How To Create a Business Continuity Plan for Your Company: The Benefits and Tips

If you're running a business, knowing how to pay yourself as a business owner is essential. This can be a tricky process, as there are several factors to consider, such as tax implications and the best interests of your business. This article will discuss the different ways small business owners can pay themselves and help you decide which method is suitable for you. We will also take a quick look at each payment method's tax implications and give you tips on avoiding mistakes while doing so. Paying Yourself as a Business Owner: The Two Options One of the first things you need to decide when figuring out how to get paid for your work as a business owner is whether you want to take a salary or an owner's draw. Paying Yourself a Salary A salary is a regular paycheck taxed like any other employee's income. For the self-employed, salary can mean different things. While some may take home whatever is left after they pay taxes and handle all the business expenses, others may set aside a specific monthly amount that goes towards their personal expenses. Paying yourself a salary when self-employed should not pose a problem, provided that you maintain accurate financial records. One method of calculating compensation is to calculate your net income first, which is your total revenue minus any business expenses. The other is relying on the average market salary for your position so you can get an idea about the appropriate amount. Whichever method you choose, it is crucial to maintain accurate financial records and ensure that you have separate personal and business accounts. Relying On an Owner's Draw An owner's draw is money you take out of your company's profits and is not subject to payroll taxes. The owner's draw is the amount of money you, as your business owner, pay yourself from your business each year for basic expenses. The IRS doesn't require business owners to pay themselves a salary, but if they don't, they may have to pay self-employment taxes on their net earnings from the company. This is why even self-employed people often allocate a salary for themselves. The amount of the owner's draw should be based on the needs of the business and the owner equally. It's important to remember that taking too much out of your business can jeopardize its financial health. The Best Way To Pay Yourself as a Business Owner - Factors To Consider You need to think about a few things when deciding which payment method suits you best. Type of Business Structure As an owner, one of the first decisions you'll need to make is what type of legal business entity your business will be. This decision will have significant implications for how much you'll pay yourself and affect factors such as liability protection and tax treatment. So, how do business owners get paid? In general, sole proprietorship and partnership offer the most flexibility when setting your salary, while corporations have more restrictions.  Sole Proprietorship or Partnership If you're operating as a sole proprietorship, you can rely on the owner's draw from the owner's equity balance and business profits. The partnership also doesn't allow a salary, as you are both a partner and an employee. C-corp and S-corp Both C-corp and S-corp allow you to set a salary for yourself. If you've set up a C-corporation, you can rely on salary and distributions. In the case of an S-corporation, you can pay yourself a market-rate wage as an employee and take dividend income as a shareholder. Limited Liability Company (LLC) An LLC is the only business structure where you can pick sides in the owner's draw vs. salary debate. If you've established an LLC, you'll again be both an employee and a company member. However, LLCs offer more flexibility in how profits are distributed, as according to the IRS, they can be taxed as a sole proprietorship, partnership, or corporation.  How Much You Need vs. How Much Your Business Needs Second, you must consider how much money you need to take out of your business each month. Taking funds in the form of a regular salary might be the best option if you only need a small amount. However, if you are trying to figure out how much you should pay yourself from your business because you need a larger sum, an owner's draw might be a better option. Another thing to consider is your current business situation. If the cash flow of your business has seen better days, then taking an owner's draw might not be a good idea. If you take too much money out of your business, you might reduce its profits and affect its performance negatively. This will mean you’ll get fewer profits in the long run and might have to dip into your own wallet to pay operating expenses down the line. Understanding Tax and Compliance Implications Behind Paying Yourself From Your Business When you are paying yourself, it is crucial to understand the tax rules of each payment method. The sole proprietor and partner will have to pay self-employment tax, including Social Security and Medicare taxes. These taxes are also included in the salary withholdings if the business structure allows this kind of payment. Different implications apply to different types of businesses, so you should inform yourself about the right way to file taxes as a small business owner. It is essential, especially if you are a small business owner, to get tax advice when figuring out what type of business structure would be right for you. You must understand how you will have to pay taxes with a specific business structure before you even get to your first tax report. Mistakes To Avoid When Paying Yourself As a Business Owner There are a few mistakes new business owners often make, so let’s take a look at how you can avoid them. Make Sure You're Not Overpaying or Underpaying Yourself First, you must ensure you are paying yourself reasonable compensation. Consistency is the key here, and you should ensure that you are paying yourself the same amount at the same intervals. While the owner's draw might seem like a good idea initially, it often pays to leave money in your business account to cover unexpected expenses instead of drawing it for personal needs. Calculate the Taxes Into Your Budget You need to make sure that you comply with all the payroll and tax regulations when paying yourself as self-employed. You might have to pay penalties or get a sizable tax bill if you do not. It’s advisable, especially for new business owners, to rely on accounting software to help you budget everything. Not Paying Yourself at All The third and final mistake to avoid is not paying yourself at all! While many new business owners initially hold out on receiving a salary, calculating the owner's compensation into your operating budget should happen as soon as the business is profitable enough to allow it. Conclusion Figuring out how to pay yourself as a business owner is a difficult task, and you must consider several factors to find an optimal sum and compensation method. It is always worth consulting with an experienced accountant and seeking advice before forming your business. They can help you avoid the most common mistakes and give some tips based on your specific situation.

If your sources of income are compromised and you’re unable to pay your debts back, you might consider filing for bankruptcy. Bankruptcy may look like the only way to get a breather, but before you do that, you must understand what the consequences of such an action could be. So, what is the downside of filing for bankruptcy? We will discuss that in this article, so read on. What Is Bankruptcy? Bankruptcy is a legal process that can be initiated when a person or business entity is financially unable to settle debts. When an individual or company files a petition for bankruptcy, the court evaluates their assets. If the assets are deemed to be of enough substantial value, they can be sold off to pay off some of the debt. The relationship between bankruptcy and debt is a serious one. Filing for bankruptcy is a negative implication regarding your ability to pay back future debts and it affects your credit score, so you shouldn’t resort to it lightly. To properly utilize bankruptcy in debt settlement, you should first know what types of bankruptcy exist. Types of Bankruptcy There are two types of personal bankruptcy you should consider when it comes to debt settlement. In most cases, it is either a Chapter 7 or Chapter 13 filing. For businesses, there’s Chapter 11. Chapter 7 Most people tend to file a Chapter 7 when it comes to bankruptcy and debt. Filing for a Chapter 7 bankruptcy usually does not result in your property being sold to cover portions of your debt, but it is still a possibility depending on the specifics of the case. The filing takes three to five months. Chapter 13 A Chapter 13 bankruptcy is usually filed to enable reorganization. This means that you seek some time to plan out how your debt settlement will go. It’s the less common type of bankruptcy filing. Your property or assets are not going to be sold to pay off debts, but this filing requires that you and your creditors agree to a repayment plan bound by the court.  Chapter 11 This bankruptcy filing isn’t that much different from a Chapter 13 filing. They both involve reorganization, but while Chapter 13 is meant for individuals, Chapter 11 is applied to business interests. It is more complex than any other type of bankruptcy and gives businesses in serious debt the chance to keep operations running, while they restructure to pay off their creditors. The cost to file a bankruptcy varies, but on average, you would be looking at around $1,500-$4,000. These cover court filing and attorney fees. Now that we’ve considered the most common types of bankruptcy, let’s look at the pros and cons of bankruptcies. Benefits and Downsides of Filing for Bankruptcy Filing for bankruptcy can be a good thing, but it can also have many disadvantages. Here’s what you can gain or lose from filing a Chapter 7, 11, or 13. Pros Filing for bankruptcy can help you save your property or assets from being sold off to settle debts. It’s a second chance for you to handle debts without throwing your life into disarray. Bankruptcy is a useful tool for relieving you of the legal obligation to pay off a credit facility, taking pressure from creditors off you until you’re able to reorganize your finances. A bankruptcy filing can help your business stay in operation even when you can’t repay debts. It’s a good way to protect the income in your business checking account. Cons On the other hand, filing for bankruptcy can lower your credit score rating. This is one of the biggest drawbacks of bankruptcy. How low your rating can drop depends on your score. A good credit score rating is estimated to drop by up to 200 points, although the effect is less severe the lower the credit score is. Bad credit scores, in turn, have several financial implications. It would be difficult to qualify for loans, mortgages, credit cards, or to even purchase or rent a property. If you do qualify for a loan, your interest rates would be much higher. However, there is a way out, as you could apply and get loans even with a bad credit score. Bankruptcy Consequences Bankruptcy may be a second chance, but it could also be a financial nightmare. For one, they stay on your credit report for a long time. Chapter 7 bankruptcies stay on credit reports for about 10 years, while Chapter 13 bankruptcies stay for about 7 years.  Even so, the negative impacts are reduced over time, especially since filing for bankruptcy usually means some of your debt is written off. Alternatives to Bankruptcy Before you jump straight to filing for bankruptcy, there may be other ways to handle your debt problems. Debt Settlement With debt settlement, creditors agree to accept a large portion of your debt in order to settle the full balance. It is only applicable in situations where you have defaulted repayments. You can try and negotiate with your debtors on your own, or hire a debt settlement company. Debt Consolidation With debt consolidation, you combine various debts into one payment. You typically get more favorable interest rates and can settle debts more quickly. However, it requires you to have a credit line or a loan that you can use to pay off these debts. Credit Counseling This plan involves turning to credit counselors, who can help you devise a plan to manage your debt and pay it off in affordable installments. Credit counselors can reach agreements with creditors to lower interest rates and payments, so you don’t need to file for bankruptcy. However, their services are not free. Conclusion As tempting as it may be to jump on the bankruptcy train, it’s wise to consider if the repercussions of filing a bankruptcy are worth it. You should always keep in mind that there are alternatives, such as borrowing from family, selling off certain properties, or looking for additional sources of income. Even a change in your lifestyle can be enough for you to avoid bankruptcy in some cases.

If you want to understand a business – either yours or someone else’s – you need to have a working cash flow definition, as cash flow is the lifeblood of private enterprises. Without it, operations would cease, and the company would be compelled to discontinue trading, no matter how profitable it might be.  In this post, we’ll define what cash flow is and underscore how it differs from profit. We’ll then list all the types of cash flow and differentiate them from one another. Cash Flow Definition Accountants define cash flow as:  The increase or decrease in cash of an organization during a specified accounting period. There are two sides to the cash flow equation: cash inflows and cash outflows. Inflows mainly come from sales, though sometimes they are donations, interest on loans, investments, royalties, and licensing agreements. Outflows include purchasing inventory and services from suppliers, as well as paying rent, wages, and petty cash expenses. Shareholders care about free cash flow (FCF) because it provides information on the company’s ability to earn profits. Positive cash flow only arises if the total income generated by a company in a given period exceeds the money spent on everyday operations, after subtracting capital expenditure. Ultimately, the money that shareholders receive in the form of dividends (or in high stock prices in accumulating funds) comes from FCF, not profits, because that is the cash the company has physical access to. Why Is Understanding Cash Flow So Important? Without sound cash flow, businesses fail even if they are profitable. Companies require cash on hand to pay their expenses. Otherwise, they must take out bridge financing or fail to pay suppliers and workers.  Having a firm grasp of financial flow lets organizations keep track of how much cash is available in their accounts and when. Moreover, proper reporting enables companies to map out their ability to meet expenditures in the future.  If a company’s annual cash flow is positive, it means that its liquid assets are increasing over time, allowing it to cover its obligations, such as rent, staff wages, and loan repayments. It also means that the enterprise can meet unexpected obligations, for instance, insurance premium hikes or fines On the other hand, when cash flow is negative, it means the company is likely in distress. It’s either spending beyond its means or its clients are not paying on time, delaying the entry of cash into the business. Ideally, companies should have enough cash on hand to buffer against these eventualities, but failing businesses may be struggling to meet all their obligations. Businesses evaluate their cash flow position on the cash flow statement, a standard accounting document that companies must produce by law. It shows the company’s starting and finishing cash totals for the period and the difference between them.  A company’s finance department will evaluate the statement to see how the company is using its cash and project its likely cash position into the future. For publicly-traded companies, shareholders may evaluate CF statements to determine whether a company’s share price is above or below fair value. Types of Cash Flows Cash flow tells you how cash is moving into and out of the enterprise. However, there are more specific cash flow calculations that companies and investors use to determine the health of their operations.  Financing Cash Flow Financing cash flow shows the net flow of cash funding the company’s capital assets. This metric tracks cash infusions from issuing equity while also tracking outflows, such as dividend payments. Investors use financing cash flow to better assess a company’s financial strength and how well it is managing its capital structure.  Investing Cash Flow Investing cash flow indicates the cash inflows and outflows from the company’s investment-related activities over a specific period. Inflows might include dividends from shares in other companies that the business owns, while outflows could encompass purchases of other enterprises or equities. How well the company’s capital is performing can be deduced from the investing cash flow.  Operating Cash Flow Operating cash flow specifies the inflows and outflows of cash associated with a company’s regular operations. To calculate whether operating cash flow is positive or negative, enterprises take net income, add non-income expenses, and then subtract increases in working capital.  Based on operating cash flow, a company can decide whether it can expand its operations. Companies with limited cash flow may have to consolidate or scale back, while those with healthy flows can open new outlets or grow in new markets. Free Cash Flow To Equity Free cash flow to equity is a term that some businesses use to describe the amount of cash left to reinvest into the business as capital expenditure. This is helpful for companies looking to expand as they will have the necessary financing to enable their business to grow. What Is the Difference Between Profit and Cash Flow? In line with the cash flow meaning described above, you’d be forgiven for thinking that cash flow and profit were the same. However, they are entirely different concepts.  Cash flow describes money going in and out of a business. Some enterprises calculate it by tallying up credit and debit, while others make corrections to net income.In contrast, profits measure a company’s financial success. They are what remains after a company has paid all its obligations in a given accounting period.  For instance, a company might have excellent cash flow for an accounting period because it refuses to pay a supplier. Naturally, its cash on hand goes up. However, that same entity could still wind up losing money long-term if insufficient funds come in to cover its expenses.  Likewise, suppose that a company has negative cash flow because a client won’t pay on time. Its business cash flow might be negative for that particular period, but if the customer ultimately pays, it still could find itself recording profit.  Overall, cash flow and profit tend to track each other closely over long periods of time. However, over shorter horizons, such as weeks and months, they can vary dramatically.  What Do Companies Use Cash Flow For? Here are some examples of cash flow being used to calculate other metrics: Liquidity: Shows the company how much cash it has available to meet its obligations at any given moment. Cash Flow Yield: Shows how much cash the company generates from each share it issues. Funding gap: Shows the difference between the cash the company has, and what it needs to be successful. Dividend payments: Lets companies calculate how much cash they can afford to distribute to investors in the form of dividends for the accounting period. Net present value: Lets potential investors figure out how much a company is worth before acquiring it. Price-to-Cash-Flow Ratio (P/CF): An alternative to price-to-earnings (P/E) that some investors prefer to use. How To Build Better Cash Flow Because having money on hand is essential for the operation of enterprises, many invest tremendous resources in developing powerful cash flow systems. How each company approaches this task depends on the strategy its management has adopted. In general, businesses can improve cash flow by: Increasing revenues Improving operating margins Boosting capital efficiency To increase revenues, a company might increase prices, attract new customers, get referrals, or improve its marketing leads. Some companies, like Apple, do this by regularly launching new products and product categories on the market.  To increase operating margins, companies can automate tasks, negotiate more favorable deals with suppliers, or slash their payroll budget. These measures are sometimes referred to as cost-cutting. Lastly, enterprises can improve the efficiency of their plants, property, and equipment by investing in proprietary technology, finding ways to reduce capital resource usage, or improving inventory management (using inventory management software can help, for example). Bottom Line If you are an entrepreneur, having a clear cash flow definition in your mind is critical for operational success. Once you understand the value of this metric, you can use it to predict how your business will perform and protect it against unexpected cash squeezes in the future.