Wondering if you have enough money to live on is always going to be on the front of your mind when you are about to quit your job. Managing finances for both your business as well as for your personal life can be a challenge but is one you can overcome.
For your business, managing finances must be done when you start your business, not after.
Simply put, managing finances will help you make money or lose money.
Let’s say that you don’t manage your business finances for 1 year and let the income and expenses come and go from your account and spend what is left over. For a rental property, you may make $6000 a year in passive income from one property and spend it as soon as it comes in.
Without managing finances, you will have bills that will come up that you didn’t plan on and they can cost you lots of money and sleep at night.
A few good examples of unexpected expenses for a business are: Income Taxes, Property Taxes, Insurance, Homeowners Association fees, Quarterly inspections, and even Government inspections. Not to mention possible unexpected repairs your property needs: Roof ($5,000-$6,000), Furnace ($2,000), A/C ($3,000), Main drain replacement ($1,000), and electrical issues ($1,000).
If you do not manage your finances to plan for these expenses, you may be stuck between a rock and a hard place when these bills come up.
Start managing your finances now, before you quit your job, life will be much easier in the end.
6 Keys to Managing Finances For Your Business
- Track all the money going in and out of your business. Any expense, big or little, must be ran through your finances.
Managing Customers (Tenants)
- Keep track of all your tenants by documenting as much as possible. Knowing more about your tenant will help you make better decisions in the future.
- Find a great team for your business is a must. They will keep your expenses low and keep your business running.
Comply With The State
- Report all your company’s income, expenses, payroll, etc to the IRS and the local Tax Collector.
Know Your Numbers
- In order to make accurate decisions for your business, you must know it’s finances. Review your finances regularly.
Prepare for the Future
- Investing takes money. Most times, you need to use other people’s money. Acquiring bank for financing for your properties will allow you to grow your business dramatically. Having your financial house in order will make the process much easier.
Managing Finances for Business
Watch Your Cash Flow
Cash flow is the lifeblood of your business.
If you run out of cash, your business may be on life support with debt.
First off, never invest in anything that gives a negative cash flow. Secondly, only invest in properties that give at least a $200 a month positive cash flow. The more the better. I personally do not put my money in any investment that does not get me at least $350 a month positive cash flow.
Keep a close eye on your income and expenses. As your expenses goes up, your income goes down. As your income goes down, so do your profits.
Remember that Cash is King and that cash flow is what will keep your business alive.
Quick Tip: Always ask for a discount from your contractors. If they say it will cost $1,700 offer what you believe it should cost. If $1,400 is a better amount and is reasonable, offer them to do the job for that. You don’t want to rip anyone off but you don’t want to be ripped off too!
Use a Spreadsheet To Keep Track of Income and Expenses
Some items you could include are taxes, insurance, other business expenses.
This is strictly used to check all the income and expenses from my Property Manager. By checking over every penny on my PM statement and placing them into this spreadsheet, I am able to catch any discrepancies here.
The ending “Total Profit” should equal the distribution (payment) from my PM into my account.
How to Handle Fixed Expenses That Come Up Yearly
Expenses that come up yearly like insurance, taxes, government fees, and others should be accounted for on a monthly basis. Even though you pay for these bills once a year, it would be wise to plan ahead for these expenses.
If you know you have a $2000 insurance bill once a year due in March every year, you should plan starting in April for the expense the next year.
The way you do this is to break down the $2,000 divided by 12 for the number of months in the year. That is how much you should set aside in your savings account for when that bill comes due.
$2,000 / 12 = $167
That is $167 a month that you must put aside every month in order to be prepared for the $2,000 bill that is due every march.
For every bill you have that is paid annually, make sure you put aside each month as if it was a payment being made towards your bill.
The small benefit doing it this way is that if you hold your money in an interest baring account, you will make interest each month from that cash you are holding onto.
Bank Online with Multiple Accounts
I run all my banking through an online bank called Capital One.
Besides the fact that they have everything is online, they have great rates for checking and saving accounts. For my business, I create multiple savings accounts for my properties where I park my money.
Aside from the high interest rate for a savings account, the multiple accounts is probably one of the best reasons for me to park my money there. I am able to create up to 20 savings accounts with different account numbers and I use these to separate my money into different categories. Even though it is all my money, having them separated into different accounts differentiates the money so I don’t think it is money that I can spend.
Here are the categories I have:
This account is where all of the rental property money is deposited. All regular repairs and expenses are paid through this account. I always leave a balance of $2000 in case there are any expenses that may come up.
Rental Property Savings
Taxes, insurance, HOA Fees, and other non-monthly expenses. An automatic withdrawal from my “Rental Properties” account goes into this account to save for when these items need to be paid. Since my taxes are due twice a year, I need to save for these so I take the entire bill, divide by 12 and have that amount automatically deposited into the savings account.
You must continue to save for investing in future properties. Your passive income needs to continue to grow over time. This is a game of patience and discipline. If you spend all the money your properties earn without reinvesting it, you are cutting your feet out from under you.
Keep building your business with the profits so one day you can live off it.
This is used as a regular savings account for my family to save for anything.
This is a big deal for entrepreneurs who have quit their job. With the ups and downs of your income, it would be wise to have at least 4-6 months expenses saved up in case there are any issue with my properties. This is just for emergencies and is not to be used for investing.
This account is to set aside $10,000 for our medical bills and deductible.
I opted out of my employer based health care because I was paying $900 a month for the premium. That turns out to be $10,800 a month just for insurance. My family rarely uses the insurance so we were just throwing away money every year. Now we save almost $10,000 a year with our own health coverage.
Hire a Bookkeeper If Needed
If you are not able to keep everything neat and tidy managing finances for your business, you may want to look into hiring a part-time book keeper. Just like accountants, they will make your life much easier. Having a clean set of financial books will help you run your business well and make you money.
How your handle your finances will dictated how profitable your business will be. I always scrutinize all expenses and income. I implemented these into my business before I quit my job with my passive income businesses.
You can do it to.
Let me know what you think. Leave me a comment below.