Sole proprietorships are as diverse as the individuals who own and operate them. Some are engines for making money, while others are labors of love, providing vehicles for self-expression while also earning enough for the owner to pay the bills. Financial goals for sole proprietorships differ based on whether an entrepreneur is primarily interested in making money or whether financial success is a secondary priority. Regardless of these differences, financial management for a sole proprietorship should aim at separating business and personal finances to obtain clear financial statements and avert the risk of a difficult audit.
Business and Personal Accounts
As a sole proprietor, you are not legally required to open a separate bank account for your business. However, opening a business bank account helps you more accurately track and allocate business and personal expenses. Whether you have a separate business account or you mingle business and personal funds, your financial management should be geared toward separating business and personal income and expenses -- at least on paper -- so you can understand patterns and also file an accurate tax return.
Business and Personal Expenses
Most of your sole proprietorship's operating expenses are tax deductible, meaning these sums can be used to offset incoming revenue amounts to calculate profit and taxable earnings. However, business and personal expenses sometimes blur, especially if you work from a home office or own a business, such as a food company, where it's tempting to use business inventory to meet personal needs. Your financial management should aim at avoiding blurry lines between business and financial expenses and noting each expenditure in the appropriate category.
Business and Personal Taxes
Your efforts to track your sole proprietorship business activities separately from your personal financial activities will pay back handsomely at tax time. Although your business earnings are part of your personal earnings, they must be recorded separately and documented as a legitimate enterprise, with a clear revenue stream and records of deductible business expenses. The goal of sole proprietorship financial management for tax purposes is to document and organize information about company transactions to facilitate the process of filling out tax forms.
Selling a Sole Proprietorship
If you decide to sell your sole proprietorship, your financial records will provide an indispensable record that a prospective owner can use to evaluate its financial success. Keeping thorough records and organizing them clearly and logically will make it easier to disclose the information that a prospective buyer needs. Your financial and clerical diligence will also speak well to your managerial skills and your ability to implement systems that a new owner can take over without difficulty.
About the Author
Devra Gartenstein is an omnivore who has published several vegan cookbooks. She has owned and run small food businesses for 30 years.
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Suggest an Article Correction
Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not seen in the 'Line' but also in the capacity of the 'Staff' in overall of a company. It has been defined differently by different experts in the field.
The term typically applies to an organization or company's financial strategy, while personal finance or financial life management refers to an individual's management strategy. It includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only for long term budgeting, but also how to allocate the short term resources like current liabilities. It also deals with the dividend policies of the share holders.
Definitions of Financial Management
- "Planning is an inextricable dimension of financial management. The term financial management connotes that funds flows are directed according to some plan." By James Van Horne
- "Financial management is that activity of management which is concerned with the planning, procuring and controlling of the firm's financial resources. " By Deepika &Maya Rani
- “Financial Management is the Operational Activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.” By Joseph Massie
- “Business finance deals primarily with rising administering and disbursing funds by privately owned business units operating in non-financial fields of industry.”– By Kuldeep Roy
- “Financial Management is an area of financial decision making, harmonizing individual motives and enterprise goals." -By Weston and Brigham
- “Financial management is the area of business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals.” – by J.F.Bradlery
- “Financial management is the application of the planning and control function to the finance function.” – by K.D. Willson
- “Financial management may be defined as that area or set of administrative function in an organization which relate with arrangement of cash and credit so that organization may have the means to carry out its objective as satisfactorily as possible." - by Howard & Opton.
- Business finance can be broadly defined as the activity concerned with planning, raising, controlling and administering of funds and in the business. “ by H.G Gathman & H.E Dougall
- Financial management is a body of business concerned with the efficient and effective use of either equity capital, borrowed cash or any other business funds as well as taking the right decision for profit maximization and value addition of an entity.- Kepher Petra; Kisii University.
- "Financial management refers to the proper and efficient use of money and it plays a significant role in analyzing to invest in profitable business enterprise. Return on Investment must be greater than the invested amount."
- "Financial management refers to the effective and efficient management of money and it is also process of planning, controlling, leading, directing of a firm's financial resources."
Objectives of Financial Management
- Profit maximization happens when marginal cost is equal to marginal revenue. This is the main objective of Financial Management.
- Wealth maximization means maximization of shareholders' wealth. It is an advanced goal compared to profit maximization.
- Survival of company is an important consideration when the financial manager makes any financial decisions. One incorrect decision may lead company to be bankrupt.
- Maintaining proper cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of company.
- Minimization on capital cost in financial management can help operations gain more profit.
- It is vague :- There are several types of profits before interest, depreciation and taxes, profit before taxes, profit after taxes, cash profit etc
Scope of Financial Management
- Estimating the Requirement of Funds: Businesses make forecast on funds needed in both short run and long run, hence, they can improve the efficiency of funding. The estimation is based on the budget e.g. sales budget, production budget.
- Determining the Capital Structure: Capital structure is how a firm finances its overall operations and growth by using different sources of funds. Once the requirement of funds has estimated, the financial manager should decide the mix of debt and equity and also types of debt.
- Investment Fund: A good investment plan can bring businesses huge returns.
Financial Management for Start Up
For new enterprises, it is important to make a good estimation on costs, sales. Consideration on appropriate length sources of finances can help businesses avoid the cash flow problems even the failure of setting up. There are fixed and current sides of assets balance sheet. Fixed assets refers to assets that cannot be converted into cash easily, like plant, property, equipment etc. A current asset is an item on an entity's balance sheet that is either cash, a cash equivalent, or which can be converted into cash within one year. It is not easy for start ups to forecast the current asset, because there are changes in receivables and payables.