Ongoing expenses: Fixed vs. variable operating costs
Many startup costs will turn into ongoing costs that you build into your monthly or quarterly expenses. These are also known as operating costs or the cost of running and maintaining your business.
Business owners can separate operating costs into two main categories: fixed and variable expenses. Knowing the difference is vital because your business’s balance between fixed and variable expenses can significantly affect profitability.
A business’s productivity or performance does not impact fixed expenses. Common fixed expenses include:
Variable expenses might change with the business’s productivity. Variable expenses include:
- Supplies, materials and inventory
- Utilities and the cost of running equipment
- Overtime wages
Periodic costs fall somewhere between fixed and variable as they happen more infrequently.
For example, consider equipment or business vehicle repairs. Hopefully, your equipment doesn’t break down every month, but you should plan for quarterly or annual costs when they do.
Understanding your expenses allows you to respond when your business needs change.
One day you may need a strategy to reduce business expenses or a plan to manage small business growth. Either way, you’ll need to know where you’ve allocated your money each month and where you have flexibility.
How to increase profitability with tax deductions
Now that you understand the various expenses tied to your business, let’s dive a little deeper into one of your fixed costs — taxes.
Unlike full-time employees, business owners don’t have taxes automatically deducted from their paychecks. Instead, it’s your job to deduct taxes from earnings.
When paying small business taxes, you’ll first need to determine what type of business you are building. Your business structure is determined by how your business operates and how you voluntarily classify it.
The main difference between a sole proprietorship and an independent contractor is how compensation is reported. Sole proprietors must track their own business expenses, while independent contractors usually receive 1099s from each company they work with.
While there is a small fee to register a business with the government as an LLC, this step can offer your business more flexibility regarding taxes.
How tax deductions increase profitability
When filing your taxes, don’t forget about deductions.
As a business owner, you pay taxes on the amount you earn minus the costs of running your business. Deductions can lower your taxable income and increase overall profitability.
Tax deductions that might apply to your small business include:
Learn more about deductions with our article: 16 amazing tax deductions for independent contractors.
NOTE: It’s important to consult with a licensed tax professional to ensure you are filing taxes and deductions correctly for your business.
How to secure additional small business funding
At some point, almost all small business owners looking to build or grow their business will need to secure funding to cover startup costs or support their growth strategy to increase profitability.
But are small business loans hard to get — especially in competitive markets?
A great place to start is the Small Business Administration (SBA). The SBA provides small businesses access to loans at competitive terms with approved lenders. The SBA offers a variety of funding options for your business, including microloans, which can be used for cash on hand to run your business or pay for inventory, supplies and equipment.
Another option that requires more research and effort to apply is small business grants, which are desirable since they don’t need to be paid back.
Every small business grant has its own requirements to apply, and are often related to your business’s size, type, needs and goals. There are many places to look for small business grants, starting with federal agency sites.
Cash flow management tips to stay profitable
Here are three financial best practices to set your business up for long-term success.
1. Reduce overhead costs
Small overhead costs can have a big impact. There are various ways to manage overhead costs, but a few common tactics include: planning for expenses, revising expenditures when your needs change and not overpaying for things you don’t really need.
2. Set aside money for a rainy day
Without proper cash flow management, you might not have funds to cover expenses during slowdowns at your business. You’ll be happy you built in a cash buffer.
3. Create a well-developed pricing strategy
This applies to how you price a product or service, and the vendors you partner with. Do your research.
How to protect your business with small business insurance
No matter how well-run your small business is, things can go wrong. Significant losses can immediately impact your business’s bottom line without business insurance.
You could be held responsible for medical bills, legal fees, or replacement or repair costs, leaving your small business in a tight corner.
Coverage like General Liability insurance can help pay for:
- Slip-and-fall injuries
- Damage to a customer’s property
- Legal fees and defense costs from a lawsuit
Other types of coverage can help protect you from other risks. For example:
Learn more about business insurance options.
How NEXT helps small business owners
NEXT is 100% committed to helping small businesses thrive. That’s why we make customizing your insurance easy with instant online access to coverage.
You can start a quote, customize your options and get your certificate of insurance online in about 10 minutes.
Manage and update your policies when the time is right for you, 24/7. If you need help, we have a team of licensed insurance advisors ready to answer your questions.
Start your instant quote today.