Make your Profit/Loss statement sing Happy tunes!
Unlike large businesses with multiple income streams, a small business is more sensitive to fluctuations in its ins and outs. Poorly planned expenses, without regard to tax burden and other operating expenses can leave you in the negative, so here are a few good tips for avoiding the pitfalls of a poorly balanced financial statement before it's too late.
1) Budgeting - Make a monthly budget at the beginning of the year for next year. Try as best you can to include every predictable monthly expense, as well as non-fixed expenses, such as travel to a conference, purchasing an EMR or going on a planned vacation. I like to make budget estimates side-by-side on an Excel Worksheet, with business expenses on the left, and home expenses on the right, tallied month by month, making sure to account for everything as best I can, this way you can see how much income your business needs to produce to cover business as well as home expenses. You should also update and correct your budget as the year progresses. Also, check in with your CPA intermittently if you're planning some new big expenses, like a property purchase, just to make sure it fits in with your budget predictions. An ounce of preparation goes a long way.
2) Determine your tax burden - You have one of two choices here as a small business owner. A) Pay estimated taxes based on current income; B) Pay last year's taxes this year. What? Wait a second, you're saying, "Doc, but I already paid last year's taxes!" Yes, but the IRS gives you a loophole as a small business owner. It lets you pay this year's taxes by matching 100% of last year's taxes. This is good for 2 reasons. If your income is staying the same, then it's a no-brainer. However, if you're like me, and your business and income are growing, it's the equivalent of the government giving you a 12-month loan on your money, since you won't have to pay the difference until the following year when you file your taxes. Great trick, huh? Now you see the reason and need for budgeting. You can put the extra money to work for you in a savings account to make more money before you pay taxes on it. This is more the reason you need to budget your tax burden, and make sure you have enough money to pay come April 15th.
3) Know what things will cost - Don't be surprised by hidden fees or administrative costs. Make sure everything is spelled out when leasing equipment, purchasing an EMR, signing up with a Clearinghouse or a billing contractor to take care of your claims. A small business needs to have a very clear understanding of its yearly expenses in order to survive. If you are planning to expand, make sure you know what that costs also. Estimate, estimate, estimate! And when you think you're sure, check your numbers again. There's nothing worse than hiring a new staff member only to learn towards the end of the year that you didn't make enough money to pay for theirs and your salary.
4) Grow organically - Yeah, like trees, not weeds! Don't set unrealistic expectations and maintain control of your operations. Don't get overly enthusiastic and spread yourself out too thin, betting on the birds in the tree, rather than the birds in hand. Sorry to get cliche-y here, but it gets the point across. Grow your roots deep before you spread your branches too wide, or you'll find yourself toppling over at the next storm. You get the picture? Don't forget the best way to grow is by networking, as I wrote in a previous post. It doesn't cost any money to give out your business card. As long as you're keeping your income ahead of inflation, you're doing a good job.
5) Set up wealth accounts - One for your business, and one for you. This will help keep you from spending all of your income. When it's sitting in your check book, it's very tempting to spend it on CME's, books, or whatever other authorized expenses you may want to run up. Pay your wealth account (which should be earning interest) first, then everything else. Set up an amount that is realistic for you. Before you know it, you'll have built up the down-payment for a house or an office space to own rather than lease. Be smart, start building your wealth now.
6) IRA's, ROTH's, SIMPLE plans, or a SEP - which one is right for you? If you haven't thought about it, it's time to start. Any of the financial websites or your CPA should have plenty of information about this. Choose one that's right for you, and get started.
7) Don't forget End-of-year Gifts - Budget for it, and remember that they are tax-deductible as a business expense. If your referrals are your lifeline, showing gratefulness for the year past is one of the best ways to ensure a steady stream of future referrals. Even if a particular doctor didn't send you many referrals, consider sending them a gift if they are a potential source of future referrals. Don't treat people based on the past. Everyone is a pluripotential cell when it comes to referrals, so leave the door open. Chocolates and food may feed their staff's tummies, but the best gift that personalizes your thankfulness is wine or a good bottle of champagne or port.
Good luck with your finances, and here's to a Succesful 2007!!