How To Pay Yourself as a Business Owner: Salary vs. Owner’s Draw

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.

The post-pandemic world has brought dramatic changes to the business landscape. Many brick-and-mortar businesses have closed their doors for good, while others have shifted to an online presence. Starting a business is easier than ever before, and there are many opportunities for those with an entrepreneurial spirit. If you’ve been thinking about starting your own business, now is the time to take the plunge. But where do you start? We've gathered tips and tricks on how to become a business owner to get you started on the right path. 1. Define Your Niche The first step to starting any business is to identify your target market. Who are you selling to? What need does your product or service fill? Make sure to brainstorm your general goals for the business, as well as specific marketing strategies that will help you reach your target audience. Once you’ve defined your niche, it’s time to research the competition. See what businesses are already out there serving your target market. What are they doing well? What could they improve upon?  Finally, if you are interested in how to become an owner of a business, you should start by identifying the gaps in the market. In that way, you’ll create a unique selling proposition for your business.  2. Decide on a Type of Proprietorship Now that you've determined what business you'd like to start and done thorough market research, it's time to choose a career path. Do you want to be a solopreneur or build a team? Are you interested in starting a franchise or an independent business? The options are endless, and the decision should be based on your specific goals and skill set. The three main ways to kick-start your company are: Purchasing an Existing Business This is the quickest way to become a business owner, but it comes with some risks. Existing businesses come with a customer base, employees, and established systems. However, becoming a small business owner this way also means that you’ll inherit the company's debts and liabilities. If you're looking to take on an existing business, make sure to do your due diligence and understand all the financial risks involved. Starting a Franchise Franchises offer the opportunity to be your own boss while also benefiting from the support of a larger company. When you start a franchise, you're purchasing the right to use the company's name, logo, and marketing materials. You'll also receive training on how to run the business and access to the company's supplier network, in case you don’t know how to become a business franchise owner.  The downside of franchises is that you'll have less control over your business, and you'll be required to pay royalties to the franchisor. Launching a New Company From Scratch This is the most challenging way to become a business owner, but it also offers the most growth potential. If you're starting a business from scratch, you'll need to generate your own funding, build a team of employees, and create a new brand. While this option is riskier, it also gives you complete control over your business. 3. Draft a Business Plan Having a business idea isn’t enough. Before you venture into finding out how to become a successful business owner, you should first put together a business plan. This document will serve as a roadmap for your business, outlining your short- and long-term goals, strategies for marketing and growth, and details about your financial projections. Your business plan should be as specific and detailed as possible. Include information on your target market, product or service, pricing strategy, and expected profits. Don’t forget to include a detailed marketing plan, which will outline how you plan to generate awareness for your business and attract customers. 4. Find Ways to Secure Funds Unfortunately, we can’t provide you with ideas on how to become a business owner with no money. In fact, according to statistics, 20% of small businesses fail within the first year. One of the main reasons for this is a lack of capital. Before starting your business, you need to find ways to secure funding. There are a number of options available, including loans, grants, and investment capital. It is ideal for a small business owner to secure enough funds to cover three to six months of expenses before getting started on their business ownership journey. Once you start, you’ll have to find a way to keep the business afloat with operating expenses. Some of the ways you can do this include: Using your own funds Obtaining venture capital from investors Visiting crowdfunding sites Taking out a small business loan 5. Choose a Name and Location  If you’re researching how to become a legal business owner, you’ll have to choose a proper name for your business. Keep in mind that your business name should be reflective of your brand and what you do. Make sure to protect the name of your company and the domain name by trademarking it. You'll also need to choose a business location. If you're starting an online business, you can work from anywhere in the world. However, if you're starting a brick-and-mortar business, you'll need to find a physical space to rent or purchase. Consider the local regulations and zoning laws in your area to find a location compliant with all the legal requirements. 6. Choose a Business Structure Successful business owners understand the importance of choosing the right business structure. The type of business you're starting will dictate the legal structure you should choose. This will further determine the legal and financial liability of your business. The most common business structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Sole Proprietorship A sole proprietorship is the simplest and most common type of business structure. It's owned and operated by one person, and there's no legal distinction between the owner and the business. Partnership A partnership is a business structure that involves two or more people. Before we delve deeper into how to become a part-owner of a business, we should explain that partnerships can be either general or limited. In a general partnership, all partners are equally liable for the debts and obligations of the business. In a limited partnership, there is at least one partner who has unlimited liability and one or more partners who have limited liability. LLC A limited liability company (LLC) is a business structure that offers personal liability protection to its owners. LLCs can be either single-member LLCs (owned by one person) or multi-member LLCs (owned by two or more people). Choose one of the top-rated LLC services and outsource LLC formation and ongoing compliance to experienced agents.  Corporation Finally, if you’ve been wondering how to become a business owner within a corporation, you should get familiar with what a corporation is. A corporation is a business structure that offers limited liability protection to its shareholders. Corporations can be either for-profit or nonprofit. Additionally, an S corporation is a special type of corporation that offers tax benefits to its shareholders. 7. Register Your Business  Once you have a business plan in place, it's time to register your business officially. If you're not sure how to become a licensed business owner, you can consult with an attorney or accountant for help. This process will vary depending on the type of business you're starting and your location.  In most cases, you'll need to choose a legal structure for your business and obtain a business license or permit. You'll also need to open a business bank account and obtain any necessary insurance for your small business. These steps will help you get started on the right foot and ensure that your company is compliant with all local, state, and federal laws. 8. Open a Business Bank Account One of the last steps to take to become a business owner is to open a business bank account with a reliable bank that deals with small businesses. This is a separate account from your personal one and is used to track the income and expenses of your company. The most common business accounts are savings accounts, credit card accounts, merchant services accounts, and checking accounts for small business owners. Most banks will require you to have a federal employer identification number (EIN) before they open a business account for you. You should also provide them with your business's formation documents, ownership agreements, and a business license. 9. Hire Team Members  Knowing how to become a small business owner isn't enough - you also need to know how to run your business effectively. If you're starting out, chances are you won't be able to do it all on your own. You'll need to build a team of employees, contractors, or freelancers to help you with the day-to-day operations.  When hiring team members, it's essential to consider the skills and experience they bring to the table. You'll also want to ensure they're a good fit for your company culture. Once you've built your team, it's important to manage them effectively. This includes setting clear expectations, providing feedback, and offering incentives for good performance. By taking the time to build a strong team, you'll set your business up for success. 10. Develop a Marketing Plan  Being a business owner means wearing many hats. One of the most important hats you'll wear is that of a marketer. As the face of your business, it's your job to generate interest in your products or services and convert that interest into sales. The best way to do this is to develop a marketing plan. This plan should include a mix of online and marketing tactics, such as search engine optimization, content marketing, social media marketing, and traditional advertising. You can hire one of the many email marketing services to create and execute your marketing plan for you. What Do You Need to Become a Successful Business Owner? Success doesn't come overnight. It takes time, dedication, and hard work. You'll need a clear vision, a strong team, and a comprehensive marketing plan. You'll also need to constantly learn and grow, monitor your progress, and make adjustments as needed. You can acquire certain soft skills through formal education, such as leadership and communication. Also, many online resources, such as Coursera and Udemy, offer affordable business courses. For example, if you want to learn more about marketing, you can take some online courses in digital marketing. However, in most cases, you won't need a business degree to start a business; knowing how to become a business owner is more important. You can pick the knowledge you need to run a business through the work experience you have gained. Some people are born entrepreneurs, while others develop the skills over time. If you have the drive and determination to succeed, you can become a successful business owner regardless of your formal qualifications. Final Thoughts Becoming a business owner requires hard work and dedication. But with the right knowledge and tools, it can be an enriching experience. By following our tips for business owners who are just starting their entrepreneurship journey, you'll be well on your way to success. Just remember that running a business is not a sprint - it's a marathon. So take your time, build a strong foundation, and continuously learn and grow.