How can you tell if your business is financially healthy?

By tracking a few key financial metrics that act like your business’s “vital signs.” These metrics fall into four main categories – profitability, liquidity, solvency, and operating efficiency – which experts say are critical financial areas to watch in combination​. In this guide, we’ll break down each category in simple terms, explain the formulas, and give real-world examples.

Don’t worry if you’re not a “numbers person” – we’ll keep it jargon-free and actionable. By the end, you’ll know how to answer the question: How healthy is your business?

Why does this matter? Tracking these metrics can help you spot problems early and make informed decisions. For example, Alicia Villanueva – who started by selling tamales door-to-door – closely monitored her finances as she expanded her business. With training, perseverance, and a small loan from Accion Opportunity Fund, she bought her first delivery van and transformed her venture into a thriving operation with a 6,000 sq. ft. production space and 14 employees​. 

Whether you’re just starting out or already growing, mastering these key metrics will empower you to make confident decisions. And as a mission-driven nonprofit lender, Accion Opportunity Fund (AOF) is here to help – with business coaching, educational resources, and affordable loans tailored for underinvested small business owners. In fact, AOF isn’t just another lender; it’s a partner in your success​. Let’s dive into the metrics that matter for your business’s financial health.

Profitability Metrics: Is Your Business Earning Enough?

Profitability metrics tell you how well your business is generating profit from its sales. In other words, are you making money after covering your costs? Profit is the fuel that lets you reinvest, grow, and sustain your company over time – so these metrics are perhaps the most important for long-term business health​. Here are the key profitability metrics and how to use them:

Gross Profit Margin

What it is: Gross profit margin measures the percentage of revenue that remains after covering the direct costs of producing your product or delivering your service. Those direct costs are usually called Cost of Goods Sold (COGS) or cost of sales – for example, materials and labor. Gross profit margin basically shows how efficiently you are turning your costs into profit at the most fundamental level of your business.

Gross Profit Margin Formula:

For example, if your bakery sells cupcakes for $5 each and the ingredients + packaging cost $2 per cupcake, your gross profit per unit is $3. If you sell 1,000 cupcakes ($5,000 revenue) and incur $2,000 in ingredient costs, your gross profit is $3,000. Dividing $3,000 by $5,000 gives a gross profit margin of 60%. This means 60 cents of every sales dollar is gross profit. A higher gross margin is usually better – it means you have more cushion to cover other expenses.

Why it matters: Gross margin reveals whether your pricing and direct costs are in line. If your gross margin is low, you may need to charge more or reduce production costs. Many successful small businesses regularly review gross margins for each product or service. For instance, if a catering business finds that one menu item has a low gross margin, they might renegotiate with suppliers for cheaper ingredients or focus on selling more of a high-margin item. Tracking gross profit margin helps ensure you’re not selling at a loss and that you have enough money to cover overhead.

Tip: Compare your gross margin to industry benchmarks if possible. Retail businesses might have lower gross margins than service businesses due to merchandise costs. The key is to monitor trends – if your gross margin is shrinking over time, dig into why (higher material costs? discounts?) and take action. Even a few percentage points drop could signal a problem that needs attention.

Net Profit Margin

What it is: Net profit margin (also called net margin or profit margin) measures the percentage of revenue that remains as net income after all expenses are deducted – not just cost of goods, but also operating expenses, interest, taxes, etc. This metric tells you how much actual profit your business keeps from each dollar of sales in the end.

Net Profit Margin Formula:

Net profit (often the “bottom line” on your income statement) is revenue minus all expenses. Suppose your business had $200,000 in sales last year and, after paying all costs (materials, rent, salaries, marketing, taxes, etc.), ended up with a net profit of $20,000. Your net profit margin would be $20,000 / $200,000 = 10%. This means you keep $0.10 as profit out of every $1 in sales.

Why it matters: Net margin is a bottom-line indicator of overall profitability. It captures the impact of not only direct costs but also your overhead and efficiency. A healthy net profit margin means your business is efficiently controlling all costs and earning enough to reward the owners (and investors, if any). If your net margin is slim (or negative), it’s a sign to analyze your expenses or pricing. For example, a local café might have a decent gross margin on coffee, but if high rent and utilities eat up most of the profits, the net margin could be low. In that case, the owner might look for ways to cut utility costs, negotiate rent, or boost higher-margin sales during slow hours.

Actionable insight: Track your net profit margin periodically (monthly or quarterly). If it’s decreasing, pinpoint which costs are rising or if sales are dropping. Perhaps marketing expenses went up without a corresponding increase in sales – a flag to evaluate your marketing ROI. On the flip side, as your net margin improves, you can consider reinvesting in the business (new equipment, more staff, etc.) or building a reserve. Many lenders and investors also look at your net profit margin to assess business viability – they want to see that you can generate sufficient profit to pay back loans or attract investment.

Operating Profit Margin (EBIT Margin)

What it is: Operating profit margin looks at profit from core operations as a percentage of revenue, before interest and taxes. It’s essentially the percentage of sales left after covering all operating expenses (like rent, payroll, utilities, marketing) but before any loan interest or income tax. This is also known as EBIT margin (Earnings Before Interest and Taxes margin).

EBIT Formula:

Operating profit is usually gross profit minus operating expenses. For example, if our earlier business had $3,000 gross profit and $2,000 in operating expenses (salaries, rent, etc.), the operating profit would be $1,000. With $5,000 revenue, that’s an operating margin of 20%.

Why it matters: Operating margin shows how well your day-to-day business is managed. An increasing operating margin can indicate better cost control or improved efficiency in operations​. It’s very useful for tracking internal performance over time. Maybe you introduced a new process or technology that reduced labor hours – you’d likely see improvement in your operating margin. Conversely, if your operating margin is shrinking, it’s a prompt to review your operating costs. Are administrative expenses creeping up faster than sales? Are you spending more on marketing without results? Since this metric excludes interest, it also lets you compare performance regardless of how the business is financed.

Actionable insight: Use operating margin to drill down: it’s basically net margin before interest and tax, so it isolates your operational efficiency. If your gross margin is fine but your net margin is suffering, check the operating margin – if it’s low, the issue lies in your overhead or admin costs. Many small business owners find this metric helpful for budgeting – e.g. setting a goal that operating expenses should not exceed, say, 80% of gross profit (which would ensure a 20% operating margin). By tracking this, you can make adjustments like cutting unnecessary subscriptions, improving staff productivity, or reducing waste in the production process.

Return on Assets (ROA)

What it is: Return on Assets measures how effectively your business uses its assets to generate profit. “Assets” include everything the business owns – cash, equipment, inventory, etc. ROA tells you what kind of bang you’re getting for each buck invested in assets. It’s especially useful for understanding efficiency in asset-heavy businesses (like manufacturing or trucking).

Return on Assets (ROA) Formula:

For example, if you have total assets of $150,000 invested in your company (equipment, vehicles, inventory, etc.) and your net profit for the year is $15,000, your ROA is $15,000 / $150,000 = 10%. This means for every $1 of assets, you earned $0.10 in profit that year.

Why it matters: ROA shows how efficiently you are using your resources to generate profits. A higher ROA indicates a more efficient use of assets. If two businesses both earn $50,000 profit, but one needs $500,000 of assets to do it and the other only $250,000, the latter is getting more out of each dollar of assets (20% ROA vs 10% ROA). 

Small business owners can use ROA to evaluate investments: say you buy a new delivery truck – did that asset help increase your profits proportionally? If not, your ROA might drop, signaling that the asset isn’t being used to its full potential (perhaps the truck isn’t doing enough deliveries).

Actionable insight: Compare ROA year over year. If you invested in new equipment or expanded your inventory, check your ROA after a year. Is your profit growing relative to your assets? If ROA is declining, you might have idle assets or need to boost sales. For example, a home-based boutique might have very few assets (mostly inventory), so a modest profit can yield a high ROA – that’s good. But if the owner takes out a big loan for a fancy storefront (increasing assets) and profits don’t rise enough, ROA will plunge – a sign that the new asset isn’t paying off. Use ROA to keep an eye on investment efficiency. (For very small or service-based businesses with minimal assets, ROA might be extremely high or not as relevant – focus more on profit margins in that case.)

Summing up Profitability: Profitability metrics are like a report card for your business’s money-making ability. They help answer questions like: Am I pricing correctly?, Are my costs under control?, Am I improving in efficiency? 

By tracking gross margin, net margin, operating margin, and ROA, you get a complete picture from the top line to the bottom line. Remember, even if profits are small in the beginning (a lot of startups break even or lose money initially), the goal is to see improvement in these metrics over time. Celebrate small wins – an uptick in gross margin or achieving your first profitable month. Each improvement means your business is getting healthier financially.

Liquidity Metrics: Can You Pay the Bills?

Liquidity is all about cash flow and short-term financial stability. In simple terms, liquidity measures your ability to meet immediate obligations – to pay your bills, payroll, and other expenses that are due soon. A company can be profitable on paper but still run into trouble if it doesn’t have enough cash on hand at the right time. (In fact, running out of cash is a common reason small businesses fail, even if sales are strong.) Liquidity metrics help ensure you have the cash reserves or assets easily convertible to cash to cover upcoming needs​. Here are the key liquidity metrics:

Current Ratio

What it is: The current ratio is a classic measure of liquidity. It compares your current assets to your current liabilities. Current assets include cash, accounts receivable (money customers owe you), inventory, and other assets you expect to turn into cash within about a year. Current liabilities are obligations due within a year, like accounts payable (bills to suppliers), short-term loans, credit lines, or upcoming tax payments.

Current Ratio Formula:

For example, let’s say at this moment your business has $50,000 in current assets (cash in the bank, plus some receivables and inventory) and $35,000 in current liabilities (upcoming bills, short-term loan payments, etc.). Your current ratio would be 50,000 / 35,000 ≈ 1.43.

What it means: A current ratio of 1.0 means your short-term assets exactly equal your short-term liabilities. Above 1.0 means you have more current assets than liabilities (a cushion); below 1.0 means you have more liabilities than assets (potential liquidity crunch). In our example, 1.43 suggests a decent cushion – you have $1.43 in current assets for every $1.00 of liabilities due soon. Generally, higher is better for the current ratio, but there’s a point of diminishing returns. If it’s too high (say 5.0), it might mean you are sitting on a lot of cash or inventory that could be invested or used more productively.

Why it matters: The current ratio is a simple way to gauge if you can pay your bills on time. Many bankers and creditors look at this ratio to assess financial health. If your current ratio is consistently below 1, it’s a red flag that you might struggle to meet obligations – you could be one unexpected expense away from a cash shortfall. For example, imagine a small retail shop with a current ratio of 0.8 – perhaps because they have a loan payment due next month that exceeds their cash on hand. The owner should take action (increase cash, refinance debt, etc.) to avoid trouble. On the other hand, if the shop has a current ratio of 1.5, it likely has some breathing room to handle surprises (like a sudden supplier price increase or a late-paying customer).

Actionable insight: Track your current ratio regularly (monthly, for instance). If you see it trending down toward 1 or below, consider steps to boost liquidity: collect receivables faster, reduce excess inventory (convert it to cash), or possibly slow down certain payments if appropriate (without damaging relationships). Building a cash buffer (even a few weeks’ worth of expenses) can improve your current ratio and your ability to sleep at night! Remember, cash is king – profitability is important, but cash flow keeps the lights on.

Quick Ratio (Acid-Test Ratio)

What it is: The quick ratio is a more conservative version of the current ratio. It answers: if you had to pay all your bills right now, do you have enough assets that are almost immediately convertible to cash? The quick ratio excludes inventory and other less liquid current assets, focusing only on your most liquid assets (cash, receivables, short-term investments). It’s called the “acid-test” because it’s a harsh test of liquidity.

Quick Ratio Formula:

Take our previous example: $50,000 in current assets, $35,000 in current liabilities, and assume out of that $50,000, inventory is $20,000. Then the quick assets (current assets minus inventory) are $30,000. The quick ratio is 30,000 / 35,000 ≈ 0.86. That’s below 1.0, indicating that if sales stopped and you had to pay all bills, you only have $0.86 in truly liquid assets for every $1 owed. The inventory is not included because you might not be able to sell it instantly at full value.

What it means: A quick ratio of 1.0 or higher is often recommended, especially for businesses that carry inventory. In the example, the current ratio was 1.43, but the quick ratio is 0.86 – the difference tells us this company’s liquidity is heavily dependent on turning that inventory into sales. If a lot of your current assets are tied up in inventory (or things like prepaid expenses), the quick ratio reveals a more cautious picture. Service businesses (with little or no inventory) often have current ratio = quick ratio. But a retail store or manufacturer might have a much lower quick ratio than current ratio.

Why it matters: The quick ratio is about immediate liquidity. It’s useful for understanding your worst-case scenario readiness. If an emergency arose – say an unexpected expense or an economic downturn – could you handle short-term obligations without relying on selling inventory? For a small business owner operating a boutique, knowing the quick ratio might prompt them to maintain a reserve of cash and receivables to cover at least 3 months of bills, in case inventory sales slow down. A lender might also check your quick ratio when assessing your loan application to ensure you’re not stretched too thin on cash.

Actionable insight: If your quick ratio is low (<1), it doesn’t automatically mean trouble, but it means you should be aware of the risk. You might manage inventory levels more tightly or build up a bit more cash reserve. Some ways to improve your quick ratio: collect accounts receivable faster (offer a small discount for early payment, perhaps), or avoid overstocking inventory by ordering in smaller batches more frequently. Essentially, think of the quick ratio as encouragement to keep some assets in truly liquid form. It’s like having an emergency fund for your business. If you’re a freelancer or service provider with no inventory, your quick ratio might be fine – just ensure your accounts receivable are collectible on time.

Working Capital

What it is: Working capital is not a ratio but a raw dollar figure: Current Assets minus Current Liabilities. It represents the short-term capital available to run your day-to-day operations. Positive working capital means you have more short-term assets than short-term debts, which is generally a good thing.

Working Capital Formula:

Using our example numbers: $50,000 in current assets – $35,000 in current liabilities = $15,000 in working capital. That means after paying off all current obligations, you’d still have $15K left to work with in the short term.

Why it matters: Working capital is a straightforward way to measure liquidity in dollars. It answers, “How much money (net) do we have to keep the business running?” If your working capital is negative, you’re essentially short on cash to cover near-term bills, which can lead to serious issues (missed payments, need for emergency loans, etc.). Positive working capital is generally needed to fund inventory purchases, cover payroll, and bridge timing gaps in cash flow. For example, if you run a small construction company, you often have to pay for materials and labor before you get paid by your client. Adequate working capital covers that gap. If you find yourself waiting on client payments and struggling to pay your crews, that’s a sign your working capital is too low for the scale of your operations.

Actionable insight: Calculate your working capital regularly and watch the trend. If it’s shrinking, investigate why. Maybe you took on more short-term debt or your inventory expanded. Improving working capital could involve speeding up cash inflows (e.g. invoice promptly, enforce payment terms) and delaying cash outflows where possible (e.g. negotiate longer payment terms with suppliers). 

You can also consider a working capital loan or line of credit to bolster short-term cash – a product that Accion Opportunity Fund offers specifically to help businesses manage liquidity​. The good news is AOF and other nonprofit lenders often look at your whole business story, not just the numbers, when deciding on such loans​ – so even if your working capital is tight, they may provide financing based on your potential and character.

Operating Cash Flow & Cash Flow Forecast (Cash is King)

In addition to the formal ratios above, it’s crucial to keep an eye on your cash flow from operations. This isn’t a single formula, but rather tracking the actual cash moving in and out of your business each month. You might be profitable and still have a cash crunch if, for example, your cash is tied up in inventory or customers pay invoices slowly. Make it a habit to review your cash flow statement or at least a basic cash ledger monthly.

A related concept is your cash flow forecast or cash runway: how many months can you operate with the cash (and expected inflows) you have now? If you have $20,000 cash and you typically have net outflows of $5,000 per month (perhaps you’re still in early growth and reinvesting earnings, so expenses exceed receipts), then you have about 4 months of cash runway. This is especially important for startups that might be burning cash initially. Monitoring this tells you when you might need a financing boost or cost adjustment.

For instance, a tech startup run by an underserved entrepreneur might realize that at their current burn rate (cash usage per month), they’ll run out of cash in 6 months. Knowing this, they can plan ahead to either raise funds, secure a loan, or cut expenses before the bank account hits zero. It’s much easier to get financing when you’re not in a crisis mode. Accion Opportunity Fund’s business advisors often coach entrepreneurs on cash flow management – helping you forecast and plan so you’re prepared, not panicked, when expenses hit.

Summing up Liquidity: Liquidity metrics like current ratio, quick ratio, and working capital are your early warning system for cash flow issues. They ensure that profit on paper turns into cash in the bank to keep your business running. AOF business coach Ben might tell a client: “Good liquidity shows you have reserves for the unforeseen and you’re not overextended​.” By staying on top of liquidity, you can confidently answer “Yes” when asked, “Can you pay your bills and keep operating normally over the next few months?” If not, you now have the tools to take action – whether that’s cutting back, speeding up collections, or seeking a working capital loan to bridge the gap.

Solvency Metrics: Are You Built for the Long Haul?

Solvency metrics gauge your business’s long-term stability and debt management. While liquidity is about the here-and-now, solvency is about the long run: Can your business sustain itself and meet long-term obligations? Does your company have a healthy balance between what it owes and what it owns? For many small businesses, this often comes down to how much debt you’ve used to finance your operations and growth, and whether you can service that debt comfortably. Let’s explore the key solvency metrics:

Debt-to-Equity Ratio (D/E)

What it is: Debt-to-Equity ratio compares your total liabilities (debt) to your equity (the value of owners’ stake in the company). It tells you how leveraged your business is – in other words, to what extent you are financing your company through borrowing versus through your own capital or retained earnings.

Debt-to-Equity Ratio Formula:

For example, suppose your small manufacturing business has $100,000 in total liabilities (this includes all loans, outstanding bills, etc.) and $50,000 in equity (your investment plus any retained profits). Your D/E ratio is 100,000 / 50,000 = 2.0. This means you have $2 of debt for every $1 of equity in the business.

What it means: A D/E of 2.0 is relatively high – it indicates the business is more debt-funded than equity-funded. A D/E of 1.0 means equal debt and equity. A lower D/E (say 0.5) means you only have 50¢ of debt per $1 of equity, which is conservative. There’s no one “perfect” D/E across all industries; some capital-intensive industries naturally use more debt. However, for small businesses, a high D/E can be risky because it means heavy obligations to lenders. If anything hampers your revenue, a highly leveraged business might struggle to keep up with loan payments.

Why it matters: Debt-to-Equity is a fundamental indicator of financial risk and long-term solvency. It shows how much cushion you have from the owners’ side to absorb losses or downturns. If your business is highly leveraged (high D/E), you’re more vulnerable to economic swings – more of your revenue must go to fixed debt payments. For many underserved entrepreneurs, taking on debt is a double-edged sword: it can fuel growth, but too much can strain the business. Lenders and investors often look at D/E to assess if you have “skin in the game” and a balanced capital structure. AOF, for instance, as a responsible lender, would want to ensure that taking a new loan won’t over-leverage you to the point of jeopardizing your business’s health.

Actionable insight: Keep an eye on your D/E ratio whenever you take on new debt. If you are considering a loan, calculate how it will affect your D/E. There’s a common-sense guideline: don’t borrow more than your business can reasonably repay. In fact, one tip is to borrow no more than roughly 10–20% of your annual revenue in new debt to maintain a healthy balance​. For example, if your annual sales are $200,000, try to keep total debt under $40,000 (20% of sales) to avoid overextension​. To improve a high D/E ratio, you can either increase equity (e.g. reinvest profits, bring in an investor) or reduce debt (pay down loans, or refinance expensive debt to cheaper debt). Many small business owners strive to gradually lower their D/E as the business matures, giving them more resiliency.

One real-world scenario: A family-owned restaurant initially borrowed heavily to open a second location, spiking their D/E to 2.5. The owners realized this was stressing their cash flow, so they paused further expansion and focused on using profits to pay down debt. Over a couple of years, they brought D/E down to 1.2, significantly reducing their interest costs and risk. The lesson: grow at a pace that your solvency can handle. Debt can help you expand, but make sure your equity (and profits) keep growing alongside to maintain balance.

Debt Service Coverage Ratio (DSCR)

What it is: While D/E looks at your balance of debt vs equity, the Debt Service Coverage Ratio looks at your ability to service (pay) your debt from your business’s income. It’s the ratio of your operating income (or cash flow) to your debt payments (usually annual). Essentially, DSCR asks: Do you earn enough to comfortably pay your loan installments?

Debt Service Coverage Ratio Formula:

• Net Operating Income can be thought of as your earnings before interest, taxes, depreciation, and amortization (EBITDA), or simply net profit plus those non-cash expenses – basically the cash available for debt payments.
  
• Annual Debt Service is the total of all debt payments (principal + interest) required over the year.
  

For example, if your business generates $60,000 per year in operating income (before interest and taxes) and your total loan and interest payments for the year are $50,000, then DSCR = 60,000 / 50,000 = 1.2. This means you have 1.2 times the income needed to cover your debt obligations.

What it means: A DSCR of 1.0 means you have exactly enough income to pay your debts – but nothing extra. Above 1.0 means you have some cushion; below 1.0 means you don’t have enough income to cover debt payments (you’d have to use outside funds or dip into savings, which is unsustainable long term). In the example, 1.2 is a modest cushion – it implies that 83% of your operating profit goes toward debt service (1/1.2 = 0.833). Many lenders like to see a DSCR of 1.25 or higher, meaning you have at least 25% more income than needed for payments, to ensure buffer for unexpected dips in earnings. For small business owners, maintaining a healthy DSCR is crucial to avoid defaulting on loans.

Why it matters: DSCR is a key solvency (and creditworthiness) metric. When you apply for a business loan (especially bigger loans or SBA loans), lenders will often calculate your DSCR to judge if you can handle the payments. If your DSCR is below a threshold (often around 1.2), it may be a sign you’re biting off more debt than you can chew. Even internally, you should treat DSCR as a reality check: Can my current profits support my debt? If you have multiple loans or plan to take another, calculate your combined debt service and see if your projected income can cover it comfortably.

Actionable insight: Calculate your DSCR at least annually, or when planning to take new debt. If your DSCR is getting thin (close to 1.0), you have a few options:

• Boost income: Increase sales or improve profit margins (easier said than done, of course, but any little improvement in profit will raise DSCR).
  
• Refinance debt: Perhaps you can refinance high-interest debt into a longer-term or lower-rate loan, reducing the annual debt service and improving DSCR.
  
• Reduce debt: Use surplus cash or profits to pay off small debts. This lowers your future debt service requirements.
  
• Avoid new debt: Hold off on that new loan until you improve your DSCR through the above steps.
  

A practical example: Let’s say a minority-owned trucking business has two truck loans. Business has been slow, and their DSCR fell to 1.0 – essentially all their operating profit was going to loans. They approached AOF for refinancing. By consolidating into one loan with a longer term, their annual debt service dropped, and their DSCR improved to 1.3. This breathing room allowed them to invest in marketing to win more contracts. The improvement in DSCR was like unchaining the business from a tight spot.

Keeping an eye on DSCR ensures you’re not overburdened by debt. It’s about being solvent and staying in control of your finances, rather than your creditors being in control of your fate.

Solvency and Stability Tips

Aside from ratios, consider some general practices for solvency:

• Build Equity: Reinvest profits into the business when possible. This not only fuels growth but also increases your equity (the “skin in the game”), which improves solvency metrics like D/E.
  
• Avoid Over-Leveraging: It can be tempting to take a large loan when a lender offers it, but always ask if your business truly can support it. As mentioned, borrowing more than ~20% of your annual revenue could be a red flag. Growth is great, but sustainable growth is the goal – it’s okay to grow a bit slower if it means staying financially solid.
  
• Emergency Fund for Debt: Try to keep a couple of months’ worth of loan payments in reserve. That way, if you hit a slow season, you won’t default. Think of it like keeping a few months of mortgage payments in savings for your business loans.
  
• Monitor Interest Coverage: Similar to DSCR, Interest Coverage Ratio = EBIT / Interest Expense, which tells you how easily you can pay just the interest on your debt. If this ratio is high, your debt interest is not a burden; if it’s low (close to 1), you’re barely covering interest – a sign to reduce debt. Typically, a healthy interest coverage might be 3.0 or more (able to pay interest 3 times over with your operating profit).
  

Staying on Solid Ground with Your Loan

When you borrow money for your business, you want to make sure it’s helping—not hurting—you in the long run. That’s what “solvency” really means: being able to handle your debt without putting your business at risk. It’s about making sure the loans you take on are manageable and that you’re not stretched too thin.

For many entrepreneurs—especially those who’ve had a hard time getting approved by banks—getting funding is already tough. So when you do get it, it’s important to use it wisely. That’s where Accion Opportunity Fund (AOF) comes in. As a nonprofit lender focused on small businesses, AOF looks at more than just your credit score. They care about your story and your potential—and they want your loan to help you grow, not overwhelm you.

By keeping an eye on a few key numbers—like how much debt you have compared to your income—you can stay in control. It helps you make smart decisions about borrowing, investing, and building for the future without risking what you’ve already built.

Operating Efficiency Metrics: How Well Are You Using Your Resources?

Operating efficiency metrics show how effectively your business is using its resources (inventory, assets, and time) to generate revenue and manage costs. Think of these as measures of productivity and management finesse. They can highlight if you’re getting the most out of your investments in stock, equipment, and working capital. For small businesses, improving efficiency can directly boost profitability and cash flow. Let’s look at some key metrics in this category:

Inventory Turnover & Days Inventory

What it is: Inventory Turnover measures how many times you sell through your inventory in a given period (usually a year). It’s calculated as COGS divided by average inventory. A related metric is Days Inventory Outstanding (DIO), which tells you on average how many days an item stays in your inventory before being sold.

Inventory Turnover & Days Inventory Formula:

For example, your boutique has an average inventory of $30,000 (at cost) throughout the year, and your Cost of Goods Sold for the year is $120,000. Inventory Turnover = 120,000 / 30,000 = 4.0. This means you turn your inventory over 4 times a year. To find DIO: 365 / 4.0 ≈ 91 days. So on average, items sit about 91 days (roughly 3 months) before being sold.

What it means: Higher inventory turnover (and a lower DIO) generally indicates efficient inventory management – you’re selling goods relatively quickly and not tying up excess money in inventory. Lower turnover (high DIO) means inventory sits longer; this could be due to overstocking, slow sales, or obsolete items. For instance, if a bookstore has an inventory turnover of 2 (meaning stock turns over every 6 months on average), it might indicate a lot of books collecting dust on shelves, which is money sitting idle. In contrast, a grocery store might have turnover of 12 or more (restocking every month) because products move fast.

Why it matters: Inventory is basically cash in another form. If it’s not selling, it’s not only not generating revenue, but it also incurs holding costs (storage, risk of damage or spoilage, opportunity cost of tied-up cash). For small businesses, excess inventory = reduced liquidity. On the flip side, if turnover is too high, it could mean you’re running too lean and risk stockouts (losing sales because shelves are empty). Efficient inventory management finds the sweet spot. This metric is especially crucial for product-based businesses: retailers, manufacturers, wholesalers. A minority entrepreneur running a clothing boutique will want to keep fresh styles coming in, but also ensure last season’s items aren’t lingering too long. By tracking inventory turnover, she can make better buying decisions – maybe ordering smaller batches more frequently, or running promotions to clear slow-moving stock.

Actionable insight: Calculate inventory turnover at least annually, and ideally quarterly if you have seasonal cycles. Compare it to industry averages if available (e.g., apparel retail might have a different ideal turnover than electronics). If your turnover is low (inventory moving slowly), consider strategies like:

• Running a sale or promotion to clear out old stock.
  
• Improving marketing for those products.
  
• Cutting back on how much inventory you purchase or produce until sales catch up.
  
• Diversifying your product mix to focus on faster-selling items.
  

If your turnover is very high, congratulations – but ensure you’re not losing potential sales by running out of stock. You might need to increase order quantities or reorder faster. Modern point-of-sale systems can help track this, but even a simple spreadsheet can do the job for a small business: list your beginning and ending inventory values and sales, compute turnover, and monitor it over time.

One success story: a small Latinx-owned grocery learned through coaching that their inventory turnover on certain imported spices was only 1 (once per year!). They realized they were over-ordering those items. By reducing the order size and frequency, they freed up cash to invest in more popular products, which raised overall turnover and profits. Little tweaks in inventory management can have a big impact on efficiency and cash flow.

Accounts Receivable Days (Days Sales Outstanding)

What it is: Accounts Receivable (AR) Days, or Days Sales Outstanding (DSO), measures the average number of days it takes to collect payment from your customers. If you sell on credit (invoice clients who pay later), this metric is vital. It essentially tracks your collections efficiency.

Formula:

For a simple approach: if at any given time your accounts receivable equals one month’s worth of sales, then your DSO is about 30 days. For example, suppose your business does $120,000 in credit sales a year (averaging $10,000 a month), and your average receivables are $20,000. DSO = (20,000 / 120,000) × 365 ≈ 61 days. This means on average it takes about two months to get paid by your customers.

What it means: A lower DSO is better – it means you collect quickly. A higher DSO means customers are taking longer to pay. If your standard credit term is, say, Net 30 (payment due in 30 days), but your DSO is 61 days, many customers are paying late. That’s effectively like giving them extended credit and it hurts your cash flow. Small businesses, especially those serving other businesses (B2B), often struggle with slow-paying clients. For instance, a catering company that caters corporate events might invoice and not get paid for 60-90 days if the corporation is slow processing accounts payable. Monitoring DSO will quantify that impact.

Why it matters: DSO tells you how well you’re managing the cash conversion cycle – the time between making a sale and actually getting the cash. If DSO is too high, you’re essentially giving an interest-free loan to your customers, and meanwhile you might be borrowing or using your cash to fund operations. This can lead to liquidity issues. It’s especially critical for minority and underserved entrepreneurs who might not have a big cash cushion; getting paid promptly can make or break monthly finances.

Actionable insight: If your DSO is high or climbing, take action on your accounts receivable:

• Invoice promptly – send invoices as soon as work is delivered or goods are shipped.
  
• Clear payment terms – ensure your invoices state when payment is due and how (e.g., 30 days, with accepted payment methods).
  
• Follow up – implement a reminder system. A polite reminder a week before and on the due date can prompt timely payment.
  
• Incentives/Penalties – consider offering a small discount for early payment (e.g., 2% off if paid in 10 days) or charging a late fee for significantly overdue invoices (if appropriate and communicated upfront).
  
• Multiple payment options – make it easy for customers to pay (online payments, credit card, etc., even if there’s a small fee – it might be worth it to get cash in faster).
  
• Know your customers – sometimes, a particular client may always be late. You might decide to continue working with them but plan your cash needs accordingly, or require a deposit/upfront amount.
  

By bringing down your DSO, you accelerate your cash inflows, which improves liquidity without needing new sales – it’s like finding money stuck in the couch cushions of your balance sheet.

As a positive example: A Black-owned creative agency had a DSO of around 75 days, since many clients were large companies with slow payment processes. This was putting strain on paying the agency’s bills. Through coaching, the owner implemented a 50% upfront policy for new contracts and started accepting credit card payments (with fees built into pricing). The result? DSO dropped to under 45 days within a few months. Cash flow improved and stress went down. All because they focused on operational efficiency in collections.

Accounts Payable Days (Days Payable Outstanding)

What it is: Accounts Payable (AP) Days, or Days Payable Outstanding (DPO), measures the average number of days your business takes to pay its own bills to suppliers. It’s basically the flip side of DSO – how long you take to pay others.

Formula:

If your average accounts payable is $10,000 and your annual COGS (or purchases from suppliers) is $120,000, then DPO = (10,000 / 120,000) × 365 ≈ 30 days. That means on average you pay suppliers about 30 days after receiving goods or invoices.

What it means: A higher DPO means you take longer to pay suppliers (which can conserve your cash in the short term), while a lower DPO means you pay faster. Efficiently managing DPO is a bit of a balancing act: you want to hold onto cash as long as possible, but not at the expense of damaging supplier relationships or missing out on early payment discounts. For example, paying in 60 days instead of 30 might help your cash flow, but some suppliers might start nagging or even halt deliveries if that’s beyond agreed terms. Alternatively, some suppliers offer a discount (like 2/10 Net 30: 2% off if paid in 10 days) – if you can afford it, taking that deal essentially earns you a 2% savings, which is significant if annualized.

Why it matters: DPO is part of the cash conversion cycle as well – in fact, one way to improve cash flow is to shorten DSO (collect faster) and lengthen DPO (pay slower), within reason. By monitoring AP days, you can gauge if you’re paying too quickly (maybe being too generous, hurting your own liquidity) or if you’re stretching payables too long (which might harm credit or relationships). Many small businesses instinctively pay bills as soon as they come in when they have cash – which is good ethics, but not always necessary from a cash management perspective. If your DPO is very low, you might actually want to slow down a bit (pay on due date rather than immediately) to keep cash longer.

Actionable insight: Review your payment terms with suppliers and your payment practices:

• Know the terms: If it’s Net 30, there’s no penalty for using the full 30 days. Don’t feel obligated to pay in 5 days if 30 is allowed – use that float for your operations.
  
• Prioritize payments: Of course, always pay on time to avoid late fees or interest. If cash is tight, prioritize payroll, taxes, and critical suppliers (ones who could halt your business if not paid). For less critical or more flexible vendors, you might gently stretch to the maximum terms.
  
• Communicate: If you need more time, sometimes asking suppliers for Net 45 or Net 60 terms can help, especially if you’ve built trust. Many are willing to accommodate if you communicate before due dates pass.
  
• Take discounts when possible: If you have solid liquidity, taking a 1-2% early pay discount is often a great return on your money. Analyze if the discount is worth more than keeping the cash in hand.
  
• Monitor DPO vs DSO: Ideally, try to collect faster than you pay. If your DSO (collection time) is 45 days and DPO (payment time) is 30 days, you’re in a 15-day cash gap – you might need a line of credit to cover that. If you can flip it (collect in 30, pay in 45), you have a 15-day cushion where you’re using supplier credit to run your business. That’s essentially free financing.
  

By managing these, you’re optimizing your operating cycle – the journey of cash out (to suppliers) -> inventory -> sales -> cash in. A shorter, more efficient cycle means more agility and less need to borrow.

Total Asset Turnover

What it is: This metric measures how efficiently your business uses all its assets to generate revenue. It’s defined as Sales divided by Total Assets. In essence, it answers: How many dollars of sales do we generate for each dollar of assets?

Formula:

For example, if your total assets (equipment, inventory, cash, etc.) are $200,000 and your annual sales are $400,000, your asset turnover is 400,000 / 200,000 = 2.0. That means you generate $2 in sales for every $1 of assets.

What it means: A higher asset turnover indicates more efficient use of assets. This can vary widely by industry. A consulting firm with few assets might have a very high asset turnover (because the main “asset” is people’s knowledge, not on the balance sheet), whereas a manufacturing company with heavy equipment might have a lower turnover. Still, improving your asset turnover typically means you’re squeezing more sales out of the resources you have.

Why it matters: For small businesses, especially ones that have invested in equipment or property, asset turnover helps you gauge if those assets are pulling their weight. Let’s say you bought an expensive piece of machinery. You’d want to see sales go up significantly thanks to that machine; if not, your asset turnover (and ROA we discussed earlier) will drop, indicating inefficiency. Lenders might indirectly consider this too – if you have taken equipment loans, they want to see that those assets are generating revenue. AOF, being a mission-focused lender, often provides equipment financing, but also guidance on how to use that equipment effectively. Tracking asset turnover before and after such a purchase tells you if the investment was worthwhile.

Actionable insight: Use asset turnover as a big-picture efficiency check. If it’s increasing, great – you’re likely growing sales without proportional asset growth (meaning you’re scaling efficiently). If it’s decreasing, ask why:

• Did you invest in assets that haven’t started contributing to sales yet (e.g., opened a second location that’s not fully ramped up)? If so, you might expect turnover to improve soon – if not, you might have excess capacity.
  
• Are there assets you’re not utilizing fully? For example, a food truck (asset) that only goes out 3 days a week – could it be used 5 days to generate more revenue? If not, maybe you have more truck than you need.
  
• It could also drop if sales slowed down while assets stayed same – pointing back to needing to boost marketing/sales.
  

Combine this with other metrics: a falling asset turnover with a rising profit margin might be fine (you invested in quality, you sell less volume but at higher margin). But a falling asset turnover with falling margins is double trouble – assets are underutilized and each sale is less profitable.

Operating Expense Ratio (bonus metric): Another efficiency metric to mention is Operating Expense Ratio (OER) – operating expenses divided by revenue. If your OER is, say, 60%, that means 60% of your revenue goes to overhead and operating costs (excluding COGS). A lower OER over time means you’re running the business more efficiently (more of each dollar is kept as profit). This can be improved by either increasing sales without a big increase in expenses (scaling up) or by cutting unnecessary expenses. It’s essentially the complement of operating profit margin we discussed earlier (since Operating Margin % = 100% – OER% if we define OER to include all non-COGS expenses).

Summing up Operating Efficiency: Efficiency metrics help you fine-tune the engine of your business. They are particularly useful to identify bottlenecks or areas of waste. For a lot of small businesses, improving efficiency can free up cash and boost profits without needing new customers. 

Remember, small improvements add up. Reducing your average receivable by 10 days or increasing inventory turnover from 4x to 5x might quietly put a few extra thousand dollars in your bank account – money that can be used for marketing, hiring, or expanding. That’s why tracking these metrics matters. And you don’t have to do it alone – leveraging AOF’s coaching or Resource Center can give you tips and tools to improve your operating efficiency step by step.

Additional Financial Metrics to Track: Going Beyond the Basics

We’ve covered the core four categories, but depending on your business and goals, there are other key performance indicators (KPIs) that can provide valuable insight into your business’s health. Here are a few additional metrics and considerations:

Break-Even Point

What it is: The break-even point is the level of sales at which total revenues equal total costs. In other words, it’s when you’re not losing money but not making a profit either – you’ve “broken even.” Knowing your break-even helps you set targets and make decisions like pricing and cost management.

How to calculate: There’s a formula approach:

For example, if you run a food truck with $5,000 in fixed costs per month (permits, truck loan, insurance, etc.), and on average it costs you $3 in ingredients to make a menu item that you sell for $8 (so $5 contribution margin per item), your break-even volume is $5,000 / $5 = 1,000 items per month. That translates to $8,000 in sales (since 1,000 items × $8 price). So if you sell around $8,000 in a month, you cover all costs; every dollar beyond that is profit.

Why it matters: Break-even gives you a concrete goal and peace of mind. If, for instance, you know your break-even is about $8,000 a month, and you’re currently selling $10,000, you know you have a buffer of profit. If you’re only selling $6,000, you know you need to increase sales or cut costs, or you’re operating at a loss. It’s particularly useful for planning and stress-testing your business. When considering a new expense (say hiring an employee with $3,000/month salary), you can recalculate break-even to see how much more sales you’d need to justify it. This helps in decision-making.

Actionable insight: Calculate your break-even periodically, especially when costs change or you’re planning for growth. For startups, doing a break-even analysis is crucial before launch – it tells you roughly how much you need to sell to survive. For existing businesses, it helps in setting sales targets and pricing. If your break-even seems too high (e.g., “I need to sell 200 cups of coffee a day just to break even – that seems unrealistic”), that’s a sign to either reduce fixed costs or increase margins (raise prices or reduce variable costs). Many business owners use break-even as a motivational target: “Once I hit break-even by mid-month, I know the rest of the month is profit.” It can also guide your promotional strategies – e.g., if sales are tracking low mid-month, you might run a special to ensure you at least hit break-even by month-end.

Growth Metrics (Revenue Growth Rate)

What it is: Growth metrics track how your business is expanding (or contracting) over time. The simplest is Revenue Growth Rate – the percentage increase (or decrease) in sales from one period to the next. You can also track profit growth rate similarly.

Formula (for year-over-year growth):

If last year you made $100,000 and this year $120,000, your growth rate is (120k – 100k) / 100k = 0.20 = 20% growth. If sales stayed the same, it’s 0%. If they dropped to $90,000, growth would be -10% (a decline).

Why it matters: Growth is an important indicator of business momentum and market traction. A healthy, sustainable growth rate depends on your industry and capacity. Even a modest growth of 5-10% per year can be great for a stable small business, especially if you’re already profitable. Rapid growth (like doubling sales) is exciting but can strain your resources (more inventory, more staff needed, etc.). Tracking growth helps you plan: if you’re growing, do you need more financing to expand? If growth is flat or negative, what strategies can boost sales (new marketing, product lines, etc.)?

Actionable insight: Calculate your growth rate year-over-year and also month-over-month or quarter-over-quarter to spot trends. If you see growth decelerating (slowing down), investigate causes – maybe market saturation or increased competition. If you see an uptick, analyze what led to it (seasonality, a successful promotion, etc.) so you can replicate it. Use growth metrics to set realistic goals: for instance, “We aim to grow revenue by 15% next year.” Then break that down – that might mean, say, acquiring 50 new customers or launching a new service line. Growth doesn’t happen by itself; linking the financial goal to concrete actions is key.

Also, keep an eye on cost growth relative to revenue growth. If your revenues grew 20% but your expenses grew 30%, your profits might shrink – unsustainable in the long run. Ideally, you want revenue growing faster than expenses, leading to widening profit margins as you scale. That’s something to strive for and celebrate when it happens.

Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

For those engaged in marketing and customer analytics, especially in e-commerce or subscription models:

• CAC is the average cost to acquire a new customer (marketing spend divided by number of new customers acquired in that period).
  
• Customer Lifetime Value is the total revenue you expect to earn from a typical customer over their time with you.
  

Why mention these? Because they are financial metrics from a marketing perspective – they help ensure your marketing is yielding profitable customers. The goal is to have LTV significantly higher than CAC. For example, if you spend $50 in ads to acquire a customer (CAC) and that customer on average gives you $200 in profit over a couple of years (LTV), that’s a healthy return. If those numbers are flipped (CAC $200, LTV $50), you’re losing money on each customer – a big problem.

These metrics might be more relevant for scalable startups or those who do a lot of paid marketing. But even a local business can benefit from thinking this way: “If a customer’s average purchase is $20 and they visit 5 times a year for 3 years, their LTV is $300. So if a local ad costs me $500 and brings in 5 new customers ($100 CAC each for, say, $300 LTV each), that ad spend yields $1,500 LTV total from those customers. That’s a profitable marketing investment.” Such thinking ensures you’re spending money to make money, wisely.

Personal Credit Score and Business Credit Profile

This isn’t a metric on your financial statements, but it’s worth tracking your credit health. Many small business owners, especially startups, rely on personal credit for business financing. Regularly check your personal credit score and take steps to improve it (timely payments, low credit utilization) because it can impact your ability to secure loans on good terms. Also, as your business grows, establish a business credit profile: get a DUNS number, perhaps a business credit card or trade lines with suppliers. A strong credit profile can open doors to higher financing if needed, and at better rates.

Accion Opportunity Fund and other CDFIs often work with entrepreneurs with less-than-perfect credit (AOF looks beyond just the score​), but improving your credit is still beneficial and an actionable goal. It might not directly reflect in profit or cash flow, but it’s part of the holistic financial health of your enterprise.

Summing up Additional Metrics: Every business is unique, and you may find certain metrics more critical than others. The key is to identify the numbers that drive your success. Use them as a dashboard to steer your company. And remember – metrics work best when you act on them. They’re not just numbers to report; they’re insights to respond to.

If this feels overwhelming, start with just a few that matter most now (say, net profit margin, current ratio, and break-even). You can gradually add more as you get comfortable. The goal is to turn raw data into decisions: if a metric moves in the wrong direction, it should trigger you to ask “Why?” and then “What can I do about it?”

At Accion Opportunity Fund’s Resource Center, you’ll find tools and templates (like break-even calculators and cash flow worksheets) that can simplify this for you. Financial literacy is a journey, and you’re not alone on it.

Next Steps: Improving Your Financial Health with Accion Opportunity Fund

Understanding these metrics is the first step. The next step is using them to make informed decisions and improvements. This is where Accion Opportunity Fund is committed to being more than just a lender – we’re a partner in helping you thrive. Depending on where you are in your business journey, here are tailored next steps and how AOF’s services and resources can support you:

For Startups and New Businesses: Coaching and Education

If you’re in the early stages – maybe still figuring out your business model or just launched – it’s the perfect time to build good financial habits. Startups often operate on thin margins and tight budgets, so tracking metrics like break-even and burn rate can literally be the difference between turning your dream into a sustainable business or running out of steam.

What you can do: Focus on learning and getting your foundation right. Develop a basic bookkeeping routine (monthly review of profit/loss and cash flow). Set simple targets, like “I need $X sales to break even this month” or “Keep costs under $Y.” Use the metrics in this guide as a checklist and don’t hesitate to ask questions.

How AOF helps: Accion Opportunity Fund offers free business coaching and personalized advising to entrepreneurs just like you. You can connect with a business advisor who will work one-on-one to help interpret your numbers and make a plan. Sometimes just talking through your finances with an expert can provide huge clarity and confidence. As one AOF client put it, “Accion Opportunity Fund has more options and more flexibility than most loan companies.”​ That flexibility includes meeting you where you are – even if you’re not loan-ready, we can help you get there.

We also provide a wealth of educational content. Check out AOF’s Business Resource Center for articles, how-to guides, and interactive courses on topics like budgeting, setting up bookkeeping, and understanding small business finances​. These resources are designed for busy entrepreneurs and are available in both English and Spanish. For example, you might find templates for cash flow tracking or a webinar on managing credit – all free on our website. As a startup founder, arming yourself with knowledge is one of the best investments you can make.

Call to action: Ready to level up your financial skills? Sign up for a free coaching session with an AOF business advisor or explore our online business courses. Even if you’re just brainstorming or in the early hustle, we’re here to support your journey from day one.

For Growing Businesses: Affordable Loans to Fuel Your Next Stage

If you have an established business (perhaps 1-2 years or more in operation) and you’re tracking these metrics, you might identify areas where additional capital could make a big difference. Maybe your strong sales growth is straining your cash flow (liquidity issue), or you see an opportunity to expand (open a new location, buy a delivery van) but need funding to do it. This is where many businesses consider loans. However, choosing the right lender is crucial – the wrong financing (too expensive, too inflexible) can hurt your financial health, while the right financing can boost it.

Your considerations: Look at metrics like your Debt Service Coverage and forecast how a new loan payment would fit in. You want a loan that you can comfortably pay (and ideally, one that helps increase your profits so those payments are even easier over time). Also consider how fast you need the money and what you need it for – is it short-term working capital to buy inventory, or a medium-term loan for equipment?

Why AOF is different (and better): Accion Opportunity Fund is not your typical lender. We’re a nonprofit Community Development Financial Institution, which means our mission is to empower business owners, not to maximize our profit from a loan. We reinvest loan repayments into helping more entrepreneurs, particularly those traditionally overlooked by banks​. 

Here’s what that means for you:

• Fair, Transparent Terms: Our interest rates start as low as 8.49%​, and we have no prepayment penalties. Unlike some online lenders that quietly charge 40-50% APR or lock you in with fees​, AOF’s rates are comparable to bank loans at the low end and we encourage you to pay off early if you can (it saves you interest!).
  
• Flexible Loan Amounts & Uses: We offer loans from $5,000 up to $250,000, so whether you need a microloan for a small purchase or a larger amount to scale, we have you covered​. You can use the funds for a wide range of purposes – working capital, hiring staff, buying equipment, refinancing higher-cost debt, you name it.
  
• Personalized Support: When you work with AOF, you’re not just an account number. You get a dedicated loan advisor to guide you through the process​. We take time to understand your business holistically. Remember how we talked about lenders looking at DSCR and credit scores? Well, AOF “does not judge by credit score alone” and looks at factors like your business plan, your experience, and your character​. We listen to your story – something many automated online lenders (like Kapitus or Funding Circle) won’t do. This means we often say “yes” when others say “no” because we see potential beyond the numbers.
  
• Compared to Other Lenders: It’s important to evaluate options. Traditional banks have low rates but often hard-to-meet requirements and slow processes. Online fintech lenders (e.g., Kapitus, Funding Circle, LendingTree’s network) might boast fast approvals, but many charge high interest or require strong credit. In fact, Bloomberg reported that one popular online lender’s average APR was 54% – imagine the strain that puts on a business’s solvency. Those lenders also won’t provide coaching or flexibility if you hit a snag. 

• Responsible Lending: We succeed when you succeed. We’ll never push you into a loan that you can’t handle. Our advisors often help clients determine an appropriate loan size. If we calculate that a slightly smaller loan makes more sense for your current cash flow, we’ll discuss that – we want you to maintain a healthy Debt-to-Equity and DSCR after taking our loan, not drown in debt. This is a key difference with AOF – we’re a partner, not a predator. 

Call to action: If you think funding might be the catalyst to improve your metrics (be it purchasing inventory to boost sales or refinancing high-interest debt to improve solvency), check out AOF’s loan offerings. You can apply for a small business loan online in minutes with no impact to your credit score for checking offers​. Our application is simple, and our team will walk you through every step. Whether you need $5K to bridge a short-term gap or $100K to open that second location, let’s talk. We’ve helped thousands of entrepreneurs access over $1 billion in capital on fair terms, and we’re ready to help you​.

Remember, the right loan used wisely can improve all your key metrics – profitability (by enabling more sales), liquidity (by providing working cash), solvency (by consolidating expensive debts), and efficiency (by funding better equipment or systems). Let’s work together to make sure any financing you take strengthens your business’s health.

For All Businesses: Leverage AOF’s Resource Center and Community

No matter your stage – just starting, growing, or even well-established – running a business can be isolating. But you are not alone. There’s a whole community of entrepreneurs and resources available to keep you informed, inspired, and supported.

Accion Opportunity Fund’s Resource Center is a goldmine for small business owners. It’s regularly updated with articles, videos, and success stories. Topics range from financial literacy (like many of the metrics we discussed) to marketing tips, legal advice, and leadership. If you enjoyed this deep dive into financial metrics, you’ll find our library of content to be an ongoing guide.

Moreover, AOF frequently hosts events and webinars (often virtually) where you can learn and ask questions in real time. Keep an eye on our Events page for upcoming workshops. Subjects might include “Maximizing Your Social Media ROI” or “Tax Prep for Small Businesses” or even panels featuring successful AOF clients sharing their journeys. Hearing the stories of others can be incredibly motivating. You’ll realize many have walked the path before – entrepreneurs like you have faced cash flow crunches, struggled with pricing, pivoted during COVID – and came out stronger. Their insights can become your shortcuts.

Ready to take your business’s financial pulse and elevate it to new heights? Start by implementing one metric improvement this month – and reach out to Accion Opportunity Fund for any help along the way. With knowledge, perseverance, and the right partner, your business’s future is bright and healthy. Here’s to your success!

In this webinar, designed for small business owners seeking to secure small business grant or loan funding, you will gain valuable insights and practical strategies to enhance the quality of your applications. With expert guidance, you will learn how to create persuasive proposals and increase your chances of securing funding.

Watch Our Webinar on Crafting Small Business Grant and Loan Applications

 

Meet the Experts

Lindsay Chung

Lindsay Chung is a Program Manager and business coach at Accion Opportunity Fund and has more than 12 years of experience in the accounting and finance industry. Lindsay has worked with hundreds of small business owners across more than 20 different industries. From startups to established businesses, she has helped businesses understand their credit and ways to improve it along with advising them on how to manage their cash flow, analyze their financials, and improve their bookkeeping practices. Lindsay first realized her passion for economic empowerment while proudly serving as a Peace Corps Volunteer in Botswana. She has a Bachelor of Science in business administration, accounting and finance from the University of Colorado.

Jeannette Flores-Katz

Jeannette Flores-Katz was born and raised in El Salvador. Through Kosher Guacamole Corp. Jeannette, with her husband, uses high quality ingredients and shares Salvadoran food and culture to Atlanta. Jeannette personifies entrepreneurship and is dedicated to self-development and the mentorship of women in Atlanta.

 

Small Business Grant and Loan Options

Types of Capital

There are many different ways to finance your business, including multiple different kinds of debt capital (like loans, merchant cash advance, credit cards), grants, or equity investments. The following chart outlines common types of capital based on your stage in business. It is important to be aware of the many different types of capital and their typical characteristics so you can make an informed decision about the best type of capital for your business.

Choosing the Right Type of Capital

When evaluating your financing options, it is important to choose the best type of capital for your business. In addition to knowing exactly how much you can afford, it is essential to evaluate the lender and make sure that its lending options are right for you and your business, just as much as the lender is evaluating you as a borrower. Companies that are not regulated and bound by state treasury laws typically offer loans full of hidden fees and fluctuating payment schedules. These daily or weekly repayment schedules can strip business owners of the cash they need to operate.

When evaluating a financing offer, you want to look for traditional terms such as a monthly payment schedule, easily understandable terms, and APR. When it comes to daily or weekly payments, proceed with extreme caution. Depending on your cash flow, it may be best to avoid such a loan because it can hurt the future of your business. Lenders that do not clearly share upfront the cost of a loan or who advertise that they’ll give you fast cash without asking for details about your business may have something dangerous to hide. If you are considering a loan, be sure to familiarize yourself with predatory lending practices and techniques to protect your business.

Applying For Grants

As the economic impact of the COVID-19 pandemic became clear, many big corporations, government agencies, and non-profit organizations started programs to support entrepreneurs that included small business grants. Many of these programs have continued to this day. Some programs provide only a grant to selected applicants, while others provide additional resources in addition to a small business grant.

Additional Benefits of Educational Programs with Grant Components

Many programs include educational resources, coaching, networking, and marketing opportunities in addition to a grant upon successful completion of the program.

• Educational programs often introduce you to small business resources you might not have know about before, on both a local and national level. AOF’s free Business Resource Library and Interactive Short Courses are an excellent resource for many small business needs.
• Weekly or monthly classes on relevant small business topics. Jeannette recognizes that these classes can be a commitment in the already busy schedule of a small business owner. However, the benefit of the, often virtual, classes is that you are forced to to work on your business instead of in your business. That mindset also helps you learn to step back from the day to day of your business, train and put faith in your team to do their jobs, and reach the  next phase of your journey as a business owner.
• Some programs also include coaching from expert business coaches, who can advise you on your business’ unique needs.
• Many educational programs incorporate networking with fellow business owners. Networking is your opportunity to get and share ideas with your peers and business experts. You never know what you are going to learn. Jeannette recommends going into these program with an open mind. In her experience, you will always learn something valuable, so make the most of the opportunity.

Where to find grants

• AOF’s Programs Page. Many of our educational programs have grant components.
• HelloAlice.
• Sign up for newsletters.
• Local, state,  and national organizations that support small businesses.

How to craft a compelling grant application

You don’t always know what they are looking for. Make sure you meet all eligibility requirements, but don’t give up and keep applying. Jeannette applied for a particular grant three times before she was accepted. There’s no one formula for success, but you need to be prepared.

• Read carefully what they are looking for or who the program is for
• Share your dream. They are looking for people who are passionate about your business
• They want to see you as successful and so they want to see someone who will maximize the impact of the funds on their business
• They also want someone who will take advantage of any other components of the program, like educational or coaching resources

Grants attached to ed programs are often less competative than grants that don’t have educational resources as part of the program. You also get additional benefits like coaching and educational resources to help your business succeed.

They can be a pain to do. Jeannette called applying for them as a job in and of themselves.

Tell them as much as you can about your business. Focus on telling your story, sharing how you would use the funds, and how that would impact your business

Save all of your grant applications, especially the answers to any questions, so you can re-use them on future grant applications, and so you can go back and reflect on your business goals and responses over time.

Grant apps offer a fantastic opportunity to reflect on your business, seriously and strategically consider your goals, and make a plan for your business. Business owners are so busy that it can be hard to find time to work on your buisness, not in your business. Grant or loan applications can force your to prioritize that time.

You just have to go for it. You don’t have to be overqualified or at your absolute finest. You’ll learn through the process and you may, in fact, win a grant along the way.

Applying For Loans

What Lenders Look For

Submitting an application for financing can feel like putting your request into a black box. Often, you don’t know what is going on inside the box and you don’t know what will come out the other side. What do lenders actually look for in a loan application? In general, they are trying to determine how likely it is that an applicant will be able to repay the loan. To determine that likelihood, they evaluate a loan application based on the 5 C’s.

• Character: This is typically represented by your credit report. For most small businesses, lenders will review your personal credit report and score. To build your business credit, in additon to your personal credit, you will need to apply for a DUNS number. To begin building business credit, Lindsay recommends starting with your banking institution and getting a secured business credit card. Make payments in on time and in full to build your credit. Over time, see if you can move to an unsecured business credit card.
• Capacity: This measures your ability to afford a loan payment. Capacity is typically measured with your debt service credit ratio. Lenders need to insure you have enough net income to cover your expenses, current debt, and future or potential debt. For newer businesses, to determine net income, lenders review financial projections. Make sure your projections are well researched and supported based on industry or competitor numbers.
• Capital: This measures your financial commitment to your business. Lenders want to make sure you have skin in the game and a personal investment in the business. To evaluate this, lenders will typically examine your balance sheet.
• Collateral: This is an asset you own that you pledge to secure the loan. That means that if you default on the loan, the lender would typically take ownership of that asset. Not all lenders require collateral, but many do, especially for purchases of real estate or major equipment.
• Conditions: This involves an evaluation of cirumumstances that may impact your ability to repay the loan. Lenders will typically consider how you plan to use the funds, your industry outlook, and the trajectory of the overall economy.

By considering the 5 C’s, lenders determine if they can offer you a loan, how much you will be offered, and under what terms.

Tips for Success: Small Business Grant and Loan Applications

Share Your Unique Value

• “I can give you my recipes but your final product won’t come out the same as mine”, Jeannette shared. As a business owner, you put your own unique touch your products and services, just like Jeannette puts on hers. You might sell similar products or services to your competitors, but your story, passion, and approach make you and your business unique. Share your story in a concise, articulate package.
• Be genuine. Not everyone is going to like you or what you sell. Your best customers will like you because of who you are and how you sell it or present it. Customers (and application reviewers) are looking for a clear and genuine picture of who you are and what you sell. For this reason, using grant writers can be hit or miss. Reviewers want to hear your voice in an application or interview.
• Personalize your pitch each time you apply for a grant. Each time you apply, you will be in a different position than you were the last time you submitted an application, so you have to update your pitch accordingly. Also, because each grant targets different business owner profiles, focuses on different aspects of a business, or asks different questions, it’s essential to tailor each pitch or application to that particular grant or loan.
• Don’t be ashamed or shy. Share where your business is really at at the time of application. Talk about your goals for your business, and how you plan to reach those goals with the grant or loan funding. While successful small business grant and loan applications need to be open and genuine, be cautious about giving away your “secret sauce” or any other intellectual property in an application.

Know Your Numbers

Part of applying for a loan is sharing your business’ financial situation with lenders. Finances can be intimidating and it can be very helpful to have a bookkeeper that helps you day to day, but you still need to understand the basics of your financial reports and budget so you can speak confidently to lenders about your numbers and your business.

• Know your credit score. Look it up and keep an eye on your credit report. Keep in mind that having too many inquiries on your credit report can be considered a negative by lenders.
• Know what you can afford. Understand your cashflow and avoid predatory lending situations like merchant cash advances.
• Know how you will use the funds and write a specific plan. Calculate exactly how much you need. Don’t ask for too little, since can be hard to get additional capital, but don’t ask for too much either, since you don’t want to pay interest on funds you don’t really need. When presenting your request, use the following template as the outline for your pitch: I am asking for $ [amount] to use for [specific reason], which I project will increase or improve [sales/output/profit/revenue] by [amount or percent].
  • For example, a taqueria might say “I am asking for $7000 to purchase an automated tortilla machine. We know house made tortillas are very popular with our customers and based on current sales and customer surveys, we project that house made tortillas will increase revenue by 9%.

Organize Your Documents

• Keep all of your business and personal documents in order.
• Submit everything that a grant application asks for. If you don’t understand a question or request, ask the organization for clarification.
• Once you have it on order, applications become much easier. Be sure to keep documents and information updated.
• Create a business plan. Even when you make major business purchases with your own funds, you need to know your numbers, have a plan, and understand how that purchase will help you reach your business goals. Loan and grant application reviewers want to know the same thing.
• When  you talk to lenders, treat it like a job interview. You are being interviewd and you need to be prepared with financial documents, business documents, and relevant market research. Lenders want to know how your business will generate income to be able to pay back the lender and how your expertise will contribute to that success. You are also interviewing the lender. Make sure you are prepared to ask questions so you fully understand how the lender operates and the terms of any loans for you are offered or educational programs to which you are accepted.

Accion Opportunity Fund also offers small business grants as part of our educational programs. Check out our current programs here.

Do you need advice around crafting small business grant and loan applications for your business? Sign up for free one-on-one coaching with our expert business coaches, including Lindsay Chung. As Jeannette says, it takes a village to build a village, so don’t be afraid to ask for help for any and all resources that are available to you.

Explore the AOF Coaching Hub

External financing can be a great way to help you reach your business goals, but with so many different terms, rates, and fees, it can be difficult to compare financing options. So, how much does a line of credit cost, and how does that compare to the cost of a term loan?

Term Loan Vs Line of Credit:Typical Uses

While they are both types of debt capital, lines of credit and term loans have very different uses in small business finance. For a deep dive into the differences between term loans and lines of credit, check out our article: Term Loans and Lines of Credit: What’s the Difference?

In general, lines of credit and term loans are best used for the following small business expenses:

Line of Credit

• Inventory
• Payroll
• Seasonal working capital
• Short term costs

Term Loan

• Equipment
• Real estate
• Start-up capital
• Larger costs
• Longer time needed to repay

Term Loan and Lines of Credit Cost Comparison

Interest rates

, annual fees, principal, and credit scores can make for a confusing time when it comes to comparing term loan and line of credit cost. To help you determine the best financing option for your business, we’ve broken the costs down into a side-by-side comparison.

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What is the Prime Interest Rate?

Prime or the prime interest rate

is the prevailing interest rate that traditional banks charge to customers with excellent credit scores. The prime rate is usually the same as the interest rate set by the US Federal Reserve. If your credit score could use some improvement, you will likely be charged more than prime.

Merchant Cash Advance (MCA)

Merchant Cash Advances or MCA are another common type of business financing. When a small business owner takes out a merchant cash advance, they’re given cash up front, which they repay through a predetermined percentage of their daily debit and credit card sales. This can be a great lending option for businesses with fairly stable debit and credit card sales, but it is also a common vehicle for predatory lending practices. If you are considering a Merchant Cash Advance, make sure you read and understand the terms carefully before agreeing to the loan.

Cost vs Flexibility

All three of these popular loan options have pros and cons that you need to consider before choosing a loan for your business. The chart below helps you consider the total cost of a loan verses the flexibility of it’s repayment terms (i.e. how much and how often you will make payments).

Which is Right for Your Business?

Comparing the cost of term loans and lines of credit can feel a bit like comparing an apple and an orange. If you are considering an MCA as well, the decision can get even more confusing. The best way to decide what is right for your business is to start with what your business can afford in terms of monthly or weekly payments, what the loan will be used for, and what loan terms work best for your business’s financial situation. Once you have that list, you can start comparing it to different financing options to find the best fit for your business.

Financing with Accion Opportunity Fund

If you do decide that a term loan is right for you and your business, consider working with Accion Opportunity Fund. At Accion Opportunity Fund, our goal is not only to help you get the funding and support you need to launch your business, but to help you grow and thrive once you’ve got your foot in the door. Accion Opportunity Fund is a government-regulated, non-profit financial institution with a mission to help small business owners reach their goals. Find out more about our small business loan program and apply online today.

Disclaimer: Average interest rates and typical loan terms can change rapidly, so please thoroughly check with any provider to confirm rates and terms.

Learn More About Business Financing

When it comes to your finances, you want clear guidance and easy to implement tools based on your unique needs. Visit Accion Opportunity Fund. to get started strengthening your financial management and meeting your goals.

Experience a different kind of financial education. Learn with AOF has flexible, on-demand courses developed by small business owners, for small business owners. Learn on your schedule, with no time commitment or limit. Save your progress any time to fit courses into your busy schedule.

As tax season begins, there’s a lot to think about. What business deductions should you take? What taxes do small businesses have to pay? To help you prepare and get ready, we will cover the following topics:

1. What Taxes a Small Business Pays
2. Small Business Tax Deductions
3. Top 10 IRS Audit Triggers and What to Do if Audited
4. How to File Taxes and What to Do if Need Extension
5. Top 5 Tax Mistakes Small Businesses Make

While paying taxes is arguably one of the least enjoyable aspects of running a business, our series is designed to make tax time much easier and a little less painful. To help you start preparing for tax time, here are some helpful ideas.

Plan Your Tax Year Based on Your Business Structure

Here’s the thing: there’s not actually one single “tax time.” April 15 is the date that looms large for individual returns, but businesses may also face other deadlines throughout the year, especially if they pay quarterly taxes or issue 1099s to contractors. It’s important to keep track of the dates so you have the proper paperwork prepared and the money available to pay anything you might owe.

In the current calendar year, you will pay taxes on income you made in the previous year. The date on which your payments are due will depend on your company’s legal structure.

• For most S-Corps and Partnerships, taxes are due March 15.
• For most C-Corporations and LLCs, the due date is April 15, the same due date as individual income taxes.

Throughout each year, there are other important dates and tax deadlines to note. If you have employees, you’ll need to provide them with the wage documentation they need to file their own returns. The deadline for providing these documents is often in January, but can vary. You’ll also need to pay payroll taxes on a regular basis. If you are self-employed, you may need to pay a self-employment tax and quarterly taxes on your estimated earnings for the year. State deadlines may be different than federal deadlines.

Your accountant can help you get set up for all the appropriate dates for the year, and the IRS has an online calendar noting all of the federal tax deadlines.

What Records Should You Keep?

There are many reasons to keep good records of your business’ financial transactions. Accurately entering the information will help you prepare the financial statements you need to run the company properly and prepare your tax returns at tax time.

The financial records you keep have to support the income, expenses, and credits you report and be available for the IRS to inspect. If you get audited, you may be asked to explain or prove the claims you’ve made. The responsibility will be on you to be able to prove any entries, statements, or deductions on your tax return.

The IRS has a list of the documentation it recommends you hold on to in order to back up your figures. Generally, it includes all the documents that support your income, purchases, expenses, and assets. Think along the lines of bank records, credit card receipts, canceled checks, register tapes, invoices, petty cash slips, and business travel and entertainment receipts. Also, hold on to your previously filed tax returns.

Information can be kept as hard copies or in digital form, as long as IRS standards are met. If you are scanning and storing records on your computer, be sure to keep a cloud or other backup. NeatFiles has software that scans receipts and exports the information into most accounting software programs.

How Long Should You Keep the Records?

For tax purposes, the IRS says you should keep tax documentation until the period of limitations for that return runs out. The IRS lists the specifics on its website, but generally, if you have filed a return that contains all of the income you’re required to report, keeping records for three years is sufficient.

There are exceptions, however, so check the IRS site and speak with your accountant. In some cases, the IRS can audit you up to six years after you file, so you may want to err on the side of caution and keep receipts and other paperwork for that long. Records of employment taxes should be kept for at least four years.

Also keep in mind that there are reasons not related to taxes to hold onto records, such as for insurance or creditors. The IRS guidelines aren’t the only ones you might want to follow.

How to Get Organized

If you are following our small business bookkeeping tips, you’re already a long way toward being well organized for filing your taxes, especially if you’re using accounting software. It’s easy to integrate that software with all the major tax applications like TurboTax or TaxACT, whether your accountant does it for you at tax time or you do it yourself.

With an accountant or on your own, here’s how to make sure you’re as ready as can be:

Stay on top of your business transactions

Make good record-keeping a habit. Some business owners enter their sales and expenses daily, others do it weekly, and some wait for one, big monthly reconciliation. Frankly, the more often you can do it, the better. Everything will be fresher in your mind and the paperwork will be less daunting when it doesn’t pile up. Whatever you do, don’t wait till tax time to reconcile your books for the entire year. That’s a headache waiting to happen.

Collect all of your receipts and statements

Keep all your receipts, even if you just write a note or two on the back and put them in an envelope for the month. This is especially important for documenting business travel or entertainment expenditures. Note who you were with and what the business purpose was. Consider an expense-tracking app for your phone, which can store images of receipts and notes together.

Make sure you have documentation for every purchase you’re claiming a deduction for, including medical expenses, interest, and charitable contributions. If you cover certain expenses for your employees, like supplies and union dues, those are deductible, as well. Keep an accurate log, including the date you paid for something, why, and a receipt for the purchase.

If you have a home office used for business, you may qualify for the home office deduction. Keep records of how much you spend on things like homeowners’ insurance, mortgage, utilities, and maintenance. Similarly, if you use your personal vehicle for business (other than commuting), keep records of the miles you drive for work, repairs, fuel, oil changes, etc.

You’ll need statements concerning any investments you have, such as stocks, bonds, mutual funds, real estate and interest.

If you or your spouse has income from another employer, you’ll also need W-2 or 1099 forms for that. The originals are filed with the IRS and matched to your tax return, so be sure to get and include them with your income filing at tax time.

Recognize and deal with any difficulties

If you don’t have the proper information or documentation to prepare your return correctly at tax time, don’t put off handling the situation. Extensions are available, and you or your accountant will save a lot of stress if you file for one early rather than waiting until the last minute.

Learn More

When it comes to your finances, you want clear guidance and easy to implement tools based on your unique needs. Visit Learn with AOF to get started strengthening your financial management and meeting your goals.

Experience a different kind of financial education. Learn with AOF has flexible, on-demand courses developed by small business owners, for small business owners. Learn on your schedule, with no time commitment or limit. Save your progress any time to fit courses into your busy schedule.

You may have any number of reasons for starting your own business – doing something you love, being your own boss, creating a venture you can pass onto your children, or something else entirely. But at the end of the day, it’s a business and you’re trying to make a living. That means you have to get money out of your business somehow. Many small business owners have a hard time deciding: How much should I pay myself? It can be a tough number to pin down – too much and you may jeopardize the financial health of your company, too little and you jeopardize your own finances.

In addition to how much you pay yourself, you’ll have to decide on a way to pay yourself. That element will depend largely on how you choose to organize your business.

Your Business Structure and Your Pay

Before we talk about how to decide on how much to pay yourself, you need to understand the different ways you can pay yourself. It’s not as simple as grabbing the cash left in the register at the end of the day. As we just mentioned, your options depend on your business structure.

Sole Proprietorships

A sole proprietorship is the simplest of business entities. As a sole proprietor, all business income is considered your income. When you’re heading up a sole proprietorship, you report taxes using a Schedule C and a Standard Form 1040. Essentially, you and the business are considered the same entity, and any profits the business makes are automatically considered to be your income.

You can pull money from your sole proprietorship at any time, but remember to keep careful records of what you’re pulling out so that your accountant can handle it properly on your annual tax return. Certain withdrawals may be treated differently.

If you’re working as a sole proprietor, you’ll probably need to pay quarterly withholding taxes to the IRS, which also means filing a quarterly return. Talk to your accountant to determine what you need to do.

Partnerships

Partnerships are like sole proprietorships, but with multiple owners. Partnerships profits pass through to the partners as income, just like a sole proprietorship. For tax purposes, a partnership will file a Schedule K-1 and Form 1065 with the IRS. As with sole proprietorships, partners may also pay themselves out of the profits of their businesses at any time.

Again, you may be required to file quarterly returns and pay quarterly withholding taxes, so talk to your accountant.

Limited Liability Corporations (“LLC”)

An LLC melds the tax pass-through of partnerships with certain protections of a corporation, such as limiting personal liability for debts and legal issues. As far as paying yourself goes, the profits are considered to be part of your income, much like a sole proprietorship or partnership.

LLCs and Corporations both require formal legal registration. When starting up your LLC or Corporation, you should take the proper steps to ensure that you’re in compliance with all state and federal registration laws. Proper registration of these business entities entitles you to certain legal protections.

Talk to your accountant about whether you need to file quarterly returns and pay quarterly withholding taxes.

S Corporations (S Corp)

When you incorporate your business, you can choose between becoming an S corp or a C corp. An S Corp structure is a popular choice among small business owners; it offers many of the legal protections of a regular C corp but has a different tax structure. S corps are taxed like partnerships, with all profits and losses passing directly through to the owners. The corporation is not taxed as its own entity.

The law requires officers in both S and C corporations to be part of the documented payroll. In other words, you’ll have to pay yourself if you’re working as an officer. As with any paycheck, that comes with withholding for taxes, Social Security, and Medicare. Whatever income you earn as an owner is still taxed at your personal rate but is not subject to the standard payroll taxes.

You may need to file quarterly returns and pay quarterly withholding taxes on the income that gets passed through to you, so you’ll need to work with your accountant.

C Corporations (C Corp)

C corps are somewhat less popular among small business owners since the requirements and rules are more complex than other forms. C corps offer the most legal protection and the most flexibility as far as dealing with investors and expanding (or contracting) ownership, but you’ll need to follow all the technical legal procedures in order to get those benefits. C corps also offer different options as far as paying yourself.

If you’re working for the C corp, you can pay yourself a salary with all the standard payroll taxes. You can also pay yourself in the form of a “dividend.” A dividend is a payment made to stockholders. Dividends are described in terms of a dollar amount per share – like $2 per share, so you’d get $500 if you own 250 shares. You generally have to pay a 15% tax on dividends rather than the rate of your personal bracket. Depending on your bracket, dividends may be cheaper than a salary.

However, dividends involve other complications. First, accounting can be tricky and probably requires the help of a professional. Second, dividends are double-taxed – the corporation can’t deduct them, so the business pays the full tax on that amount and you pay an additional 15% on what you get. And if there are multiple owners, you’ll have to get everyone to agree on dividend payment and rate and everyone will have to get the same rate.

Note that you can set up a C corp with just one owner; you don’t have to have a large group of shareholders. Then you can set salaries and dividends however you like. Just remember to carefully follow the rules (talk to your attorney to make sure you’re doing it right) or the IRS may decide to treat you as a sole proprietorship.

General Considerations

If you’re the owner of a pass-through entity (a sole proprietorship, partnership, LLC, or S Corp), you’re generally just going to take the profits of the company when you want to and that’s your income. Whether you actually pull that money out of the company or not, you’ll be taxed on it in the year that the company earned that money. If your company is registered as a separate entity (anything but a sole proprietorship), you may choose to pay yourself a salary. If your personal tax rate is lower than the company’s, it makes sense to pay the company’s full profit to yourself as a salary. If not, then you’ll want to take out a reasonable amount and leave the rest in the company.

Note that for companies with multiple owners, you’ll have to get everyone on board with the payment arrangements. Some groups may prefer to set salaries for any owners working within the company, to ensure that those people are paid for their work and don’t just get the benefits of their proportion of the profits. Some groups may also want to limit the ability of individuals to draw out profits at any time or take out loans. And if you’re in a C corp, you’ll need the shareholders to agree on a salary, dividend, and loan policy.

How Much Salary Should I Pay Myself?

Now that you know the options for paying yourself, you face the big question: how much? Of course, the answer depends on a number of factors.

According to the IRS, “reasonable compensation” is what you should pay yourself. Obviously, that is a nebulous, imprecise term. How do you determine what that means? The IRS states that “Wages paid to you as an officer of a corporation should generally be commensurate with your duties. Refer to “Employee’s Pay, Tests for Deducting Pay” in Publication 535, Business Expenses” for more information. In other words, you’ll need to give yourself a market wage.

In general, a market wage is a good idea. That means you know how much pay to expect and that your company is running in a comparable fashion to others. If you can’t cover a market wage, your company may not be running efficiently. If you have way more cash than you need, you may be missing opportunities for growth.

Look at other people doing similar work in your area are doing and pay yourself similarly. That’s it – there’s no hard math, just a general number range for the same kind of work.

Even if you aren’t required by law to pay yourself a salary (market or otherwise), it’s a good idea. In the words of Alice Bredin, a B2B marketing entrepreneur and small business adviser for OPEN, “Compensating yourself is important for you and your company,” Bredin told Business News Daily. “If you are not allocating funds for your own salary, your books do not accurately reflect the health of your company, since your expenses are missing a large cost, namely you. Without factoring in all expenses, you won’t know if you need to raise prices, market more, cut costs or make other adjustments that will help your company succeed.”

Payday

Your pay is just one of a million things you’ll have to consider as you start and run your own business. The amount is something that you can change over time, but you’ll need to think about your payment options upfront as you decide on a corporate structure. Do you want to be able to pay dividends? C corp or nothing. Is a pass-through entity better for tax reasons? C corp isn’t the move. Talk to your accountant and attorney to get a sense of what might be best for you.

And as for the amount, treat yourself like you would any other employee. If you were to hire someone to do your job, what would you pay them? That’s the amount you should pay yourself.

As in much of daily life, a lot of running a small business is about managing your finances. Most small businesses take on some kind of loan to get started or to fund an expansion, and many individuals have personal or consumer debt as well. According to 2016 data from the Federal Reserve, Americans have $945.9 billion in unpaid credit card or revolving debt. That, in turn, means that each American has approximately $4,000 worth of credit card debt. That amount doesn’t include educational loans, auto loans, mortgage debt, and the like. Whether it’s personal or business, carrying a large amount of debt can be stressful and may not be sustainable, leading to default and even bankruptcy. If debt is adding up, it’s easy to feel overwhelmed. So, let’s take a look at some ways to reduce debt and pay it off as quickly as possible.

What Needs Paying?

First, you have to figure out what you owe. You’ll need to:

1. Gather all of your financial records, documents, and account information.
2. Access your credit reports from the reporting bureaus. Check for debts that you may have forgotten and debts that are in collections.
3. Write down all outstanding balances and loans, including interest rates and the monthly amount of debts. Note which of your credit cards or loans have higher APRs, so you can focus on those first.
4. Create a spreadsheet listing all credit cards, debts, and loans, including balances and interest rates. Figure out the total amount you need to pay each month to stay current.
5. Add your other expenses to that spreadsheet – food, entertainment, clothing, medical care, supplies, etc. Figure out how much you’re spending each month aside from debt payments, then add those two numbers together to get your total spending.
6. Compare that number with your income – do you have enough to cover everything or are you coming up short?

It’s the same process for personal as business debt – the first step is to really get a handle on your financial situation.

Creating a Personal Budget provides more detailed information on setting up your budget. Creating a Small Business Budget shares details on how to draft your small business budget to stay on track with expenses and debts. If you need help tracking and organizing your monthly finances, Wells Fargo’s monthly expenses worksheet is a helpful resource.

Make A Plan

If you’re bringing in enough to cover all of your debts and expenses, you’re in good shape! You just need to be careful to stick to your budget and be sure to make your payments on time and in full every month.

If not, you need to set up a plan for paying off that debt as quickly as possible to get you back in the black. For many types of debt, you can actually work with your lender to have your interest rates lowered or put off payments for a few months – it’s more trouble for them if you default and they’re often willing to set up a plan to make your payments easier. Note that this is less common for business debts, but it never hurts to ask. Many people are afraid to call and admit that they’re struggling with payments, but lenders actually appreciate it. You can work something out before you fall behind. So, call your mortgage lender, auto lender, bank, and other creditors to ask about your options for lowering your payments. In addition to changing the interest rate or duration of a given debt, they may suggest refinancing or bundling some debts. In some cases, that can make payment easier, but make sure to read the fine print and figure out if it’s actually an improvement.

You should also look into transferring your credit card balances to take advantage of lower rates. Some credit card companies offer 0% promotional rates for qualified customers. One caveat: be wary of additional fees. Some credit card companies charge additional fees of up to 3% to transfer balances. Read the fine print to make sure that you’re getting a good deal. Check out Best Cards with 0% Balance Transfer APR. for more information on low or no-interest credit cards.

If you’re struggling with federal student loan debt, be sure to take advantage of their many different repayment plans. They offer a variety of income-based repayment plans and people working in certain professions may actually have their loans forgiven.

Start Making Payments

Once you’ve made your payments as manageable as possible, it’s time to start paying down that debt. If you’re still going to struggle to cover it, you may need to adjust your spending to try to free up cash for those payments. A little budget pinch now can save you a bundle later, so it’s worth it.

The best way to pay down debt quickly is pretty obvious – pay more than you have to every month. At the very least, you need to keep up with all your payments. But if you have a little extra leftover, funnel that cash toward paying down your debt.

There are a number of different strategies for choosing which debts to pay down first. Some experts suggest going for the debts with the highest interest rates (usually credit cards) since they’re racking up the most in interest payments. Some suggest going for the biggest debts, since even a low interest rate on a large amount can shake out to big payments. Others suggest the “snowball” approach, where you pay off the smallest debts first and work up to the big ones. That gives you the satisfaction of starting to pay things off quickly, as well as making life simpler by giving you fewer bills to track.

In general, it’s probably a good idea to take on the debt that’s costing you the most in interest, whether it’s a small debt with a high rate or a large debt with a low rate. If all of your debts have similar rates, then the snowball approach is a good way to get on track.

Beware Quick Fixes

There is no silver bullet for paying off your debt on the spot, short of winning the lottery. It’s just about setting up a sensible plan and being disciplined about sticking with it. That’s not particularly exciting or fun, but it is the way to get it done.

Unfortunately, there are a lot of organizations out there offering “debt relief” programs that promise to cut your payments in half or wipe out large portions of your debt. Buyer beware – many of those companies are scams. They’ll ask you to pay fees or a large lump sum with the promise of settling your debt, but they don’t actually have any power over your lenders and you may end up losing that cash.

Some organizations are actually there to help you create and stick to a plan and may be able to guide you through working with your lenders, but you need to be careful of the unscrupulous ones. Do your research online before accepting help from those types of organizations.

Stay Steady

For most individuals and businesses, debt is simply part of life. But it can also be a scary part, looming over you and threatening your financial future. The good news is that with some careful accounting and discipline, you can steadily get rid of those debts. And working with your lenders may make your repayment timeline a lot shorter!

When you’re heading up your own small business, your financial future is in your hands. It’s easy to get caught up in the day-to-day financial needs of the business, but don’t forget your own future! How much do you need to save for a comfortable retirement?

The short answer: It depends. It depends on your lifestyle, age of planned retirement, health challenges, and your projected income stream at the age of retirement, as well as other factors.

While there’s no way to predict the future and prepare for all the unknowns, there are some tools, tips, and resources available to help you plan for your retirement future. Here are some simple ways to help you determine how much to save for retirement and ways to get there.

 

1. Think Hard About Your Future Plans

One huge challenge all small business owners face when saving for retirement is the specter of the unknown. You can’t predict how long you’ll live, whether you’ll face financial challenges or medical issues, or any number of other factors. So, you’re working with an educated guess. You don’t want to set aside so much that it hobbles your life and business growth today, but you certainly don’t want to run short once you’re retired.

To make your educated guess, start thinking about what your retirement is going to look like. Do you expect to work for as long as possible or retire early? Will you downsize your home, retire somewhere with a lower cost of living, or buy a vacation home? Will you be supporting a spouse or other family member? Will you have alternative sources of income such as an investment account?

Consider also what you want to do in your retirement. For example, maybe you’ll want to travel. Maybe you’ll want to take up sailing or golf. All of those hobbies cost money and you’ll need to make sure you have enough on hand. On the other hand, you may want to take up part time work doing something you enjoy – teaching a class or two at your local college, for example. Then you can factor that additional income into your plans.

With that information, you can start to get a ballpark estimate for how much money you’ll need once you leave the office behind.

 

2. Save, Save, Save

Once you have an idea of how much money you want to have in the bank in order to retire, it’s time to look at how you’re going to reach that goal.

The general rule of thumb for retirement savings from industry pros is to start early and be aggressive. Save as much as you, as soon as you can. Financial planners recommend that you start saving for retirement as soon as you start earning a steady paycheck. The ideal goal is to start saving for your retirement in your 20s. Some financial planners say that you should start saving 10% to 15% of your income for retirement as soon as you land your first full-time job.

Don’t despair if you missed that deadline – it’s never too late to start. No matter what your current age, there’s still time to evaluate your retirement goals and to put together a working plan toward financing your future. If you need help trying to manage these complex plans, then working with a certified financial planner can help you assess your current financial heath and assist you in making a plan for the future.

 

3. Let Your Money Grow On Its Own

Starting to save early is not just about getting more dollars in the bank. It’s also a matter of growth. For example, let’s say you put $5,000 into the stock market today and you earn a 12% return. In 10 years, that $5,000 will have turned into more than $15,000! Getting a 12% return generally requires stock market investment. That’s riskier than certain other kinds of investments. However, that’s another benefit of starting young – you can afford to take a little bit riskier investment because there’s plenty of time for things to turn around before you need the cash.

If you’re more risk-averse, consider investing in mutual funds. Mutual funds are considered a fairly safe way to save for retirement, and they provide more growth than a traditional savings account would. Investments inherently have some level of risk, but if you start out with lower risk ventures, like mutual funds, then you’re balancing that risk in a conservative way.

So how do mutual funds work? Instead of investing in a single stock, you invest in a fund made up of lots of different investments. The returns are usually lower than investment in the open stock market, but that’s because the risks are lower.

Starting your own investment portfolio can be a little overwhelming. This is another area where a financial planner can be really helpful for evaluating investment prospects that align with your future retirement needs. They can help you put together a portfolio of stocks, bonds, mutual funds, savings accounts, and cash that balances your needs for growth with your preferences for risk.

 

4. Use Tools and Resources to Help

Many DIY resources exist online to help you visualize exactly how much you need to save and plan for. Online tools can provide a clear picture of the consequences of each of your financial choices. Retirement calculators won’t stand in for one-on-one pro financial advisor advice, but they can provide you with an accessible way to forecast the outcome of different savings plans.

NerdWallet’s interactive Retirement Calculator allows you to determine actual calculations based on your age, retirement age, savings, current income, and other contributions.

While online tools are no substitute for pro advice, they can be a useful tool to assist you in making choices about your retirement options.

 

5. Make Your Business Part of Your Plans

As you plan for your personal retirement, don’t forget to leave your business out. It’s not just about your paycheck – it’s about your ownership! Will you sell the business? Will you keep ownership and earn dividends going forward? That should all be part of your estate planning process as well as your retirement planning process.

 

Happy Retirement!

Knowing how much to save for retirement and formulating a plan can scary uncharted territory for the small business owner. By taking steps today to look at your savings plans and retirement financial needs, you’ll get the ball rolling toward a fiscally viable retirement.

 

Cash is comfortable – it’s easy to track and make sure you’re not overspending. However, using all cash all the time means you’re not building up a credit history. And that means it will be harder for you to rent an apartment, take out a car or home loan, or even get a cell plan! One great way to flesh out your credit history is to get a credit card.

There are a lot of benefits to having a credit card. You don’t have to worry about carrying cash and you may get rewards or deals associated with the card. But there are also drawbacks. Most importantly, you could lose track of your spending and end up in credit card debt. The trick is to manage your card wisely so that you can build up your credit and take advantage of the perks of having a credit card without letting it get out of control. These are a few helpful credit card tips to get you started on the right foot with your credit card!

 

1. Choosing Your Credit Card

Have you ever received one of those credit card offers in the mail? They may say that you’re pre-approved or just invite you to apply. But you shouldn’t just sign up for any old card. Different cards have different terms, fees, and rewards, and you should shop around to find one that’s right for you.

Some of the most important things to check are:

 

• Fees – Some cards come with annual fees or fees for certain kinds of transactions. Make sure you take a good look at the fees so you don’t have to deal with any surprises down the road. In the vast majority of cases, it’s not worth it to pay a fee. There are a few cards (like high-level American Express cards) that charge fees but come with a lot of perks. However, your first card probably won’t fall into that category.
• Rates and Rules – All credit cards work more or less the same way. You charge purchases to the card and at the end of the month you get a bill. Pay it in full and you won’t face any extra charges. Pay less than the full amount and you’ll have to pay interest on the balance until you pay it off. The interest rates can be really high, so check those before you commit to a card. Ideally you’ll never have to pay interest, but you should know up front just in case.
• Perks and Rewards – Nowadays, lots of cards come with perks or rewards. For every dollar you charge (and pay off), you may get a certain amount of cash back, airline miles, or other rewards. Some cards offer a flat rate, like 2% cash back on every purchase, while others offer different rates depending on the purchase. For example, you may get 3% back on gas, 2% on groceries, and 1% on everything else. You’ll need to consider your budget, how you spend your money, and your needs to decide what’s right for you. If you travel a lot, you may want to get airline miles. If you drive a lot, you may want to look for a card with extra cash back for gas.
• Restrictions – Some cards come with extra fees or restrictions for certain kinds of transactions. The most common one is a fee for foreign transactions. So if you’re going to need to use your card outside the country frequently, consider getting a travel card that doesn’t have those fees.

2. Getting Your Credit Card

There are a number of ways you can apply for your chosen credit card. You could use one of the applications that come in the mail. You can also go into your bank and ask them about it; most banks offer their own credit cards and you may be able to get a better card if you already have an account there. You can also typically apply online. If you go into the bank or apply online, you’ll know whether you were approved within a couple of minutes.

Note that in order to approve your application, the bank or credit card company will do a credit check. That dings your credit score a tiny bit, so you don’t want credit checks to happen often. If you get denied for your card of choice, don’t just reapply – evaluate your credit and consider applying for a card that’s easier to get (usually cards with fewer or no rewards).

If you have low credit or no significant credit history, it can be tough to get approved for a card. If you’ve applied and been denied, consider getting a store credit card. Lots of stores offer them and the requirements are typically less strict than when you apply directly through a bank or credit card company.

If that’s not an option, consider talking to your bank about a secured credit card. With a secured card, you’ll need to put down a deposit as collateral. Once you’ve kept up your payments for a certain amount of time, you’ll be able to get a regular card.

 

3. Using Your Credit Card

Now you have your card and it’s time to start using it – in a smart way. If you’ve never had a credit card before, it can be really tempting to overspend. Your credit limit (the max you can charge to the card in a month) may be a lot higher than what you can actually pay. So, keep a close eye on your budget. Consider using the card for just one purpose when you start out – buying gas, for example. That will help you avoid overspending and get into the habit of managing your bill.

You may have gotten a credit card for emergency situations, and that can be really handy. However, remember that you need to use your card regularly to keep up your credit. You don’t have to spend a lot, but make sure you use it a couple of times a month.

And every month, pay your bill on time and in full. Otherwise, you’re going to get stuck paying a ton of interest. Your bill will have a “minimum payment amount” on it – usually a small fraction of your total bill. You have to pay at least that much to keep your account in good standing. But don’t fall for that minimum. They want you to pay the minimum so that you keep having to pay interest on the balance. Those charges add up quickly and can easily land you with a balance you can’t manage. Things happen and one month you may not quite be able to cover everything, but pay as much as you can and pay the rest off as soon as you’re able.

 

Swipe Smart

Getting a credit card is a really important step in building your credit history. It can also be a good deal – you may get discounts at some stores or on certain kinds of purchases. Plus, cash back or travel rewards are free money (as long as you pay your full balance every month). The trick is to be thoughtful when choosing your card and careful with how you use it. These simple credit card tips are all you need to be a smart credit card holder!

 

Budgeting is a critical part of being a business owner. Without a proper budget, you won’t be able to know where to allocate assets, how to manage costs, and how to make business projects. Setting up a concrete budget gives you a road map for day-to-day operations, as well as long-range future planning. But that’s not all you need – you also have to start creating a personal budget.

As a business owner, you may not give as much as much thought to how to manage your personal assets as you do your business ones. The financial skills you learn from starting and heading up your small business can carry over into your personal finances as well. In addition, your personal finances may affect your ability to get loans or lines of credit for your business, since many lenders require personal guarantees for loans to new businesses.

As with a business budget, creating a personal budget is all about tracking your income and expenses. It just takes a few simple steps!

3 Easy Steps To Creating A Personal Budget

A monthly budget can help you manage debt, know where to cut back, and where to prioritize your funds. With a limited amount of money to go around, planning where it will go can keep you on track to meet your long-range financial goals.

You can keep track of your monthly budget in whichever way feels organic and useable to you. Some find spreadsheets helpful and others find software like Quicken user-friendly; others prefer the old-fashioned notepad approach. It’s entirely up to you to use the method that you feel most comfortable with. Just be sure to pick one that you’ll stick with.

1. Calculate Your Monthly Income

The first step to creating your personal budget is to calculate your monthly income. Your monthly income is all of the money that comes into your household each month from any source. This income may be from paychecks, wages, your business, dividends, interest, child support or alimony, or income from rental properties or other investments.

At this step, you should also deduct your taxes, Social Security, insurance, and any other withholdings. That will come out of your paycheck automatically, but it may not come out of your investment income, child support, alimony, and other income sources. You’ll need to account for that to avoid overstating your income.

2. Calculate Your Monthly Expenses

The second step to creating your personal budget is to calculate your monthly expenses. This is just as it sounds – what items do you spend money on each month? You will have two categories to consider: 1) Fixed expenses and 2) Variable expenses. Some of these numbers will be exact, but others will be ballpark. The idea here is to figure out how much you have to spend and how much you can afford to spend.

Fixed expenses are bills that don’t change each month. For example, your rent, your car payment, and your cable bill are all the same each month. You may also have student loans or other types of fixed payments. It’s easy to project what those costs will be since they are static.

Variable expenses are those that fluctuate each month, such as your grocery bills, utilities, or gas bills. These are harder to calculate. Experts recommend that to determine your variable expenses, you look at your bank statements or credit card statements over the span of several months for costs such as transportation, household items, food costs, and entertainment. Then you can determine an average amount over the span of several months to give you a clearer picture of your variable expenses. For example, you can look at your total expenditures on groceries for the last 6 months and find that you spend an average of $500 per month.

You will also want to include periodic expenses, such as auto or health insurance, in your calculations. Then you can divide it up to get a monthly expense. For example, if you pay $600 for car insurance every 6 months, you can add $100 to your expenses each month. That way you’re putting away enough to make the payment when it comes up.

3. Compare Your Monthly Expenses To Your Income

Your third step to creating a personal budget is to subtract your monthly expenses from your income. Hopefully, you’ll find that you have money left over each month. If not, it’s time to reevaluate your spending patterns to try and correct the overages. You may decide to spend less on restaurants, for example, or find a less expensive car insurance option. You may be able to refinance debt and get lower payments. You can also find a way to earn more income, like taking on freelance work or asking for more hours or shifts.

If you have money left over, you can choose what to do with it. Save it, invest it, or spend it on something fun. Experts advise having a cushion of personal savings for an emergency spending fund. If you suddenly need a major car repair, for example, that money is there for you.

Make A Financial Plan

Now that you have your budget set up, take a look at your personal finances. The goal is to make sure your monthly income exceeds your expenses so that you can put some money away and you don’t get caught up in credit card debt or other types of debt.

Think about your long-term goals. Are you saving up to put a kid through college or to buy a new home? Do you have credit card debt or medical debt to pay off? Write those goals down and include them in your budget. Make a commitment to set aside or pay off a certain amount every month. With a concrete plan, it’s much easier to reach your financial goals.

Conclusion

Calculating your personal budget is an important step toward financial autonomy. Moreover, it can be a useful step to earning financing for your small business, should you need to present your personal assets and income as collateral to earn a business loan. Make the effort to be financially savvy with creating a personal budget for a bright financial future.

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