Opening your doors for business was just the beginning. Now, you wonder as each day dawns whether it will bring triumph or challenge. Despite your independent spirit, many days may leave you feeling quite besieged, your constant companions anxiety and headaches. However, you're not alone, and what you're doing does indeed matter. According to the Small Business Administration:

  • Your enterprise is but one of the 28 million small businesses in America, which, by the way, account for 54 percent of all U.S. sales.
  • If you have fewer than 20 hired employees, you represent nearly 90 percent of all firms with employees.
  • If you're a lone, non-employer entrepreneur, you're one of more than 20 million.- More than half of all small business owners run a home-based business.
  • Businesses like yours have generated 64 percent of net new jobs created in the United States since 1993.

You have a lot to be proud of, and while defeat is never an option, those early years can be incredibly uneasy. If you've been "entrepreneuring" for a few years, your business just might be entering its teen phase. Simple things can trip you up, and if you're ready to scale, you may not even recognize the end result. Whether you are just getting to where you think you are ready to be your own boss, or are already open for business, there are some important points you should consider. We've listed them in this guide.

In this financial guide for small businesses:

Breaking Even, Profit Margins And Cash Flow
Scaling Quantity and Quality
Responsibility by the Numbers
Liability Protections for Small Businesses

  1. Breaking Even, Profit Margins and Cash Flow

    Calculating The Break-Even Point.

    Before you can even think about profit margins, you have to know your break-even point. It's not a static figure that you can calculate once, either. It's a constantly shifting number, but it's an important one. Let it get ahead of you, and your day-to-day operations will quickly turn unsustainable, draining cash flow and sending tentacles of financial need into your personal life.

    In calculating your break-even point, you're determining the minimum performance level that will pay the bills. It may involve hours of labor, parts and materials, or both. You may have to tweak and adjust the elements that you can until you reach a sustainable formula. However, any time one element changes – even by a penny – your break-even point will change, too.

    To identify your break-even point:

    • Calculate the direct cost of the service or product per work unit. This would be the cost per hour or per product to you.
    • Determine a per-unit price. You need to have a very clear idea of how much you would charge a customer for a product or service you offer.
    • Find the difference between the two. This is the gross profit for one hour or item.
    • Calculate your overheads (indirect costs).
    • If you divide your indirect costs by your gross profit figure from number 3, your quotient will tell you how many hours or items you must sell just to stay at zero (no profit but no debt, either).

    Profit Margins

    In addition to monitoring your threshold for breaking even, you'll need to know your profit margins and track them. Calculating your profit margins will yield percentages that correlate to your business' financial health. Before you set your sights too high or are too hard on yourself, however, realize that the average profit margins for your industry are probably not nearly as healthy as you might think.

    A wide disparity often exists between gross versus net profit margins, and while a business' gross profit margin may be in the forty-percent range or even higher, the net profit margin may actually be in the single digits. Numbers collected by Sageworks in August 2015 indicated that the average net profit margin for American businesses averaged 7.3 percent, a 1.3-percent increase over 2014's figure and 3.2 percent more than 2011's. While accounting and bookkeeping firms took top honors among small businesses, averaging 20.5 percent, many industries operate on a more modest 4 percent or less. 

    To get a true sense of how your business is doing, you need to calculate both gross and net profit margins. You can run figures for the year, the month, or even a week or day. You need to know your total sales as well as all your costs, both direct and indirect – that's the cost of your goods sold and all your overhead and recurring costs.

    To calculate gross profit margin, use this formula:
    (Total Revenue - Cost of Goods Sold) / Total Revenue = Gross Profit Margin

    To calculate net profit margin, use one of these formulas:
    (Total Revenue – Cost of Goods Sold – Operating Expenses – Interest and Taxes) / Total Revenue = Net Profit Margin

    Net Profit / Total Revenue = Net Profit Margin

    Cash Flow 

    Cash flow is all about customers paying you so that you can pay your creditors. If you can't pay your vendors and other suppliers, they won't do business with you. Sometimes, small businesses need lines of credit to smooth out the financial potholes when timing isn't perfect. Other times, a negative situation, such as sliding profit margins or break-even points, may be developing. By monitoring cash flow, you can establish your business' rhythms and identify changes within departments or other facets of operation.

    Find a spreadsheet program that serves your business, and track your cash flow at least monthly. The Small Business Administration recommends a template from; it's free, and can be used in Microsoft Excel. It's a good place to start if you're not sure of how to monitor cash flow on paper.

    You may find that you're overbuying in one area but underbuying in another and then having to pay extra fees for expedited delivery or service. You may see that utilities are eating you alive in the winter months but are nearly free in warmer seasons, prompting you to budget throughout the year for the big freeze. Cash flow may even reveal what you suspected all along – it really is time to buy a new work truck.

  2. Scaling Quantity And Quality

    The Question

    Success often brings hard decisions, expansion foremost among them. However, scaling presents a host of challenges you may not have anticipated. You've built your business to its current success over time. When you began, you probably didn't have the equipment you have now. You may have been limited in quantities, but now your production has tripled. You know your customer base and have established a reputation for quality. The challenge is to grow but still maintain the distinct differentiators that separate you from your competitors.

    New Locations And Old Ones, Too

    New or upgraded locations, new personnel, a whole new market and intervening distances of time and space can turn a financial picture upside-down.

    Expenses can build quickly as you contemplate: 

    • Finding new vendors who can handle your supply demands.
    • Opening an interim location.
    • Remodeling or upgrading a current or new location, possibly both due to shifting technology and compatibility issues.
    • Duplicating or upgrading everything you have at your original location.
    • Traveling between multiple locations, for you and for employees. Costs will include time and fuel.
    • Maintaining consistent corporate culture, including your policies, procedures and the atmosphere you want for your business.
    • Communicating between locations on a day-to-day basis.
    • Hiring new employees.
    • Training new employees and keeping them current.
    • Expensing for lag time as you expand.
    • Maintaining cash flow.

    Haul out that old business plan, and update it. You might even want to craft a new one. One of the most difficult issues that small businesses face is how to integrate new hires en masse and still maintain a consistent corporate identity.

    Preserving What You Have

    Keep in mind, however, that not all businesses scale well. If you are the business, the dilemma becomes how to either split yourself in two or just never, ever sleep again. You might want to ask yourself:

    • Is it time to find partners or hire managers, and will they have the same priorities and focus that you do?
    • Will scaling put your personal financial life (and your family's) at risk?
    • How much financial pressure will the new location or jump in scale exert on your current resources?
    • How much time do you need to make the expansion profitable?
    • Do you have sufficient resources to protect your current operations until your expansion yields profit?

    Independence or Dependence

    If you depend upon a single industry or only one or two clients, ask yourself some really difficult questions:

    • Are you considering expanding for you or for them?
    • Who ultimately benefits?
    • Will the expansion be sustainable over the long term?

    Overextending while overdepending on one source of revenue could leave you with overwhelming financial responsibilities if you don't have a viable backup plan. Scaling involves far more than the small black figures displayed on a spreadsheet. Personalities and territories all come into play. Make sure you understand all the rules of the playing field before you expand your team.

  3. Responsibility by the Numbers

    Operating as a business brings with it externally mandated responsibilities. That is, taxes. Ignore them, and your whole house of cards can fall. Because small businesses are notorious for making tax mistakes, they're under greater Internal Revenue Service (IRS) scrutiny and more likely to experience audits. Whether you're an individual or an extensive partnership, taxes can cause trouble at any time in the year.

    Some of the most common mistakes small business owners make include:

    • Making a hobby a business. You must be able to demonstrate profits for at least 3 years out of the last 5. Otherwise, the IRS will declare your business a hobby; you'll have to file amended tax returns and pay your back taxes as well as additional penalties.
    • Underpaying estimated taxes. Even if you're self-employed, you must "estimate your income tax for the year and pay it in quarterly installments throughout the year." Rules vary by your business' legal structure, your earnings and your expected tax responsibility.
    • Failing to pay payroll taxes. The IRS has all sorts of schedules and requirements to detail how small businesses must file their taxes, but one rule prevails: If you don't pay your payroll taxes, the IRS can close your doors and seize all assets, including outstanding customer debt.
    • Borrowing from payroll taxes. Withholding taxes belong to the federal government, not the business that withholds them, not even for a little bit. Using payroll taxes to pay expenses that might otherwise temporarily disrupt cash flow is a federal crime.
    • Designating employees as contractors. If the IRS determines that an "independent" is actually an employee, you'll owe penalties and a good portion of the worker's compensation.
    • Leaving the figures to others. Having one person who keeps the books and also writes the checks can be a bad idea, unless that one person is you. If your accountant or bookkeeper falsifies records and steals your money, you're still responsible for your tax figures. Experts recommend completely separating accounting responsibilities from the authority to write checks, but nothing will substitute for vigilance.
    • Keeping a box of receipts. A heap of paid bills does not a set of books make. Even if you're just a small operation, you need to keep a tax organizer of expenses that are, well, organized. If you travel and claim a vehicle and fuel expenses, you need to track your records of mileage and fuel receipts in one consistent place. Plan for what you'd need to show an auditor, and keep it as your voodoo stick; if you already have documentation prepared, maybe you'll never need it.
  4. Liability Protection For Small Businesses

    As a business owner, you face risk daily. On some days, it's as simple as taking a chance on whether any paying customers will actually walk through your doors. On other days, you may be wishing someone hadn't paid your establishment a visit. There will likely come a time when you may wish that you hadn't agreed to take on a particular job.

    Licensed, Bonded And Insured

    As a quick clarification, being licensed and bonded does not mean you are insured. Many business owners may hope that it protects them, but business is more complex and often requires all three: 

    • Licensing ensures that you're in compliance with state law. In some cases, states may require that you be licensed to be eligible for separate, state-run insurance programs, but the license is basically your permission to practice your craft or skill.
    • Bonding guarantees to protect your customers from loss. That's why bonding is desirable to clients. It traditionally conveys a degree of trustworthiness because customers know that they're insured when they patronize your services. You, however, may have to repay the surety company for any funds paid to customers.
    • Insurance protects the business owner. Whether you're self-employed, work from home, rent a storefront or build your own manufacturing plant, you'll need some form of insurance to protect your venture and all its assets.

    Common Types Of Insurance Needed

    At the very least, you should consult your insurance agent, especially if you're operating a business from your home; most homeowners insurance does not cover business liabilities. In addition, you may also need to adjust car insurance coverage if you use your vehicle for business. As your venture expands, you'll need to periodically revisit your coverage and premiums, too. What might have been sufficient at one time may not serve as you grow.

    Here are some policies to consider:

    • General Liability. No matter where you operate, experts recommend some form of general liability insurance in case you, your employees or your products are accused of having caused bodily injury or property damage to another party. Note, however, that this insurance will not protect you against charges of negligence or malpractice.
    • Home-Based. This is not homeowners insurance. In fact, most homeowner's insurance policies offer little, if any, home-based business coverage. You may be able to add riders or endorsements to your existing policy, but in some cases (day care, for example) state regulations may require a separate policy. You'll need to ensure that your property is covered for loss and that you're protected against bodily injury or property damage to others.
    • Professional Liability. Also known as errors and omissions insurance, professional liability insurance protects you and your business from accusations of malpractice and other errors. Policies usually differ by industry and profession, and many fields offer specialized or group insurance programs and advice on minimizing your liability.
    • Interruption of Business. If your business is unable to operate, the insurance will ensure a degree of cash flow for a period of time while you're repairing, rebuilding or replacing. This can be especially helpful during natural disasters, fire or even power failures.
    • Worker's Compensation. If you issue a W-2 for even one employee, state laws require that you carry worker's compensation insurance. It provides benefits to workers injured on the job and protects you from being sued if an employee is injured.
    • Data Breach. In the world of technology, databases and hackers, most companies still must maintain customer databases of sensitive information. If your business devices are connected to the internet (which business these days is not?), you are at high risk of becoming the victim of a data breach. If your business involves storing any kind of sensitive information on a computer, you may also be held liable for client losses if that data is lost in a computer breakdown. Even if you maintain paper files, you are still required to protect sensitive data. If that information is compromised, you could be held responsible for damages. If you use paper files, you should look for an insurance policy that covers liability for all data breaches or losses, rather than just cyber insruance.
    • Healthcare Under the Affordable Care Act. You are under obligation to offer healthcare insurance to your full-time employees if you have 50 or more full-time-equivalent employees. If you have fewer and still offer healthcare benefits, you may be eligible for tax credits.

    The names and descriptions of insurances recommended and sold vary by company, state and even industry. You may need to investigate a more comprehensive, all-risk commercial policy or take out peril-specific coverage. Requirements and liabilities vary with the legal structure of your business, too. A frank and honest conversation with a trustworthy, reputable insurance agent will ensure you have the coverage you need for your location and specific set of circumstances.

  5. Do I Really Need It?

    You might not feel that the business you run is particularly prone to financial disasters, but think twice before writing off insurance as an unnecessary expenses. Even if you run a simple pet-sitting business, you will likely be entering other people's homes and taking care of animals with sentimental and possibly pedigree or show value. If Zeus the golden retriever decides to give the house a more open floor plan, eat the TV remote or simply disappear, you could be held financially responsible for losses or damages. Homeowners don't want to be held responsible if a contractor falls from their roof any more than you want to pay medical bills if people at an event you cater to fall ill from food poisoning. Your goal as a small business owner is to stay in business. Just as profit, growth and taxes are essential to your survival, insurance to protect all you've worked so hard to achieve is a vital part of it, too.

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