What tools do you need to operate your business?
How much funding will you need?
Should you carry inventory?
The answer depends on the size of your business and your industry.
You need to invest in software and other tools, based on your current situation. Company growth may require you to outsource payroll, for example, but that decision may not be necessary right now.
There are a number of resources you can access to help you make spending decisions. The NAICS code system is a good place to start.
The North American Industry Classification System (NAICS) is a coding system used by the Census Bureau to classify U.S. companies. The United States generates statistical data using the codes, and the information is useful for small business owners.
Self-employed workers must include their NAICS code on Schedule C, which reports business profits on the personal tax return. Large businesses, including C corporations, list a NAICS code on tax returns and IRS reports.
The NAICS six-digit codes separate businesses by company type.
How codes are assigned
Retail trade businesses, for example, are assigned to sector 44 or 45. The NAICS code for a sporting goods store is 451110, with the first two digits identifying the sector.
Note, however, that the categories do not identify firm size, or if the business is a non-profit entity.
Use the NAICS manual to determine the code for your business. There are a number of ways to use NAICS codes to grow your business.
Using the codes
Federal and state governments frequently use NAICS codes.
If your company bids on federal contracts, you need to provide your code to determine eligibility. Government contracting is managed through the System for Award Management (SAM), and the federal government determines the services they need based, in part, on NAICS codes.
The government also sets aside government contracts for small business owners. The U.S. Small Business Administration (SBA.gov) manages small business contracts, and the SBA requires NAICS codes. The Department of Veterans Affairs has a similar program for small business owners, which is based on NAICS codes.
The codes are also required when applying for a government grant.
Commercial bankers use NAICS codes to analyze your financial results when you apply for a business loan. The banker will compare your performance to other firms in the same industry.
If a sporting goods retailer is able to generate higher annual sales than other firms with the same NAICS code, the banker may be more likely to approve a loan.
Finally, NAICS codes are used to perform market research on a particular industry. As Chron.com explains, “The NAICS code system reveals the percentage of different types of businesses operating in the country, as well as income data for each of these industries. This data can, in turn, help a prospective small business owner choose the type of industry he wants to enter.”
Most companies that sell market research to businesses sort the data by NAICS code. If you sell sporting goods equipment to retailers, you can use market research to identify the retailers that make up your target market.
Once you know your NAICS code and understand how to use it, look into the services offered by the Small Business Administration. The first step is to understand how the SBA defines an entity as a small business.
SBA size standards
The SBA provides a Size Standards Tool to determine if your small business qualifies for government contracting purposes.
The tool uses the NAICS code for your industry, and the average number of employees over the last 12 months. Once you input the data, the Size Standards Tool will tell you if your business is eligible for government contracting work.
You can also review the size standards to determine if your business qualifies as “small” for SBA purposes. The definition of small varies by industry, and the standards are based on number of employees and annual revenue (or average annual receipts).
The table of small business standards lists the annual revenue and the number of employees requirement for each industry. For example, a sporting goods store (NAICS code 451110) with sales of up to $16.5 million dollars is considered a small business.
The SBA offers a number of other services to assist small businesses.
Working with the SBA
If you manage a startup, or are planning a new business venture, you’ll find some great tools at the SBA website.
This page provides resources that you can use to create a business plan. When you have your ideas down on paper, use the SBA tips to register your business concern, obtain a tax identification number, and apply for permits and licenses.
If you’ve already launched your venture, use the SBA resources for business development. The business guide not only provides tips to grow your market share, but also advice on hiring. The guide can be your road map for starting a sole proprietorship.
SBA also provides financial assistance.
The SBA loan program reduces the risk for lenders, and makes it easier for private sector businesses to obtain loans. SBA guarantees repayment of the debt, which means that U.S. companies can borrow at lower interest rates. An SBA-guaranteed loan may allow a lower down payment than a commercial loan that is not guaranteed.
You may qualify for other government programs, including grants or SBA-guaranteed surety bonds. To find out more about SBA, check out the local assistance page to find an office near you.
Every business has a limited amount of resources. If you make informed spending decisions, you can grow your business and still have cash in the bank
Making spending decisions
Business size, and the types of products and services you sell, will dictate your spending decisions.
Launching your business
Before you launch your business, you need to understand and comply with the laws and regulations for your industry.
Health care businesses must have systems that protect patient data from theft. If you own real estate, you need to insure your property and buildings for potential damage. Many occupations require a professional license, and you need to budget for fees and continuing education courses.
Before you launch your business, speak with an attorney. A legal expert can determine if you’ve met all of the legal requirements to start your business.
You should use accounting software from the day you start your business. QuickBooks® offers an online version of their software that’s easy to learn and install.
If you use accounting software, you’ll minimize the use of paper files and spend less time pulling together your records at tax time.
Preparing for tax time
You can use software to simplify the tax preparation process. Accounting software lets you scan and post receipts, and you can track business mileage using technology. When tax time rolls around, the software will post your business activity into Schedule C (Profit and Loss from Business) on your personal tax return.
As you start to hire workers, you may spend a great deal of time on payroll.
Large enterprises use payroll software tools to pay workers, but firms with fewer employees should also consider the investment.
Payroll software uses employee data to compute net pay, and integrates with your bank to pay workers electronically. The software is updated when tax laws change, so your payroll calculations are accurate. You can also use software to generate payroll tax forms for federal and state taxes.
Managing payroll is a complex process, and tax laws change frequently. If you’re hiring staff and you’re spending too much time on payroll, make the investment in software. Small firms with 10 to 20 workers can save time and justify the cost of payroll software.
Companies that do retail trade or wholesale trade must finance the cost of inventory.
Retailers need products on the shelf to sell, and wholesalers sell units of product to retailers. In both instances, you need to estimate the cost of inventory, and determine how you’ll pay for inventory purchases each month.
Initially, you can monitor your inventory levels and make purchase decisions using a spreadsheet. However, this system will quickly become inefficient with company growth.
Once you start selling more than a few dozen items per week, start using accounting software to track your inventory. Generate a report each day, so you can make informed decisions about inventory purchases. Your cash is valuable, and you should use software to decide when to buy more inventory.
Service business, such as carpenters and plumbers, don’t need to invest in inventory.
In addition to inventory, you may need to invest in other assets.
A retailer may need a physical space to sell items, along with shelving and other furniture. If you manufacture a product, you’ll invest in machinery and equipment.
You need to budget for repair and maintenance on fixed assets, and plan for the cost of replacing assets that are no longer useful.
Your most important spending decisions involve people.
But you can’t grow your business without a great team.
There’s no perfect answer to the hiring question, but consider how you’re spending your time. Here are some examples:
- If it takes two hours each day to post accounting transactions, hire a bookkeeper.
- When your staff grows to more than 20 people, you need someone to handle human resources. That may be a part-time position initially, but get someone in place.
- If your posting more than 100 accounting transactions a month, hire a CPA to review your accounting records each month.
To make informed spending decisions, you need to create a formal budget.
Creating a budget
To put a budget together, start with the end in mind.
Let’s say that Julie operates a sole proprietorship in the landscaping business. She wants to generate $200,000 in revenue in the next year.
To make that happen, Julie needs to purchase materials, including sod, mulch and flowers. She’ll also hire a part-time employee, who will be paid $20 an hour. The cost of materials and labor must be posted to her budget.
Julie will incur other costs that are not directly related to landscaping work. She must budget for marketing costs, insurance and equipment. Assume that Julie’s costs total $150,000 for the year, and she generates a $50,000 profit.
The last step is to budget for the cash inflows and outflows Julie expects by month. She will have cash inflows from customer payments, and cash outflows for materials, labor and other costs. Julie uses this formula to forecast her cash flow balance each month:
(Beginning cash balance) + (cash inflows from customers) – (cash outflows for expenses) = (ending cash balance)
Now, keep in mind that Julie’s business varies by season. She’s very busy from March to October, and does less business from November to February.
These seasonal fluctuations impact her cash flow. Julie needs a larger cash balance in March to pay for materials and labor as her busy season starts. She may need to borrow from a line of credit, and repay the loan as customers make payments in March and April.
Profit does not equal cash flow. Many businesses, including profitable firms, risk a cash shortage if they don’t forecast their cash flow needs.
So, where do you go from here?
What to do next
Follow these steps to improve your business results:
- Business plan: Write a comprehensive business plan. If you’ve already written a plan, review the document and make any necessary changes.
- NAICS code: Identify the code for your business.
- Government contracts: Use the SBA size standards for small business tools, and see if you are eligible for small business contracts. Learn about the government entities that hire contractors for projects.
- SBA resources: Review the business guide section of the SBA website, and read about the funding options for small businesses.
- Spending decisions: Consider the spending that’s required to grow your business now, and create a cash flow forecast. Find business peers, and ask them how they make spending decisions. Use accounting software to post your transactions and track your spending.
Use the tools you have available to make better decisions and outperform the competition. If you complete each of these steps, you can move forward with confidence.