many business terms and jargons that you learn through education or online research in order to better understand these tools.
For those that are selling products (digital or physical), a majority tend to sell on e-commerce websites like: Etsy, Shopify, Wordpress, Squarespace, Ebay, Amazon, Ali Express, Pinterest, Google shopping, Instagram shopping, Depop, Poshmark, drop shipping, and many more that provide sellers an easy platform to sell their products. There are countless YouTube videos that review these platforms giving you an idea of how it’s like to run a business on them.
Personally, I’ve benefitted from using Etsy and Ribblr. For my fiber arts community, these platforms including Ravelry is where most consumers and sellers are at. When setting up your shop, consider the traffic and visitors to your shop. The benefits of these platforms is that it brings in a lot of traffic since most visitors use the website to search for items to buy. If you set up your own shop website, you will have to make sure you can garner as much traffic.
For example, say you're an artist making music. Stream numbers are important. Starting up a YouTube channel and posting music on Spotify, Apple Music, and SoundCloud are platforms made for music. Getting traffic to these platforms to stream your music is how you gain visibility. That’s why it’s important to research and choose a platform that is beneficial for your product or service.
Shipping
Usually with these e-commerce websites, it builds in a software that helps you select and create shipping labels. You are responsible for shipping the product out and will need to get shipping supplies for that. You must be familiar with the different types of shipping carriers. For the U.S., we have the standard USPS. There’s other carriers such as: FedEx, UPS, DHL Express, etc.
If you are in the business of drop shipping, you are responsible for communicating and setting that up with a third-party supplier. For more information about drop-shipping, I suggest reading this blog post: https://www.shopify.com/blog/what-is-dropshipping. This is part of supply chain management that you also have to research into if your product is being made by a supplier.
Records You Should Be Keeping
This is where I am revisiting the accounting and bookkeeping aspect of business. Every business requires accounting. Accounting is how you keep track of everything in organized records and ledgers. If you are selling a product, cost of goods sold (COGS) is the direct cost of producing your goods. Click on the link if you want to know more about COGS.
Once you make a sale, you need to keep an invoice. An invoice is a document that records the products or service delivered to a customer. It has the total amount and payment method. An invoice is a request for payment while a receipt is proof of payment. Getting billed or invoiced is quite similar.
Usually selling platforms for e-commerce websites have a software that keeps record of every sale and collect data for you. For tax purposes, they also generate a Form-1099 so you can use the information to file your taxes. For more information, consult with your accountant or research online the types of tax forms and records you need to keep when you file your taxes.
Funding Your Business
There are different ways to fund your business. Some require lots of funding and some are easy to fund. Funding from yourself (internal) are from: personal savings, credit cards, or from friends and family. Funding from outside of yourself, friends, and family (external) includes: loans, grants, Angel investors, venture capital, and crowdfunding (donations).
Consider how much money you will be needing and how long it takes to repay it (if you're taking a loan). Especially assess how risky your business is. Will it generate profit to cover your debts? Make sure you also apply for business insurance. An insurance agent will help figure out what coverage is appropriate for your business.
Funding your business buys everything you need for it such as softwares, tools, supplies, inventory, etc. If your business operates out of a building, you will need to look into renting a space for your business. For example, say you need a warehouse to store all of your inventory. You will need to look into warehouses and spaces that you can lease for that. Once again, research what your business will need, make a checklist with how much it will cost to obtain it, and consult with a financial advisor.
Marketing, Advertising, & Campaigns
How will customers know about your business? It’s important to have a website and social media pages. In this day and age, everything is online. Even if you're a brick and mortar business, you will need to have a website and social media pages for your business. Every consumer is looking at reviews online before they purchase a product. You can create your website using any website builders such as Wordpress, GoDaddy, Squarespace, Wix, etc. These websites provide plans that help you with a domain and building the pages. If you sell on an e-commerce website that builds a profile for your shop, that is also another way.
When it comes to marketing and advertising, you can invest in tools that promote your product for a price or use social media. Social media is FREE. You can use social media to create content that shows your product, have influencers market your product, participate in collaborations, create campaigns, send PR packages, and even make content that could go viral. There are many social media apps you can use such as: Tik Tok, Instagram, Pinterest, Facebook, Youtube, Twitter, Snapchat, etc.
For example, if you’re active on Tik Tok, I’m sure you’re well aware of the viral video promoting 81st Deli’s chicken salad. The lady saying "you better come up here and get one of these. It’s a chicken salad.” became viral content that is profitable marketing for the deli. You never know what content of yours could go viral. Posting on these social media apps is FREE marketing.
It's not everyday that you can go viral. Consistency is key when it comes to posting content. Posting on social media and creating an audience-base for your business results in loyal customers and fan-base. You develop a relationship with your audience and they impact your business. Investing time into cultivating and nurturing an audience can go a long way.
Scaling Your Business & Hiring Employees
Let’s say, your business is growing fast. If your customer base and revenue is growing rapidly, you will end up scaling it and you need to prepare in how to deal with it. You can expand your business by partnering up with a third-party supplier or you can start hiring employees. If you want to expand your products, you can do so with contacting third-party suppliers to create your product. There are businesses that sell their products and services to other businesses.
You're the Employer
When you hire employees, consult with your accountant on how payroll works. You can also hire someone that sets up payroll. Hiring an employee will cost money and you need to be in a position that pays them fairly. You have to consider their paycheck amount, their health insurance, their retirement plans (social security and Medicare for federal and state), and how much you will need to withhold from their paycheck for taxes. If you are your only employee, you need to figure out how much taxes will be withheld for your own paycheck as well.
To look for potential employees, you can conduct interviews and review resumes through hiring platforms like Indeed, Glassdoor, LinkedIn, Google Jobs, etc. There’s freelancers you can also hire for projects from Fiverr if you are not looking to hire a full-time employee.
You're the Independent Contractor
You can partner up with another business or hire an independent contractor. You can also be an independent contractor. Independent contractors are different from employees. If you are an independent contractor, you are self-employed. There are self-employment tax that is explained by the IRS. There are firms that are independent contractors. For example: doctors, veterinarians, dentists, lawyers, accountants, contractors, etc. are independent professions that offer their service to the public. They run their own firm and provide their service. Their firm entity (as explained earlier) exists as their own business.
Customer Service
There needs to be customer service. Whether they can contact through email, chat, call, message or even in person, there needs to be a way customers can contact you for their needs. They may have questions or issues regarding your product or service. It’s up to you to set up good customer service where the customer can resolve their issues.
There are websites where customers and clients leave reviews on your product or service such as: Yelp, Trustpilot, etc. Some of the selling platforms have a review section where customers can leave their reviews on your shop profile. Excellent customer service and products leads to good reviews. Potential customers look at reviews before buying your product or contacting you for service. Keep that in mind.
Business Ethics
This is actually my favorite topic. Ethics is defined as: "moral principles that govern a person's behavior or conduct of an activity". Personally, I have seen a lot of bad business practices and I’ve learned what not to do. Something that I’ve realized about bad business practice is that it is more of a liability than a benefit. Cutting corners to gain something is only temporary. In the long run, there are consequences. If you care about sustaining your business legally, it’s important to research the laws and consequences if your business break those laws. Every industry and country is different. For the U.S., businesses must follow the Internal Revenue Code.
Experience is a great teacher
I am not about to get into this finance guru lecture where I tell you what to invest in and how to generate profit fast. Success looks different for everyone. My philosophy is that to live a happy life is to have a career that you love. I am simply a small business owner giving insight on how a small business operates. Business is a skillset to learn and the training can be rigorous depending on the industry you're in. Knowledge is power. There’s always more to learn and room to grow in. Whatever you do with your asset, consult with your accountant.
Lastly, small business owners are humans too! Unlike a corporation that is it's own entity, small business owners are just regular people like you and me running their shop. Most of the time, they’re sole proprietors. What I love about small businesses is how many immigrants and POCs in America have their own business operating in their community. Small businesses is what builds a community.
The cultural impact of small businesses introduce products that immigrants and POCs bring over from their culture. The diversity of these businesses and communities introduce other people to other cultures. There's a comfort that community members have when they access products or services by their people. I absolutely adore and love it. Shop local. Support your small businesses. I hope this guide brings insight or spark interest in starting your own.
