Top 7 Financial Considerations When Starting a Small Business

By MBO Partners | February 26, 2024

consultant working on computer

Key Points

When starting an independent business, set a goal for your desired income.

Be sure to set aside enough of your income for tax payments and expenses.

Manage cash flow by staying organized, being aware of payment terms, and maintaining enough operating capital.

When starting a small business, there are many financial considerations to consider. Maintaining a consistent pipeline of work, marketing your services, and building your brand are big pieces of the puzzle, but to make a sustainable income and operate compliantly, you’ll need to think about your finances as well.

Here are seven financial management topics to review before starting your business.

1. Desired Income and Bill Rate

When starting your business, it’s a good idea to set a goal for your desired amount of income. That number will dictate many important decisions as your bill rate, business purchases you make, and type of clients you target.

With your desired income number in mind, you’ll want to consider what your bill rate is—how much you plan on charging clients. There are a few ways to calculate this number:

  • Cost-based method: considers the costs you need to cover to make your target income.
  • Market-based method: considers the supply and demand of your services.
  • Value-based method: considers the value you provide to your client.

To play around with different bill rate numbers and calculations, check out MBO’s bill rate calculator.

2. Taxes

As an independent contractor, paying taxes will be different than what you are familiar with. You should plan on playing at least 30-35% of your gross income in taxes. This will include income tax (per your tax bracket) as well as both halves of Social Security and Medicare (FICA). This is also known as the self-employment (SE) tax.

You will also be paying estimated tax payments quarterly. Because taxes are not taken out of payment you receive from a client, paying taxes quarterly helps to eliminate paying a huge tax at the end of the year. To file your taxes, you’ll generally use form 1040-ES, Estimated Tax for Individuals to calculate and pay these taxes. This form contains blank vouchers you can use to mail in payments, or you can make payments online using the Electronic Federal Tax Payment System (EFTPS). If you are not familiar with paying taxes as an independent contractor, it is always helpful to consult a tax expert to get your questions answered—especially the first time around.

Filing Self Employed Taxes: What You Need

3. Expenses

Running your own business means that you get to choose what you invest in. While it can be tempting to outfit a new office with the latest technology and comfy furniture, you’re better off playing it safe and only buying what you truly need when you first start out.

While high-quality technology might be a necessary purchase, a top-of-the-line ergonomic chair might not be essential. Before making any big purchases set a budget for yourself and list out what you truly need. Be sure to consider what reoccurring expenses you’ll have as well such as office supplies or software subscription renewals.

Setting a Budget for Small Business: Saving vs Spending

4. Vacation

One of the biggest perks to working independently is better work-life balance. While your choice of vacation time might sound great in theory, it is often harder in practice. It can be difficult to turn down work to take time off or put a hold on projects to take a trip. But keep in mind that working long hours and through holidays can lead to exhaustion and burnout, and ­­­defeat one of the reasons you went independent in the first place.

Taking a vacation is a matter of planning ahead. That means letting clients know well ahead of time when you are not going to be available and putting in some extra hours if needed. Be sure to set boundaries with clients so they know what to expect but also how to reach you in the case of an emergency.

How to Take a Vacation as an Independent Professional

5. Payment Terms

If you’re new to independent contracting, you might not be familiar with payment terms. Payment terms are typically established in a contract or Scope of Work (SOW) and outline when and how a client will pay you. Typically, the bigger the client the longer the payment terms. Typical payment terms are around 30 days, but larger clients may have payment terms up to 90 or 120 days.

This is important information to consider, because you won’t get paid for your work immediately when you finish it. Consider payment terms when managing your cash flow and make sure you have enough operating capital coming in to stay on top of your expenses.

How to Bill and Invoice Clients: 10 Steps to Get Paid on Time

6. Business Credit

Business credit is a track record of a business’s financial responsibility that companies, investors, or financial organizations use to determine whether that business is a good candidate to lend money to or do business with. Good business credit can help you grow your business because it will give you better access to loan terms, insurance premiums, or credit line increases. If you’re considering any of these methods for financing your company, business credit is something you’ll want to be aware of.

There are many ways to build business credit including establishing trade lines, which involves purchasing items for your business through suppliers who you pay back later and applying for business credit cards and paying them on time.

3 Ways to Build Small Business Credit

7. Invest in Growth

Lastly, think about where you want your business to be in the next five and ten years. Take a look at your business plan. What goals have you set for yourself? What financial steps do you need to take now to help you reach those goals later? Perhaps it is budgeting to go to an annual conference, saving to take a professional development course, or hiring a part-time employee so you can take on bigger projects.

No matter what your goals are, don’t lose sight of them. Keeping your growth opportunities in mind will help you direct your financial decisions so your company can reach its full potential.

9 Growth Strategies for Your Small Business

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