Cash in the Balance Sheet should always be positive
Amount paid for long term assets should be entered as a negative amount
What You Need to Know About Calculating Financial Ratios for Your Business Plan
By henry sheykin, introduction.
Financial ratios are variables used to measure a company's financial performance. They provide valuable insight into a business's liquidity, debt, profitability and other essential aspects. A business plan is a strategic document prepared by entrepreneurs to secure funding or other resources. It is a critical document that outlines the goals and objectives of the business, and how it will achieve them. Introducing financial ratios into a business plan could help to emphasize the viability of the project in the eyes of a potential investor.
What is a Financial Ratio?
Financial ratios are mathematical calculations of a company’s financial performance that provide insight into the company's performance. By comparing financial ratios such as profitability, liquidity, and solvency, investors and business owners can understand better how their business operates financially.
Types of Financial Ratios
Financial ratios are broken down into five main categories: profitability, liquidity, solvency, efficiency, and coverage. They can be further divided into various types of ratios, such as gross profit margin, cash flow, debt-equity ratio, and asset turnover.
Examples of Most Popular Financial Ratios
Profitability ratios assess how profitable a company is, such as gross profit margin, operating profit margin, and net profit margin.
Liquidity ratios assess how easily a company can access cash and pay off liabilities, such as the current ratio and quick ratio.
Solvency ratios measure a company’s ability to repay debt, such as the debt-equity ratio and interest coverage ratio.
Efficiency ratios assess how well a company is able to manage assets and liabilities, such as asset turnover and inventory turnover.
Coverage ratios measure the ability to meet financial obligations, such as the debt service coverage ratio.
Preparing Financial Ratios
Financial ratios are an important part of a business plan as they help in tracking company performance and predicting future performance. Preparation of financial ratios requires certain steps, data, and knowledge. It is also beneficial in understanding well the financial position of a company and designing strategies accordingly.
Steps on How to Calculate Financial Ratios
Calculating financial ratios is a tool to measure a business entity’s performance, liquidity, solvency, profitability, efficiency, and capital structure. The following steps are involved in calculating financial ratios:
Step 1: Set Objective: It is important to have clear objective and purpose before starting the process by considering factors like time and resources that are available.
Step 2: Select Ratios: Having an idea about the financial performance gives an indication about the kind of ratio to be selected for measurement. Ratios can be selected based on industry benchmark or on the basis of the company goals.
Step 3: Collect Data: Data collection is one of the most important steps in determining financial ratios. The accuracy of the ratios depends on the accuracy and availability of the data.
Step 4: Calculate Ratios: The actual calculation is the next step, where the relevant two or three financial variables are related for achieving the desired ratio.
Step 5: Analyze Ratios: After calculating the ratios, the results are hyperlinked with the goals and results are analyzed and discussed.
Data Needed to Prepare Ratios
The data required for calculating financial ratios include certain financial variables such as profit margin, asset turnover, liquidity ratios, and debt ratio. The financial variables depend on the ratio being computed.
For example, for computing liquidity ratios such as current ratio and quick ratio, the data required will include current assets, current liabilities, and quick assets. Likewise, for computing profitability ratios such as gross profit margin, the required data will include gross sales, gross profit and total operating costs.
Benefits of Preparing Financial Ratios
Financial ratios offer useful information that can be used to improve different aspects in a business such as expense management and product pricing. The benefits of preparing financial ratios include:
Better Understanding of Financial Performance: Preparing financial ratios helps in understanding the financial performance better and making future financial goals.
Easy Comparison with Competitors: Financial ratios help in measuring the financial position of one’s company in comparison to its competitors.
Achievement of Goals: Ratios help in understanding the degree of financial success achieved or needs to be achieved.
Identification of Problems: Preparing financial ratios helps in early identification of problems such as inventory control, liquidity, and high expenses.
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Calculating Profitability Ratios
Profitability ratios are used to evaluate the financial health of a business by showing the return on investments. They provide a valuable insight into the business performance and offer important metrics that are essential to understanding the business plan.
Definition of Profitability Ratios
Profitability ratios measure a company’s ability to generate income from its operations and investments. They capture the ability of a company to increase its sales and decrease its costs by providing a quantitative analysis of how efficiently the company is using its resources to generate the desired income.
Examples of Profitability Ratios
Gross Profit Margin
Net Profit Margin
Operating Profit Margin
Return on Assets
Guide on How to Calculate Profitability Ratios
In order to calculate profitability ratios, it is essential to have accurate financial information such as sales, expenses, and capital. Further, companies may require different ratios to be calculated based on their specific goals and objectives.
To calculate profitability ratios, first, determine the sales and expenses associated with the business plan. This includes all costs directly related to the business, such as direct materials, direct labor, and marketing expenses. Next, calculate the gross profit margin, by subtracting the direct costs from sales and dividing the result by sales. Net profit margin is then calculated by subtracting all indirect costs, such as administrative and general expenses, from the gross profit margin and dividing the result by the sales.
Operating profit margin is calculated by subtracting operating expenses from net profit margin. Finally, the return on assets ratio is calculated by dividing the net profit margin by the company’s total assets and multiplying the result by 100.
Assessing Liquidity Ratios
Businesses can use liquidity ratios to assess the short-term ability to pay off immediate debts, such as business taxes, loan payments and invoice payments. These liquidity ratios measure whether a company's assets are quickly converted into cash, so management can fulfill its current liabilities.
Definition of Liquidity Ratios
Liquidity ratios measure a company's ability to pay off short-term debts and obligations. Higher liquidity ratios indicate that a company is better able to pay off its liabilities and lower liquidity ratios indicate that a company may be at risk of not being able to pay its obligations. Common liquidity ratios include current ratio, quick ratio and cash ratio.
Examples of Liquidity Ratios
Current Ratio: This ratio is used to measure the ability of a company to pay its liabilities using its most liquid assets, such as cash, inventory and accounts receivable. Current ratio is calculated by dividing current assets by current liabilities.
Quick Ratio: This ratio measures the capability of a company to pay its liabilities using only its most liquid assets. Quick ratio is calculated by dividing quick assets (cash, marketable securities and accounts receivable) by current liabilities.
Cash Ratio: This ratio is used to measure the ability of a company to pay its liabilities using its most liquid asset, cash. Cash ratio is calculated by dividing cash by current liabilities.
Guide on how to Calculate Liquidity Ratios
Current Ratio: To calculate current ratio, divide total current assets by total current liabilities.
Quick Ratio: To calculate quick ratio, divide total quick assets (cash, marketable securities and accounts receivable) by total current liabilities.
Cash Ratio: To calculate cash ratio, divide total cash by total current liabilities.
By examining these ratios, company management can assess the company's ability to meet its short-term demands, adjust pricing and production decisions, increase or decrease the size of the company's inventory and plan accordingly.
Demonstrating Feasibility Ratios
Feasibility ratios are an important part of a business plan, as they provide an accurate assessment of the potential financial stability of a project and its potential for success. By analyzing these ratios, investors and lenders can quickly identify whether or not the project is worth their investment.
Definition of Feasibility Ratios
Feasibility ratios are a type of financial ratio used to analyze the financial stability of a project by assessing the amount of risk it may pose. These ratios measure the project's ability to generate cash, repay debt, and cover its ongoing expenses. They are used to determine if the project is feasible and if it can meet the expected goals and objectives.
Examples of Feasibility Ratios
Some of the most common feasibility ratios include:
Cash Ratio: This measures the company’s ability to cover its short-term liabilities with cash.
Debt Coverage Ratio: This ratio is used to identify how much of a company’s cash flow is used to cover its debt obligations.
Return on Investment Ratio: This ratio measures the profitability of a project by comparing the project’s net profits to the amount of money invested.
Guide on How to Calculate Feasibility Ratios
To calculate these feasibility ratios, you will need to have certain financial documents, like a cash flow statement and balance sheet. You will then use this information to analyze the project’s current financial standing and its potential for success. Here are some tips on calculating feasibility ratios:
Find the figures that you will need to calculate the ratios, such as cash flow, net income, and debt levels.
Calculate the cash ratio by dividing the total cash available by the current liabilities. This will tell you how much cash is available to cover the short-term liabilities.
Calculate the debt coverage ratio by dividing the net income available by the total debt. This will tell you how much of the net income is used to cover debt obligations.
Calculate the return on investment ratio by subtracting total fixed costs from the net profits available and then dividing the result by the total amount invested. This provides an estimation of the project’s profitability.
Feasibility ratios are a great way to assess the financial viability of a project and its potential for success. By carefully analyzing these ratios, you can come up with an accurate assessment of the project’s feasibility and decide if it is worth investing in.
In this blog post, we discussed the importance of financial ratios in constructing a successful business plan. We discussed the common types of financial ratios and their utility in measuring the financial standing of a business, such as solvency, profitability, and efficiency. Additionally, we discussed the steps to integrating financial ratios into the business planning process, such as collecting the financial documents, being aware of benchmarks, and creating a strategy based on the analysis.
Summary of Information Presented
Financial ratios are analytic tools used to measure the performance of a company and aid in business planning. Common and useful types of financial ratios can include a debt-to-assets ratio (for solvency measurements), a current or operating ratio (for liquidity measurements), or a return on assets ratio (for profitability measurements). To effectively use financial ratios in a business plan, a company must gather financial documents, be aware of industry benchmarks, and use the analytics to create a strategy.
Benefits of Using Financial Ratios in a Business Plan
Using financial ratios can be immensely beneficial for businesses of any size. These measurables tell the story of a business's performance over time and provide owners and managers with data to guide the direction of the business. Additionally, they can help investors assess the risk of a certain business venture while also gauging the profitability of said venture.
What to do Next for Further Guidance on the Topic
For further guidance on using financial ratios in a business plan, we recommend consulting your business advisor or financial adviser. Additionally, we suggest researching accepted benchmarks in your industry and researching top performing companies to glean useful insights from their processes. You can also find useful information on online resources related to business planning and best practices.
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How to make financial projections for business.
Writing a solid business plan should be the first step for any business owner looking to create a successful business.
As a small business owner, you will want to get the attention of investors, partners, or potential highly skilled employees. It is, therefore, important to have a realistic financial forecast incorporated into your business plan.
We’ll break down a financial projection and how to utilize it to give your business the best start possible.
Key Takeaways
Accurate financial projections are essential for businesses to succeed. In this article, we’ll explain everything you need to know about creating financial projections for your business. Here’s what you need to know about financial projections:
A financial projection is a group of financial statements that are used to forecast future performance
Creating financial projections can break down into 5 simple steps: sales projections, expense projections, balance sheet projections, income statement projections, and cash flow projections
Financial projections can offer huge benefits to your business, including helping with forecasting future performance, ensuring steady cash flow, and planning key moves around the growth of the business
Here’s What We’ll Cover:
What Is a Financial Projection?
How to Create a Financial Projection
What goes into a financial projection, what are financial projections used for.
Financial Projections Advantages
Frequently Asked Questions
What Is Financial Projection?
A financial projection is essentially a set of financial statements . These statements will forecast future revenues and expenses.
Any projection includes your cash inflows and outlays, your general income, and your balance sheet.
They are perfect for showing bankers and investors how you plan to repay business loans. They also show what you intend to do with your money and how you expect your business to grow.
Most projections are for the first 3-5 years of business, but some include a 10-year forecast too.
Either way, you will need to develop a short and mid-term projection broken down month by month.
As you are just starting out with your business, you won’t be expected to provide exact details. Most financial projections are rough guesses. But they should also be educated guesses based on market trends, research, and looking at similar businesses.
It’s incredibly important for financial statements to be realistic. Most investors will be able to spot a fanciful projection from a mile away.
In general, most people would prefer to be given realistic projections, even if they’re not as impressive.
Financial projections are created to help business owners gain insight into the future of their company’s financials.
The question is, how to create financial projections? For business plan purposes, it’s important that you follow the best practices of financial projection closely. This will ensure you get accurate insight, which is vital for existing businesses and new business startups alike.
Here are the steps for creating accurate financial projections for your business.
1. Start With A Sales Projection
For starters, you’ll need to project how much your business will make in sales. If you’re creating a sales forecast for an existing business, you’ll have past performance records to project your next period. Past data can provide useful information for your financial projection, such as if your sales do better in one season than another.
Be sure also to consider external factors, such as the economy at large, the potential for added tariffs and taxes in the future, supply chain issues, or industry downturns.
The process is almost the same for new businesses, only without past data to refer to. Business startups will need to do more research on their industry to gain insight into potential future sales.
2. Create Your Expense Projection
Next, create an expense projection for your business. In a sense, this is an easier task than a sales projection since it seems simpler to predict your own behaviors than your customers. However, it’s vital that you expect the unexpected.
Optimism is great, but the worst-case scenario must be considered and accounted for in your expense projection. From accidents in the workplace to natural disasters, rising trade prices, to unexpected supply disruptions, you need to consider these large expenses in your projection.
Something always comes up, so we suggest you add a 10-15% margin on your expense projection.
3. Create Your Balance Sheet Projection
A balance sheet projection is used to get a clear look at your business’s financial position related to assets, liabilities , and equity, giving you a more holistic view of the company’s overall financial health.
For startup businesses, this can prove to be a lot of work since you won’t have existing records of past performance to pull from. This will need to be factored into your industry research to create an accurate financial projection.
For existing businesses, it will be more straightforward. Use your past and current balance sheets to predict your business’s position in the next 1-3 years. If you use a cloud-based, online accounting software with the feature to generate balance sheets, such as the one offered by FreshBooks, you’ll be able to quickly create balance sheets for your financial projection within the app.
Click here to learn more about the features of FreshBooks accounting software.
4. Make Your Income Statement Projection
Next up, create an income statement projection. An income statement is used to declare the net income of a business after all expenses have been made. In other words, it states the profits of a business.
For currently operating businesses, you can use your past income statements and the changes between them to create accurate predictions for the next 1-3 years. You can also use accounting software to generate your income statements automatically.
You’ll need to work on rough estimates for new businesses or those still in the planning phase. It’s vital that you stay realistic and do your utmost to create an accurate, good-faith projection of future income.
5. Finally, Create Your Cash Flow Projection
Last but not least is to generate your projected cash flow statement. A cash flow projection forecasts the movement of all money to and from your business. It’s intertwined with a business’s balance sheet and income statement, which is no different when creating projections.
If your business has been operating for six months or more, you can create a fairly accurate cash flow projection with your past cash flow financial statements. For new businesses, you’ll need to factor in this step of creating a financial forecast when doing your industry research.
It needs to include five elements to ensure an accurate, useful financial forecast for your business. These financial statements come together to provide greater insight into the projected future of a business’s financial health. These include:
Income Statement
A standard income statement summarizes your company’s revenues and expenses over a period. This is normally done either quarterly or annually.
The income statement is where you will do the bulk of your forecasting.
On any income statement, you’re likely to find the following:
Revenue: Your revenue earned through sales.
Expenses: The amount you’ve spent, including your product costs and your overheads.
Pre-Tax Earnings: This is your income before you’ve paid tax.
Net Income: The total revenues minus your total expenses.
Net income is the most important number. If the number is positive, then you’re earning a profit, if it’s negative, it means your expenses outweigh your revenue and you’re making a loss.
Cash Flow Statement
Your cash flow statement will show any potential investor whether you are a good credit risk. It also shows them if you can successfully repay any loans you are granted.
You can break a cash flow statement into three parts:
Cash Revenues: An overview of your calculated cash sales for a given time period.
Cash Disbursements: You list all the cash expenditures you expect to pay.
Net Cash Revenue: Take the cash revenues minus your cash disbursements.
Balance Sheet
Your balance sheet will show your business’s net worth at a given time.
A balance sheet is split up into three different sections:
Assets: An asset is a tangible object of value that your company owns. It could be things like stock or property such as warehouses or offices.
Liabilities: These are any debts your business owes.
Equity: Your equity is the summary of your assets minus your liabilities.
Looking for an easy-to-use yet capable online accounting software? FreshBooks accounting software is a cloud-based solution that makes financial projections simple. With countless financial reporting features and detailed guides on creating accurate financial forecasts, FreshBooks can help you gain the insight you need to let your business thrive. Click here to give FreshBooks a try for free.
Financial projections have many uses for current business owners and startup entrepreneurs. Provided your financial forecasting follows the best practices for an accurate projection, your data will be used for:
Internal planning and budgeting – Your finances will be the main factor in whether or not you’ll be able to execute your business plan to completion. Financial projections allow you to make it happen.
Attracting investors and securing funding – Whether you’re receiving financing from bank loans, investors, or both, an accurate projection will be essential in receiving the funds you need.
Evaluating business performance and identifying areas for improvement – Financial projections help you keep track of your business’s financial health, allowing you to plan ahead and avoid unwelcome surprises.
Making strategic business decisions – Timing is important in business, especially when it comes to major expenditures (new product rollouts, large-scale marketing, expansion, etc.). Financial projections allow you to make an informed strategy for these big decisions.
Financial Projections Advantages
Creating clear financial projections for your business startup or existing company has countless benefits. Focusing on creating (and maintaining) good financial forecasting for your business will:
Help you make vital financial decisions for the business in the future
Help you plan and strategize for growth and expansion
Demonstrate to bankers how you will repay your loans
Demonstrate to investors how you will repay financing
Identify your most essential financing needs in the future
Assist in fine-tuning your pricing
Be helpful when strategizing your production plan
Be a useful tool for planning your major expenditures strategically
Help you keep an eye on your cash flow for the future
Your financial forecast is an essential part of your business plan, whether you’re still in the early startup phases or already running an established business. However, it’s vital that you follow the best practices laid out above to ensure you receive the full benefits of comprehensive financial forecasting.
If you’re looking for a useful tool to save time on the administrative tasks of financial forecasting, FreshBooks can help. With the ability to instantly generate the reports you need and get a birds-eye-view of your business’s past performance and overall financial help, it will be easier to create useful financial projections that provide insight into your financial future.
FAQs on Financial Projections
More questions about financial forecasting, projections, and how these processes fit into your business plan? Here are some frequently asked questions by business owners.
Why are financial projections important?
Financial projections allow you to gain insight into your business’s economic trajectory. This helps business owners make financial decisions, secure funding, and more. Additionally, financial projections provide early warning of roadblocks and challenges that may lay ahead for the company, making it easier to plan for a clear course of action.
What is an example of a financial projection?
A projection is an overall look at a business’s forecasted performance. It’s made up of several different statements and reports, such as a cash flow statement, income statement, profit and loss statement, and sales statement. You can find free templates and examples of many of these reports via FreshBooks. Click here to view our selection of accounting templates.
Are financial forecasts and financial projections the same?
Technically, there is a difference between forecasting and projections, though many use the terms interchangeably. Financial forecasting often refers to shorter-term (<1 year) predictions of financial performance, while financial projections usually focus on a larger time scale (2-3 years).
What is the most widely used method for financial forecasting?
The most common method of accurate forecasting is the straight-line forecasting method. It’s most often used for projecting the growth of a business’s revenue growth over a set period. If you notice that your records indicate a 4% growth of revenue per year for five years running, it would be reasonable to assume that this will continue year-over-year.
What is the purpose of a financial projection?
Projection aims to get deeper, more nuanced insight into a business’s financial health and viability. It allows business owners to anticipate expenses and profit growth, giving them the tools to secure funding and loans and strategize major business decisions. It’s an essential accounting process that all business owners should prioritize in their business plans.
Michelle Alexander, CPA
About the author
Michelle Alexander is a CPA and implementation consultant for Artificial Intelligence-powered financial risk discovery technology. She has a Master's of Professional Accounting from the University of Saskatchewan, and has worked in external audit compliance and various finance roles for Government and Big 4. In her spare time you’ll find her traveling the world, shopping for antique jewelry, and painting watercolour floral arrangements.
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Entrepreneurship
How to Calculate Financials for Business Plan?
Creating a business plan is essential for any entrepreneur who wants to start a new business venture. A business plan outlines the business’s objectives and strategies, including the financial projections, which play a vital role in the success of the business. Financial projections help entrepreneurs to understand how much money they need to start and run their business, how much they can expect to earn, and how long it will take to break even. In this article, we will provide a step-by-step guide on how to calculate financials for a business plan.
1. Calculate Start-up Costs
The first step in calculating financials for a business plan is to determine the start-up costs. Start-up costs refer to the expenses that an entrepreneur will incur before the business starts generating revenue. These costs may include market research, legal fees, equipment, office rent, and other expenses. Once you have identified all the start-up costs, you can add them up to determine the total start-up cost.
The start-up cost will give you an idea of how much money you need to start your business. It will also help you determine how much you need to borrow if you plan to secure funding from investors or lenders.
2. Estimate Monthly Operating Expenses
After determining the start-up costs, the next step is to estimate the monthly operating expenses. These expenses include rent, utilities, salaries, marketing, and other costs associated with running the business. It is essential to be as accurate as possible when estimating these expenses to avoid underestimating or overestimating the monthly operating costs.
Once you have estimated the monthly operating expenses, you can multiply them by the number of months in your financial projection to determine the total operating expenses for the period.
3. Project Revenue
The next step in calculating financials for a business plan is to project revenue. Revenue refers to the money the business will earn from the sale of products or services. To project revenue, you need to estimate the number of units that you will sell and the price per unit.
It is crucial to be realistic when projecting revenue. You can use market research to determine the demand for your product or service and how much customers are willing to pay for it.
4. Calculate Gross Profit
After projecting revenue, the next step is to calculate gross profit. Gross profit refers to the money left over after deducting the cost of goods sold from the revenue. Cost of goods sold includes the direct costs associated with producing the product or service, such as materials, labor, and overhead costs.
To calculate gross profit, you can subtract the cost of goods sold from the projected revenue.
5. Determine Net Income
Once you have calculated the gross profit, the next step is to determine the net income. Net income refers to the profit after deducting all the expenses, including operating expenses, taxes, and interest.
To calculate net income, you can subtract the total expenses from the gross profit.
6. Create Cash Flow Statement
Creating a cash flow statement is essential to understanding the cash flow of the business. A cash flow statement shows the inflow and outflow of cash in the business over a period. It helps entrepreneurs to determine how much cash they need to keep the business running and when they will need it.
A cash flow statement includes three sections: operating activities, investing activities, and financing activities.
7. Calculate Break-Even Point
Calculating the break-even point is essential for entrepreneurs to understand when the business will start making a profit. The break-even point is the point at which the revenue equals the total expenses. To calculate the break-even point, you need to divide the total fixed costs by the contribution margin.
The contribution margin is the difference between the price of the product or service and the variable costs associated with producing it.
8. Analyze Financial Ratios
Analyzing financial ratios is essential to understand the financial health of the business. Financial ratios help entrepreneurs to compare their business’s performance with other businesses in the same industry.
Some of the critical financial ratios include liquidity ratios, profitability ratios, and debt ratios.
9. Benefits of Calculating Financials
Calculating financials for a business plan has several benefits. It helps entrepreneurs to understand how much money they need to start and run their business. It also helps them to determine the profitability of the business and when they can expect to break even.
Financial projections also help entrepreneurs to secure funding from investors or lenders. Investors and lenders want to see a well-thought-out financial projection before investing in a business.
10. Conclusion: Calculating Financials for Business Plan
Calculating financials for a business plan is essential for entrepreneurs who want to start a new business venture. Financial projections help entrepreneurs to understand the financial health of the business and how much money they need to start and run the business.
By following the steps outlined in this article, entrepreneurs can create a well-thought-out financial projection that will help them secure funding from investors or lenders and make informed business decisions.
Frequently Asked Questions:
What are the financial statements required for a business plan.
Financial statements required for a business plan include the income statement, balance sheet, and cash flow statement. The income statement outlines the revenues and expenses of the business, while the balance sheet shows the assets, liabilities, and equity. The cash flow statement shows the cash inflows and outflows of the business.
These financial statements help potential investors and lenders understand the financial health of the business and make informed decisions about investing or lending money.
How do I calculate revenue projections for my business plan?
To calculate revenue projections for your business plan, start by estimating the number of units or services you expect to sell. Then, determine the price per unit or service and multiply that by the estimated number of sales. Be sure to consider any factors that may impact sales, such as seasonality or competition.
It’s important to be realistic in your revenue projections and to base them on market research and industry benchmarks. Investors and lenders will be looking for realistic and achievable revenue projections in your business plan.
How do I calculate my business’ break-even point?
The break-even point is the point at which your business’s total revenue equals its total expenses. To calculate the break-even point, you need to know your fixed costs, variable costs, and the price per unit or service.
Once you have these numbers, you can use a break-even formula to calculate the number of units or services you need to sell to break even. This information can help you make informed decisions about pricing and sales strategies.
What is a cash flow statement, and how do I create one?
A cash flow statement shows the cash inflows and outflows of your business over a specific period. It helps you understand how much cash your business has on hand and how it is being used. To create a cash flow statement, you’ll need to start with the beginning cash balance, add cash inflows, subtract cash outflows, and end with the ending cash balance.
It’s important to keep accurate records of all cash transactions in your business to create an accurate cash flow statement. This information is important for investors and lenders who want to understand how your business uses cash.
What is the difference between net income and cash flow?
Net income is the profit your business makes after all expenses have been deducted from revenue. Cash flow, on the other hand, is the amount of cash that is coming in and going out of your business.
While net income is important, cash flow is critical to the success of your business. Your business needs cash to pay bills, invest in growth, and survive unexpected challenges. It’s important to carefully manage your cash flow and plan for contingencies to ensure the long-term success of your business.
In conclusion, mastering the art of calculating financials for a business plan is crucial for the success of any business venture. It involves a thorough understanding of the different financial statements, such as the income statement, balance sheet, and cash flow statement, and how they interrelate. By accurately forecasting revenues, expenses, and profits, you can make informed decisions that will drive your business forward.
However, it’s important to note that financial projections are just that: projections. They are based on assumptions and estimates, and the actual results may vary. Therefore, it’s essential to regularly monitor and adjust your financials as needed to stay on track and achieve your business goals.
In the end, the key to successful financial planning is to take the time to do it right. Don’t rush through the process or cut corners. Instead, invest the time and effort to develop a solid financial plan that will serve as a roadmap for your business’s success. With the right financials in place, you can confidently move forward, knowing that you have a clear understanding of your business’s financial health and a plan for achieving your goals.
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Steer your business on the road to success with a solid financial plan.
A financial plan gives you a snapshot of the overall health of your business.
There are 3 key financial statements that make up a business financial plan:
Cash flow statement
Income statement
Balance sheet
1. Cash flow statement
Sometimes called cash flow projection, this is one of the most important steps in completing your financial plan. It details your incoming and outgoing cash and helps make sure you have enough money to keep your business running. You can use the Business cash flow view to see a monthly summary of your incoming and outgoing cash flow in the CommBank app.
Try this simple cash flow formula:
Determine the period you want to focus on (e.g. the next 3 or 6 months)
Start with your opening cash balance
Estimate your incoming cash and expenses for the period
Subtract the estimated expenses from your income and add it to the opening balance
You can look at your cash flow statement from previous years to determine if you’ll have enough to cover your costs, like wages and rent, over the specified period. It’s important to allow for glitches like late payments when projecting your cash flow .
2. Income statement
Also known as profit and loss statement (P&L), this shows you a clear view of your income and expenses, and how these change over a period of time.
What to include in your income statement
What goes into an income statement depends on the type of business. You should at least cover these key areas:
Cost of goods or services
Total profit or loss (revenue minus cost of goods/services)
Operating costs (e.g. rent)
General expenses (e.g. marketing, advertising, depreciation)
Operating income (total profit minus expenses)
Estimate your sales and expenses on a monthly, quarterly or yearly basis to see whether you can expect to make a profit or loss for these periods. This will help you develop sales targets and find ways to grow your business .
3. Balance sheet
Unlike your cash flow statement which looks at the future, and your income statements which looks at the past, your balance sheet is a financial snapshot of your business in the present.
Try this simple balance sheet formula:
In one column list all your assets (e.g. cash, inventory, buildings)
On the other side list your liabilities (e.g. accounts payable and loans)
Subtract your total liabilities from your total assets to determine your equity
Your balance sheet can help you evaluate the financial health of your business, show your profit at a glance and work out if you’ll have enough resources to run your day-to-day operations.
Take your business financial plan to the next level
To enhance your business financial plan, consider preparing a break-even analysis . This shows you the number of sales needed to cover costs – anything above this number can be counted as a profit.
The break-even point can be useful for analysing the sales, costs and pricing numbers used in your earlier forecasts and judge whether your business idea is feasible. For example, if your break-even point is years away, you may want to revisit your numbers to see if there are any opportunities to make your business more profitable.
Next steps
Once it’s ready, treat your financial business plan as a guide to running your business. Remember that it’s a working document, so if your goals and circumstances change, update the plan. If you need help, an accountant could help assess your prospective financial position and ensure you’ve thought through all potential income and expenses.
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Building Your Business
How To Create Financial Projections for Your Business
Learn how to anticipate your business’s financial performance
Understanding Financial Projections & Forecasting
Why Forecasting Is Critical for Your Business
Key financial statements for forecasting, how to create your financial projections, frequently asked questions (faqs).
Maskot / Getty Images
Just like a weather forecast lets you know that wearing closed-toe shoes will be important for that afternoon downpour later, a good financial forecast allows you to better anticipate financial highs and lows for your business.
Neglecting to compile financial projections for your business may signal to investors that you’re unprepared for the future, which may cause you to lose out on funding opportunities.
Read on to learn more about financial projections, how to compile and use them in a business plan, and why they can be crucial for every business owner.
Key Takeaways
Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more.
Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to investors.
Some of the key components to include in a financial projection include a sales projection, break-even analysis, and pro forma balance sheet and income statement.
A financial projection can not only attract investors, but helps business owners anticipate fixed costs, find a break-even point, and prepare for the unexpected.
Understanding Financial Projections and Forecasting
Financial forecasting is an educated estimate of future revenues and expenses that involves comparative analysis to get a snapshot of what could happen in your business’s future.
This process helps in making predictions about future business performance based on current financial information, industry trends, and economic conditions. Financial forecasting also helps businesses make decisions about investments, financing sources, inventory management, cost control strategies, and even whether to move into another market.
Developing both short- and mid-term projections is usually necessary to help you determine immediate production and personnel needs as well as future resource requirements for raw materials, equipment, and machinery.
Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts. They can also be used to make informed decisions about the business’s plans. Creating an accurate, adaptive financial projection for your business offers many benefits, including:
Attracting investors and convincing them to fund your business
Anticipating problems before they arise
Visualizing your small-business objectives and budgets
Demonstrating how you will repay small-business loans
Planning for more significant business expenses
Showing business growth potential
Helping with proper pricing and production planning
Financial forecasting is essentially predicting the revenue and expenses for a business venture. Whether your business is new or established, forecasting can play a vital role in helping you plan for the future and budget your funds.
Creating financial projections may be a necessary exercise for many businesses, particularly those that do not have sufficient cash flow or need to rely on customer credit to maintain operations. Compiling financial information, knowing your market, and understanding what your potential investors are looking for can enable you to make intelligent decisions about your assets and resources.
The income statement, balance sheet, and statement of cash flow are three key financial reports needed for forecasting that can also provide analysts with crucial information about a business's financial health. Here is a closer look at each.
Income Statement
An income statement, also known as a profit and loss statement or P&L, is a financial document that provides an overview of an organization's revenues, expenses, and net income.
Balance Sheet
The balance sheet is a snapshot of the business's assets and liabilities at a certain point in time. Sometimes referred to as the “financial portrait” of a business, the balance sheet provides an overview of how much money the business has, what it owes, and its net worth.
The assets side of the balance sheet includes what the business owns as well as future ownership items. The other side of the sheet includes liabilities and equity, which represent what it owes or what others owe to the business.
A balance sheet that shows hypothetical calculations and future financial projections is also referred to as a “pro forma” balance sheet.
Cash Flow Statement
A cash flow statement monitors the business’s inflows and outflows—both cash and non-cash. Cash flow is the business’s projected earnings before interest, taxes, depreciation, and amortization ( EBITDA ) minus capital investments.
Here's how to compile your financial projections and fit the results into the three above statements.
A financial projections spreadsheet for your business should include these metrics and figures:
Sales forecast
Balance sheet
Operating expenses
Payroll expenses (if applicable)
Amortization and depreciation
Cash flow statement
Income statement
Cost of goods sold (COGS)
Break-even analysis
Here are key steps to account for creating your financial projections.
Projecting Sales
The first step for a financial forecast starts with projecting your business’s sales, which are typically derived from past revenue as well as industry research. These projections allow businesses to understand what their risks are and how much they will need in terms of staffing, resources, and funding.
Sales forecasts also enable businesses to decide on important levels such as product variety, price points, and inventory capacity.
Income Statement Calculations
A projected income statement shows how much you expect in revenue and profit—as well as your estimated expenses and losses—over a specific time in the future. Like a standard income statement, elements on a projection include revenue, COGS, and expenses that you’ll calculate to determine figures such as the business’s gross profit margin and net income.
If you’re developing a hypothetical, or pro forma, income statement, you can use historical data from previous years’ income statements. You can also do a comparative analysis of two different income statement periods to come up with your figures.
Anticipate Fixed Costs
Fixed business costs are expenses that do not change based on the number of products sold. The best way to anticipate fixed business costs is to research your industry and prepare a budget using actual numbers from competitors in the industry. Anticipating fixed costs ensures your business doesn’t overpay for its needs and balances out its variable costs. A few examples of fixed business costs include:
Rent or mortgage payments
Operating expenses (also called selling, general and administrative expenses or SG&A)
Utility bills
Insurance premiums
Unfortunately, it might not be possible to predict accurately how much your fixed costs will change in a year due to variables such as inflation, property, and interest rates. It’s best to slightly overestimate fixed costs just in case you need to account for these potential fluctuations.
Find Your Break-Even Point
The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors.
To find this number, you need to determine two things: your fixed costs and variable costs. Once you have these figures, you can find your BEP using this formula:
The BEP is an essential consideration for any projection because it is the point at which total revenue from a project equals total cost. This makes it the point of either profit or loss.
Plan for the Unexpected
It is necessary to have the proper financial safeguards in place to prepare for any unanticipated costs. A sudden vehicle repair, a leaky roof, or broken equipment can quickly derail your budget if you aren't prepared. Cash management is a financial management plan that ensures a business has enough cash on hand to maintain operations and meet short-term obligations.
To maintain cash reserves, you can apply for overdraft protection or an overdraft line of credit. Overdraft protection can be set up by a bank or credit card business and provides short-term loans if the account balance falls below zero. On the other hand, a line of credit is an agreement with a lending institution in which they provide you with an unsecured loan at any time until your balance reaches zero again.
How do you make financial projections for startups?
Financial projections for startups can be hard to complete. Historical financial data may not be available. Find someone with financial projections experience to give insight on risks and outcomes.
Consider business forecasting, too, which incorporates assumptions about the exponential growth of your business.
Startups can also benefit from using EBITDA to get a better look at potential cash flow.
What are the benefits associated with forecasting business finances?
Forecasting can be beneficial for businesses in many ways, including:
Providing better understanding of your business cash flow
Easing the process of planning and budgeting for the future based on income
Improving decision-making
Providing valuable insight into what's in their future
Making decisions on how to best allocate resources for success
How many years should your financial forecast be?
Your financial forecast should either be projected over a specific time period or projected into perpetuity. There are various methods for determining how long a financial forecasting projection should go out, but many businesses use one to five years as a standard timeframe.
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Business plans
Develop your business plan
On this page
Why you need a business plan
Use our business plan tool, download a detailed business plan template, tips to help you write your business plan.
Whether you've just started out or have been running your business for years, business planning can be the key to your success. Having a business plan:
helps you to prioritise – it gives your business direction, defines your objectives, maps out how you'll achieve your goals and helps you to manage possible bumps in the road
gives you control over your business – the planning process helps you learn about the different things that could affect your success. If you're already in business, it helps you to step back and look at what's working and what you can improve on
helps you seek finance – if you're seeking finance for your business, you'll need to show banks and investors why they should invest in your business.
It will help you to develop a shorter business plan to:
evaluate a new business idea
set some goals for the year ahead
keep your business on track.
Use this template if you are seeking finance for your business or want to include more detail in your business plan.
Business plan template
1. Determine what your plan is for
Does your business plan have more than one purpose? Will you use it internally, or will you share it externally, for example with potential investors or banks?
Deciding what the purpose is, can help you develop your plan for the right audience. If the plan has been developed for third parties, you will need to determine what they’ll be most interested in.
2. Prepare your finances
Use our detailed business plan template if you are seeking finance.
Lenders and investors will want to know if your finances are in order and your business is in a strong financial position. They'll want to know how much money you currently have, how much money you need and how much you expect to make in the near future. While a bit of extra funding will help you ensure you’re covered for unexpected costs, be realistic and avoid asking for more than you need.
If you're starting out and don't have financial information yet, our template provides resources to help you get your finances ready.
3. Write your summary last
Summarise the main points of your business plan using as few words as possible. You want to get to the point but not overlook important facts. This is your opportunity to sell yourself, but don't overdo it. The summary should include details about your business, market, goals and what makes you different from other businesses.
4. Get help
Don't leave your business plan to the last minute. It takes time, research and careful preparation to develop an effective business plan.
If you aren't confident in completing the plan yourself, consider getting a professional to look over it and provide advice.
There are a number of government services available to help you plan, start or grow your business. These services can provide general advice, workshops, seminars and networking events, and can even match you with a mentor or business coach.
Get expert help from a business adviser in your area .
5. Review your plan regularly
As your business changes, your plan will need to change to ensure your business is still heading in the right direction. Having your plan up-to-date can keep you focused on where you are heading.
It's a good idea to keep a record of each version of your business plan.
6. Protect your plan
Having an understanding with third parties when distributing a plan could be enough protection for some businesses. But if you have innovative business practices, products or services, you may want people to sign a confidentiality agreement to protect your innovations.
It may also be a good idea to include some words in your plan asking the reader not to disclose the details of your plan.
Start writing and developing your marketing strategy.
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How To Start A Business In 11 Steps (2024 Guide)
Updated: Apr 7, 2024, 1:44pm
Table of Contents
Before you begin: get in the right mindset, 1. determine your business concept, 2. research your competitors and market, 3. create your business plan, 4. choose your business structure, 5. register your business and get licenses, 6. get your finances in order, 7. fund your business, 8. apply for business insurance, 9. get the right business tools, 10. market your business, 11. scale your business, what are the best states to start a business, bottom line, frequently asked questions (faqs).
Starting a business is one of the most exciting and rewarding experiences you can have. But where do you begin? There are several ways to approach creating a business, along with many important considerations. To help take the guesswork out of the process and improve your chances of success, follow our comprehensive guide on how to start a business. We’ll walk you through each step of the process, from defining your business idea to registering, launching and growing your business .
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The public often hears about overnight successes because they make for a great headline. However, it’s rarely that simple—they don’t see the years of dreaming, building and positioning before a big public launch. For this reason, remember to focus on your business journey and don’t measure your success against someone else’s.
Consistency Is Key
New business owners tend to feed off their motivation initially but get frustrated when that motivation wanes. This is why it’s essential to create habits and follow routines that power you through when motivation goes away.
Take the Next Step
Some business owners dive in headfirst without looking and make things up as they go along. Then, there are business owners who stay stuck in analysis paralysis and never start. Perhaps you’re a mixture of the two—and that’s right where you need to be. The best way to accomplish any business or personal goal is to write out every possible step it takes to achieve the goal. Then, order those steps by what needs to happen first. Some steps may take minutes while others take a long time. The point is to always take the next step.
Most business advice tells you to monetize what you love, but it misses two other very important elements: it needs to be profitable and something you’re good at. For example, you may love music, but how viable is your business idea if you’re not a great singer or songwriter? Maybe you love making soap and want to open a soap shop in your small town that already has three close by—it won’t be easy to corner the market when you’re creating the same product as other nearby stores.
If you don’t have a firm idea of what your business will entail, ask yourself the following questions:
What do you love to do?
What do you hate to do?
Can you think of something that would make those things easier?
What are you good at?
What do others come to you for advice about?
If you were given ten minutes to give a five-minute speech on any topic, what would it be?
What’s something you’ve always wanted to do, but lacked resources for?
These questions can lead you to an idea for your business. If you already have an idea, they might help you expand it. Once you have your idea, measure it against whether you’re good at it and if it’s profitable.
Your business idea also doesn’t have to be the next Scrub Daddy or Squatty Potty. Instead, you can take an existing product and improve upon it. You can also sell a digital product so there’s little overhead.
What Kind of Business Should You Start?
Before you choose the type of business to start, there are some key things to consider:
What type of funding do you have?
How much time do you have to invest in your business?
Do you prefer to work from home or at an office or workshop?
What interests and passions do you have?
Can you sell information (such as a course), rather than a product?
What skills or expertise do you have?
How fast do you need to scale your business?
What kind of support do you have to start your business?
Are you partnering with someone else?
Does the franchise model make more sense to you?
Consider Popular Business Ideas
Not sure what business to start? Consider one of these popular business ideas:
Start a Franchise
Start a Blog
Start an Online Store
Start a Dropshipping Business
Start a Cleaning Business
Start a Bookkeeping Business
Start a Clothing Business
Start a Landscaping Business
Start a Consulting Business
Start a Photography Business
Start a Vending Machine Business
Most entrepreneurs spend more time on their products than they do getting to know the competition. If you ever apply for outside funding, the potential lender or partner wants to know: what sets you (or your business idea) apart? If market analysis indicates your product or service is saturated in your area, see if you can think of a different approach. Take housekeeping, for example—rather than general cleaning services, you might specialize in homes with pets or focus on garage cleanups.
Primary Research
The first stage of any competition study is primary research, which entails obtaining data directly from potential customers rather than basing your conclusions on past data. You can use questionnaires, surveys and interviews to learn what consumers want. Surveying friends and family isn’t recommended unless they’re your target market. People who say they’d buy something and people who do are very different. The last thing you want is to take so much stock in what they say, create the product and flop when you try to sell it because all of the people who said they’d buy it don’t because the product isn’t something they’d buy.
Secondary Research
Utilize existing sources of information, such as census data, to gather information when you do secondary research. The current data may be studied, compiled and analyzed in various ways that are appropriate for your needs but it may not be as detailed as primary research.
Conduct a SWOT Analysis
SWOT stands for strengths, weaknesses, opportunities and threats. Conducting a SWOT analysis allows you to look at the facts about how your product or idea might perform if taken to market, and it can also help you make decisions about the direction of your idea. Your business idea might have some weaknesses that you hadn’t considered or there may be some opportunities to improve on a competitor’s product.
Asking pertinent questions during a SWOT analysis can help you identify and address weaknesses before they tank your new business.
A business plan is a dynamic document that serves as a roadmap for establishing a new business. This document makes it simple for potential investors, financial institutions and company management to understand and absorb. Even if you intend to self-finance, a business plan can help you flesh out your idea and spot potential problems. When writing a well-rounded business plan, include the following sections:
Executive summary: The executive summary should be the first item in the business plan, but it should be written last. It describes the proposed new business and highlights the goals of the company and the methods to achieve them.
Company description: The company description covers what problems your product or service solves and why your business or idea is best. For example, maybe your background is in molecular engineering, and you’ve used that background to create a new type of athletic wear—you have the proper credentials to make the best material.
Market analysis: This section of the business plan analyzes how well a company is positioned against its competitors. The market analysis should include target market, segmentation analysis, market size, growth rate, trends and a competitive environment assessment.
Organization and structure: Write about the type of business organization you expect, what risk management strategies you propose and who will staff the management team. What are their qualifications? Will your business be a single-member limited liability company (LLC) or a corporation ?
Mission and goals: This section should contain a brief mission statement and detail what the business wishes to accomplish and the steps to get there. These goals should be SMART (specific, measurable, action-orientated, realistic and time-bound).
Products or services: This section describes how your business will operate. It includes what products you’ll offer to consumers at the beginning of the business, how they compare to existing competitors, how much your products cost, who will be responsible for creating the products, how you’ll source materials and how much they cost to make.
Background summary: This portion of the business plan is the most time-consuming to write. Compile and summarize any data, articles and research studies on trends that could positively and negatively affect your business or industry.
Marketing plan: The marketing plan identifies the characteristics of your product or service, summarizes the SWOT analysis and analyzes competitors. It also discusses how you’ll promote your business, how much money will be spent on marketing and how long the campaign is expected to last.
Financial plan: The financial plan is perhaps the core of the business plan because, without money, the business will not move forward. Include a proposed budget in your financial plan along with projected financial statements, such as an income statement, a balance sheet and a statement of cash flows. Usually, five years of projected financial statements are acceptable. This section is also where you should include your funding request if you’re looking for outside funding.
Learn more: Download our free simple business plan template .
Come Up With an Exit Strategy
An exit strategy is important for any business that is seeking funding because it outlines how you’ll sell the company or transfer ownership if you decide to retire or move on to other projects. An exit strategy also allows you to get the most value out of your business when it’s time to sell. There are a few different options for exiting a business, and the best option for you depends on your goals and circumstances.
The most common exit strategies are:
Selling the business to another party
Passing the business down to family members
Liquidating the business assets
Closing the doors and walking away
Develop a Scalable Business Model
As your small business grows, it’s important to have a scalable business model so that you can accommodate additional customers without incurring additional costs. A scalable business model is one that can be replicated easily to serve more customers without a significant increase in expenses.
Some common scalable business models are:
Subscription-based businesses
Businesses that sell digital products
Franchise businesses
Network marketing businesses
Start Planning for Taxes
One of the most important things to do when starting a small business is to start planning for taxes. Taxes can be complex, and there are several different types of taxes you may be liable for, including income tax, self-employment tax, sales tax and property tax. Depending on the type of business you’re operating, you may also be required to pay other taxes, such as payroll tax or unemployment tax.
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When structuring your business, it’s essential to consider how each structure impacts the amount of taxes you owe, daily operations and whether your personal assets are at risk.
An LLC limits your personal liability for business debts. LLCs can be owned by one or more people or companies and must include a registered agent . These owners are referred to as members.
LLCs offer liability protection for the owners
They’re one of the easiest business entities to set up
You can have a single-member LLC
You may be required to file additional paperwork with your state on a regular basis
LLCs can’t issue stock
You’ll need to pay annual filing fees to your state
Limited Liability Partnership (LLP)
An LLP is similar to an LLC but is typically used for licensed business professionals such as an attorney or accountant. These arrangements require a partnership agreement.
Partners have limited liability for the debts and actions of the LLP
LLPs are easy to form and don’t require much paperwork
There’s no limit to the number of partners in an LLP
Partners are required to actively take part in the business
LLPs can’t issue stock
All partners are personally liable for any malpractice claims against the business
Sole Proprietorship
If you start a solo business, you might consider a sole proprietorship . The company and the owner, for legal and tax purposes, are considered the same. The business owner assumes liability for the business. So, if the business fails, the owner is personally and financially responsible for all business debts.
Sole proprietorships are easy to form
There’s no need to file additional paperwork with your state
You’re in complete control of the business
You’re personally liable for all business debts
It can be difficult to raise money for a sole proprietorship
The business may have a limited lifespan
Corporation
A corporation limits your personal liability for business debts just as an LLC does. A corporation can be taxed as a C corporation (C-corp) or an S corporation (S-corp). S-corp status offers pass-through taxation to small corporations that meet certain IRS requirements. Larger companies and startups hoping to attract venture capital are usually taxed as C-corps.
Corporations offer liability protection for the owners
The life span of a corporation is not limited
A corporation can have an unlimited number of shareholders
Corporations are subject to double taxation
They’re more expensive and complicated to set up than other business structures
The shareholders may have limited liability
Before you decide on a business structure, discuss your situation with a small business accountant and possibly an attorney, as each business type has different tax treatments that could affect your bottom line.
Helpful Resources
How To Set Up an LLC in 7 Steps
How To Start a Sole Proprietorship
How To Start a Corporation
How To Start a Nonprofit
How To Start a 501(c)(3)
There are several legal issues to address when starting a business after choosing the business structure. The following is a good checklist of items to consider when establishing your business:
Choose Your Business Name
Make it memorable but not too difficult. Choose the same domain name, if available, to establish your internet presence. A business name cannot be the same as another registered company in your state, nor can it infringe on another trademark or service mark that is already registered with the United States Patent and Trademark Office (USPTO).
Business Name vs. DBA
There are business names, and then there are fictitious business names known as “Doing Business As” or DBA. You may need to file a DBA if you’re operating under a name that’s different from the legal name of your business. For example, “Mike’s Bike Shop” is doing business as “Mike’s Bikes.” The legal name of the business is “Mike’s Bike Shop,” and “Mike’s Bikes” is the DBA.
You may need to file a DBA with your state, county or city government offices. The benefits of a DBA include:
It can help you open a business bank account under your business name
A DBA can be used as a “trade name” to brand your products or services
A DBA can be used to get a business license
Register Your Business and Obtain an EIN
You’ll officially create a corporation, LLC or other business entity by filing forms with your state’s business agency―usually the Secretary of State. As part of this process, you’ll need to choose a registered agent to accept legal documents on behalf of your business. You’ll also pay a filing fee. The state will send you a certificate that you can use to apply for licenses, a tax identification number (TIN) and business bank accounts.
Next, apply for an employer identification number (EIN) . All businesses, other than sole proprietorships with no employees, must have a federal employer identification number. Submit your application to the IRS and you’ll typically receive your number in minutes.
Get Appropriate Licenses and Permits
Legal requirements are determined by your industry and jurisdiction. Most businesses need a mixture of local, state and federal licenses to operate. Check with your local government office (and even an attorney) for licensing information tailored to your area.
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Open a Business Bank Account
Keep your business and personal finances separate. Here’s how to choose a business checking account —and why separate business accounts are essential. When you open a business bank account, you’ll need to provide your business name and your business tax identification number (EIN). This business bank account can be used for your business transactions, such as paying suppliers or invoicing customers. Most times, a bank will require a separate business bank account to issue a business loan or line of credit.
Hire a Bookkeeper or Get Accounting Software
If you sell a product, you need an inventory function in your accounting software to manage and track inventory. The software should have ledger and journal entries and the ability to generate financial statements.
Some software programs double as bookkeeping tools. These often include features such as check writing and managing receivables and payables. You can also use this software to track your income and expenses, generate invoices, run reports and calculate taxes.
There are many bookkeeping services available that can do all of this for you, and more. These services can be accessed online from any computer or mobile device and often include features such as bank reconciliation and invoicing. Check out the best accounting software for small business, or see if you want to handle the bookkeeping yourself.
Determine Your Break-Even Point
Before you fund your business, you must get an idea of your startup costs. To determine these, make a list of all the physical supplies you need, estimate the cost of any professional services you will require, determine the price of any licenses or permits required to operate and calculate the cost of office space or other real estate. Add in the costs of payroll and benefits, if applicable.
Businesses can take years to turn a profit, so it’s better to overestimate the startup costs and have too much money than too little. Many experts recommend having enough cash on hand to cover six months of operating expenses.
When you know how much you need to get started with your business, you need to know the point at which your business makes money. This figure is your break-even point.
In contrast, the contribution margin = total sales revenue – cost to make product
For example, let’s say you’re starting a small business that sells miniature birdhouses for fairy gardens. You have determined that it will cost you $500 in startup costs. Your variable costs are $0.40 per birdhouse produced, and you sell them for $1.50 each.
Let’s write these out so it’s easy to follow:
$500 for the first month
40 cents per birdhouse
$1.50
$500/($1.50 - 40 cents)
This means that you need to sell at least 456 units just to cover your costs. If you can sell more than 456 units in your first month, you will make a profit.
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There are many different ways to fund your business—some require considerable effort, while others are easier to obtain. Two categories of funding exist: internal and external.
Internal funding includes:
Personal savings
Credit cards
Funds from friends and family
If you finance the business with your own funds or with credit cards, you have to pay the debt on the credit cards and you’ve lost a chunk of your wealth if the business fails. By allowing your family members or friends to invest in your business, you are risking hard feelings and strained relationships if the company goes under. Business owners who want to minimize these risks may consider external funding.
External funding includes:
Small business loans
Small business grants
Angel investors
Venture capital
Crowdfunding
Small businesses may have to use a combination of several sources of capital. Consider how much money is needed, how long it will take before the company can repay it and how risk-tolerant you are. No matter which source you use, plan for profit. It’s far better to take home six figures than make seven figures and only keep $80,000 of it.
Funding ideas include:
Invoice factoring: With invoice factoring , you can sell your unpaid invoices to a third party at a discount.
Business lines of credit: Apply for a business line of credit , which is similar to a personal line of credit. The credit limit and interest rate will be based on your business’s revenue, credit score and financial history.
Equipment financing: If you need to purchase expensive equipment for your business, you can finance it with a loan or lease.
Small Business Administration (SBA) microloans: Microloans are up to $50,000 loans that can be used for working capital, inventory or supplies and machinery or equipment.
Grants: The federal government offers grants for businesses that promote innovation, export growth or are located in historically disadvantaged areas. You can also find grants through local and regional organizations.
Crowdfunding: With crowdfunding , you can raise money from a large group of people by soliciting donations or selling equity in your company.
Choose the right funding source for your business by considering the amount of money you need, the time frame for repayment and your tolerance for risk.
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You need to have insurance for your business , even if it’s a home-based business or you don’t have any employees. The type of insurance you need depends on your business model and what risks you face. You might need more than one type of policy, and you might need additional coverage as your business grows. In most states, workers’ compensation insurance is required by law if you have employees.
Work With an Agent To Get Insured
An insurance agent can help determine what coverages are appropriate for your business and find policies from insurers that offer the best rates. An independent insurance agent represents several different insurers, so they can shop around for the best rates and coverage options.
Basic Types of Business Insurance Coverage
Liability insurance protects your business against third-party claims of bodily injury, property damage and personal injury such as defamation or false advertising.
Property insurance covers the physical assets of your business, including your office space, equipment and inventory.
Business interruption insurance pays for the loss of income if your business is forced to close temporarily due to a covered event such as a natural disaster.
Product liability insurance protects against claims that your products caused bodily injury or property damage.
Employee practices liability insurance covers claims from employees alleging discrimination, sexual harassment or other wrongful termination.
Workers’ compensation insurance covers medical expenses and income replacement for employees who are injured on the job.
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Business tools can help make your life easier and make your business run more smoothly. The right tools can help you save time, automate tasks and make better decisions.
Consider the following tools in your arsenal:
Accounting software : Track your business income and expenses, prepare financial statements and file taxes. Examples include QuickBooks and FreshBooks.
Customer relationship management (CRM) software : This will help you manage your customer relationships, track sales and marketing data and automate tasks like customer service and follow-ups. Examples include Zoho CRM and monday.com.
Project management software : Plan, execute and track projects. It can also be used to manage employee tasks and allocate resources. Examples include Airtable and ClickUp.
Credit card processor : This will allow you to accept credit card payments from customers. Examples include Stripe and PayPal.
Point of sale (POS) : A system that allows you to process customer payments. Some accounting software and CRM software have POS features built-in. Examples include Clover and Lightspeed.
Virtual private network (VPN) : Provides a secure, private connection between your computer and the internet. This is important for businesses that handle sensitive data. Examples include NordVPN and ExpressVPN.
Merchant services : When customers make a purchase, the money is deposited into your business account. You can also use merchant services to set up recurring billing or subscription payments. Examples include Square and Stripe.
Email hosting : This allows you to create a professional email address with your own domain name. Examples include G Suite and Microsoft Office 365.
Many business owners spend so much money creating their products that there isn’t a marketing budget by the time they’ve launched. Alternatively, they’ve spent so much time developing the product that marketing is an afterthought.
Create a Website
Even if you’re a brick-and-mortar business, a web presence is essential. Creating a website doesn’t take long, either—you can have one done in as little as a weekend. You can make a standard informational website or an e-commerce site where you sell products online. If you sell products or services offline, include a page on your site where customers can find your locations and hours. Other pages to add include an “About Us” page, product or service pages, frequently asked questions (FAQs), a blog and contact information.
Optimize Your Site for SEO
After getting a website or e-commerce store, focus on optimizing it for search engines (SEO). This way, when a potential customer searches for specific keywords for your products, the search engine can point them to your site. SEO is a long-term strategy, so don’t expect a ton of traffic from search engines initially—even if you’re using all the right keywords.
Create Relevant Content
Provide quality digital content on your site that makes it easy for customers to find the correct answers to their questions. Content marketing ideas include videos, customer testimonials, blog posts and demos. Consider content marketing one of the most critical tasks on your daily to-do list. This is used in conjunction with posting on social media.
Get Listed in Online Directories
Customers use online directories like Yelp, Google My Business and Facebook to find local businesses. Some city halls and chambers of commerce have business directories too. Include your business in as many relevant directories as possible. You can also create listings for your business on specific directories that focus on your industry.
Develop a Social Media Strategy
Your potential customers are using social media every day—you need to be there too. Post content that’s interesting and relevant to your audience. Use social media to drive traffic back to your website where customers can learn more about what you do and buy your products or services.
You don’t necessarily need to be on every social media platform available. However, you should have a presence on Facebook and Instagram because they offer e-commerce features that allow you to sell directly from your social media accounts. Both of these platforms have free ad training to help you market your business.
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To scale your business, you need to grow your customer base and revenue. This can be done by expanding your marketing efforts, improving your product or service, collaborating with other creators or adding new products or services that complement what you already offer.
Think about ways you can automate or outsource certain tasks so you can focus on scaling the business. For example, if social media marketing is taking up too much of your time, consider using a platform such as Hootsuite to help you manage your accounts more efficiently. You can also consider outsourcing the time-consumer completely.
You can also use technology to automate certain business processes, including accounting, email marketing and lead generation. Doing this will give you more time to focus on other aspects of your business.
When scaling your business, it’s important to keep an eye on your finances and make sure you’re still profitable. If you’re not making enough money to cover your costs, you need to either reduce your expenses or find ways to increase your revenue.
Build a Team
As your business grows, you’ll need to delegate tasks and put together a team of people who can help you run the day-to-day operations. This might include hiring additional staff, contractors or freelancers.
Resources for building a team include:
Hiring platforms: To find the right candidates, hiring platforms, such as Indeed and Glassdoor, can help you post job descriptions, screen résumés and conduct video interviews.
Job boards: Job boards such as Craigslist and Indeed allow you to post open positions for free.
Social media: You can also use social media platforms such as LinkedIn and Facebook to find potential employees.
Freelance platforms: Using Upwork, Freelancer and Fiverr can help you find talented freelancers for one-time or short-term projects. You can also outsource certain tasks, such as customer service, social media marketing or bookkeeping.
You might also consider partnering with other businesses in your industry. For example, if you’re a wedding planner, you could partner with a florist, photographer, catering company or venue. This way, you can offer your customers a one-stop shop for all their wedding needs. Another example is an e-commerce store that partners with a fulfillment center. This type of partnership can help you save money on shipping and storage costs, and it can also help you get your products to your customers faster.
To find potential partnerships, search for businesses in your industry that complement what you do. For example, if you’re a web designer, you could partner with a digital marketing agency.
You can also search for businesses that serve the same target market as you but offer different products or services. For example, if you sell women’s clothing, you could partner with a jewelry store or a hair salon.
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To rank the best states to start a business in 2024, Forbes Advisor analyzed 18 key metrics across five categories to determine which states are the best and worst to start a business in. Our ranking takes into consideration factors that impact businesses and their ability to succeed, such as business costs, business climate, economy, workforce and financial accessibility in each state. Check out the full report .
Starting a small business takes time, effort and perseverance. But if you’re willing to put in the work, it can be a great way to achieve your dreams and goals. Be sure to do your research, create a solid business plan and pivot along the way. Once you’re operational, don’t forget to stay focused and organized so you can continue to grow your business.
How do I start a small business with no money?
There are several funding sources for brand-new businesses and most require a business plan to secure it. These include the SBA , private grants, angel investors, crowdfunding and venture capital.
What is the best business structure?
The best business structure for your business will depend entirely on what kind of company you form, your industry and what you want to accomplish. But any successful business structure will be one that will help your company set realistic goals and follow through on set tasks.
Do I need a business credit card?
You don’t need one, but a business credit card can be helpful for new small businesses. It allows you to start building business credit, which can help you down the road when you need to take out a loan or line of credit. Additionally, business credit cards often come with rewards and perks that can save you money on business expenses.
Do I need a special license or permit to start a small business?
The answer to this question will depend on the type of business you want to start and where you’re located. Some businesses, such as restaurants, will require a special permit or license to operate. Others, such as home daycare providers, may need to register with the state.
How much does it cost to create a business?
The cost of starting a business will vary depending on the size and type of company you want to create. For example, a home-based business will be less expensive to start than a brick-and-mortar store. Additionally, the cost of starting a business will increase if you need to rent or buy commercial space, hire employees or purchase inventory. You could potentially get started for free by dropshipping or selling digital goods.
How do I get a loan for a new business?
The best way to get a loan for a new business is to approach banks or other financial institutions and provide them with a business plan and your financial history. You can also look into government-backed loans, such as those offered by the SBA. Startups may also be able to get loans from alternative lenders, including online platforms such as Kiva.
Do I need a business degree to start a business?
No, you don’t need a business degree to start a business. However, acquiring a degree in business or a related field can provide you with the understanding and ability to run an effective company. Additionally, you may want to consider taking some business courses if you don’t have a degree to learn more about starting and running a business. You can find these online and at your local Small Business Administration office.
What are some easy businesses to start?
One of the easiest businesses to start also has the lowest overhead: selling digital goods. This can include items such as e-books, online courses, audio files or software. If you have expertise in a particular area or niche, this is a great option for you. Dropshipping is also a great option because you don’t have to keep inventory. You could also buy wholesale products or create your own. Once you create your product, you can sell it through your own website or third-party platforms such as Amazon or Etsy.
What is the most profitable type of business?
There is no one answer to this question because the most profitable type of business will vary depending on a number of factors, such as your industry, location, target market and business model. However, some businesses tend to be more profitable than others, such as luxury goods, high-end services, business-to-business companies and subscription-based businesses. If you’re not sure what type of business to start, consider your strengths and interests, as well as the needs of your target market, to help you choose a profitable business idea.
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Katherine Haan is a small business owner with nearly two decades of experience helping other business owners increase their incomes.
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For recent developments, see the tax year 2023 Publication 505, Tax Withholding and Estimated Tax .
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
If you don’t pay enough tax through withholding and estimated tax payments, you may have to pay a penalty. You also may have to pay a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
Estimated tax requirements are different for farmers, fishermen, and certain higher income taxpayers. Publication 505, Tax Withholding and Estimated Tax , provides more information about these special estimated tax rules.
Who must pay estimated tax
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
You may have to pay estimated tax for the current year if your tax was more than zero in the prior year. See the worksheet in Form 1040-ES, Estimated Tax for Individuals for more details on who must pay estimated tax.
Who does not have to pay estimated tax
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
If you receive a paycheck, the Tax Withholding Estimator will help you make sure you have the right amount of tax withheld from your paycheck.
You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.
You had no tax liability for the prior year
You were a U.S. citizen or resident alien for the whole year
Your prior tax year covered a 12-month period
You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax .
How to figure estimated tax
Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES , to figure estimated tax. Nonresident aliens use Form 1040-ES(NR) to figure estimated tax.
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year's federal tax return as a guide. You can use the worksheet in Form 1040-ES to figure your estimated tax. You need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties.
You must make adjustments both for changes in your own situation and for recent changes in the tax law.
When to pay estimated taxes
For estimated tax purposes, the year is divided into four payment periods . Each period has a specific payment due date. If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
If a payment is mailed, the date of the U.S. postmark is the date of payment. If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that isn’t a Saturday, Sunday or holiday.
How to pay estimated taxes
You may send estimated tax payments with Form 1040-ES by mail , or you can pay online , by phone or from your mobile device using the IRS2Go app . You can also make your estimated tax payments through your online account, where you can see your payment history and other tax records. Go to IRS.gov/account . Visit IRS.gov/payments to view all the options. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax .
Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS . If it’s easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you’ve paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.
Corporations must deposit the payment using the Electronic Federal Tax Payment System . For additional information, refer to Publication 542, Corporations .
Penalty for underpayment of estimated tax
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers, fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax , for additional information.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations ), to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 and 1040-SR Instructions or Form 1120 Instructions PDF , for where to report the estimated tax penalty on your return.
The penalty may also be waived if:
The underpayment was due to a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and your underpayment was due to reasonable cause and not willful neglect. For information on how to request a waiver, see Form 2210 Instructions PDF .
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Ryan Brady is a lead writer at NerdWallet and authority on car insurance and life insurance. Ryan enjoys unraveling complex insurance topics to help people make smarter financial decisions. His work has appeared in TechCrunch, MarketWatch, Yahoo, Nasdaq and more.
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For a lot of people, buying car insurance is like buying sliced bread. It’s not the most exciting purchase, and the options all seem similar. So thrifty shoppers might simply reach for the cheapest thing on the shelf. But like cheap bread, cheap car insurance may leave you wishing you spent a little more on quality.
“The cheapest is not always the best,” warns Jessica McNally, an agency owner with Goosehead Insurance in Dallas. That’s because there are lots of factors that make up a car insurance company. And while price is one of them, it’s best to look at the bigger picture.
Here’s what to look for when picking the best car insurance company.
1. Choose a financially stable company
The best car insurance companies have plenty of money on hand to pay for customers’ claims. It’s important to check an insurer’s financial stability before buying a policy, especially if it’s a smaller insurer you’ve never heard of.
There are several independent agencies that evaluate the financial strength of insurance companies. One example is A.M. Best. You can use its online search tool to find an insurer’s financial strength rating. Companies with a rating of A or higher are considered to have an excellent ability to pay out customer claims.
2. Check customer satisfaction ratings and reviews
Not every insurer is customer-first. That’s why it’s important to research the customer satisfaction of insurers you’re considering.
You can turn to surveys from companies like J.D. Power to find insurers with the best customer satisfaction scores [0] J.D. Power . Auto Insurance Customer Satisfaction Plummets as Rates Continue to Surge, J.D. Power Finds . Accessed May 21, 2024. View all sources . Or, if you don’t mind doing a little detective work, you can compare customer complaints against insurers by using the National Association of Insurance Commissioners’ website . But take other people’s emotionally charged comments about companies or agents you might read online with a grain of salt, McNally advises.
3. Look for convenience
A great auto insurer should offer multiple ways to manage a policy. For example, some insurers allow customers to use a mobile app to file and track claims. But it’s hard to tell how simple it’ll be to file a claim or perform other essential tasks, like paying your premium, before becoming a customer.
Some telltale signs that an insurer will be easy to work with are high mobile app ratings, flexible customer service hours and an easy-to-use website with helpful content. Consider asking a company representative to walk you through the claims process to learn what you’ll need to do if you have to file a claim. And pay attention to how the company communicates with you. "If they don't properly communicate, well, that's a warning sign," says Michael DeLong, a research and advocacy associate for the nonprofit Consumer Federation of America.
4. Pick an affordable company
Car insurance premiums are stretching to record-breaking heights [0] U.S. BUREAU OF LABOR STATISTICS . Consumer Price Index for All Urban Consumers (CPI-U) . Accessed May 21, 2024. View all sources , and almost half of U.S. consumers shopped for a new car insurance policy in the past year, according to an April 2024 report by J.D. Power [0] J.D. Power . Half of Auto Insurance Customers Currently Shopping for New Policies, J.D. Power Finds . Accessed May 21, 2024. View all sources . The best car insurance companies offer competitive rates and a variety of potential discounts.
It’s not hard to get car insurance quotes online from many companies. Make sure you compare the same coverage options throughout the quote-gathering process. And don’t forget to look for car insurance discounts, like breaks for being a good driver, paying your premium in full or driving a new car.
More tips to find the best car insurance
When shopping for the best car insurance, keep the following tips in mind.
Assess your needs. Before buying car insurance, take a moment to reflect on what’s important to you and your family. For example, maybe you prioritize affordability and a well-polished mobile app, but don’t need accident forgiveness .
Consider small insurers. There are lots of small insurance companies you’ve probably never heard of. These regional insurers may provide lower rates and better customer service than the big companies you see advertised on TV.
Work with an independent agent. While it may be easy to get quotes yourself, independent car insurance agents and brokers can streamline the process. These experts vet companies and compile quotes from small and large insurers on your behalf. Independent agents and brokers can especially come in handy if you have a less-than-perfect driving record and can’t find insurance on your own.
Do your research. Search online for recent mentions of a company in the news before buying a policy, recommends DeLong. If you find a company has lots of recent lawsuits against it, you may want to think twice about signing on the dotted line. “And if they've had to pay out settlements, that's an even bigger red flag,” DeLong says.
Shop around once a year. Make a practice of shopping for car insurance every year — especially if price is important to you. Insurers adjust car insurance rates regularly, so what might have been the most affordable option last year may no longer be a bargain.
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Best Life Insurance of June 2024
Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate insurance products to write unbiased product reviews.
Life insurance is as complicated as the policyholders and beneficiaries who use it. That means there's no single "best" life insurance company. Instead, you can find the best option based on what you want or what you prioritize.
Summary of the Best Life Insurance Companies
Best for customer satisfaction: State Farm Life Insurance
Best for older adults: Prudential Life Insurance
Best for agent support: New York Life Insurance
Best for long-term care: Columbus Life
Best for high returns: Allianz Life
Best for term life: North American Company
Best Life Insurance Companies of 2024
While there is no such thing as the objective best life insurance policy, you will be able to find the best insurance policy for your specific needs. Here are our picks for the best life insurance companies, whether you want to use your life insurance policy to build wealth through cash value or you're just looking for a term life insurance policy .
Best Life Insurance for Customer Satisfaction: State Farm Life Insurance
Bundling is standard, and agents often quote with multiple discounts.
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Best in JD Power customer service ratings
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Company offers a range of different insurance products to meet buyer needs
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Agents are knowledgeable about its products
con icon Two crossed lines that form an 'X'. Life insurance products are conservative and limited
con icon Two crossed lines that form an 'X'. Buyers may be subject to multi-year waiting periods before they qualify for full payouts on life insurance policies
con icon Two crossed lines that form an 'X'. State Farm agents cannot offer alternative options if State Farm is unable to bind a life insurance policy
State Farm is one of the insurance industry's most prominent insurers offering auto, home, and other insurance. Bundling is standard, and agents often quote with multiple discounts. Its term, universal, and whole life insurance products are no exception.
Life insurance products include term and permanent life
Ranks highly for customer satisfaction
State Farm Life Insurance gets the best life insurance ranking in J.D Power's Individual Life Insurance Study, with a score of 843/1,000. The company is also ranked A++ with AM Best for its financial stability with term, universal, and whole life insurance options.
All State Farm policies have to be purchased through a State Farm agent. Your agent can help you bundle and save or buy one policy. State Farm is also among the companies offering "survivorship universal life insurance ," which means the policy covers two people, and it kicks in after the second person dies. Couples looking to maximize their death benefit for beneficiaries with one premium payment each month may enjoy lower overall costs.
State Farm agents can run quotes and compare options to find the right plans for each applicant. The range of options, discounts, and familiar name all contribute to the popularity of State Farm's life insurance.
Read our State Farm Life Insurance review here.
Best Life Insurance for Older Adults: Prudential VUL Protector Life Insurance
Offers aggressive financial plans.
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Available in all 50 states (New York residents may have different plans)
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Buyers can withdraw money to pay for nursing home bills due to severe illness or disability
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Knowledgeable agents who can walk you through your options
con icon Two crossed lines that form an 'X'. Financial returns are limited
con icon Two crossed lines that form an 'X'. Limited policy options for seniors and other groups who might struggle to find life insurance
The aggressive financial plans offered by Prudential may appeal to many younger buyers and those with a stable income. However, those with lower income or buyers who aren't sure about the financial system may be more hesitant to engage with Prudential. Like many other industry giants, Prudential is working to change this perception.
Prudential Life Insurance is available in all states except New York. New York residents can buy the Pruco Life of New Jersey VUL Protector plan. This plan allows buyers to pull money out of their plan to pay for nursing home expenses. Cash value policy premiums are fixed, so you won't have to worry about extra costs later on. Internal costs are low, which minimizes risk. Due to age, many older adults want a safe investment option for their money. Prudential VUL Protector invests to avoid loss. That also means you're not as likely to see big increases in your available funds outside of what you deposit.
Read our Prudential Life Insurance review here.
Best Life Insurance for Long-Term Care: Columbus Life Insurance
Offers lien method to makes it easier to calculate the financial impact of pulling money out early.
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Buyers can pull money out for medical and other bills in the event of disease or disability
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Columbus uses lien method to simplify accelerated death payments
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Company offers a wide range of riders to customize policies
con icon Two crossed lines that form an 'X'. Premiums may be higher than competitors
con icon Two crossed lines that form an 'X'. Term policies are not guaranteed to be converted to whole
Best for long-term care and accelerated death benefits.
Columbus Life offers a wide range of riders to customize your policy with affordable premiums. The company also allows you to convert term policies to whole life insurance policies until the end of your term (generally around age 70). For this and many other reasons, customer satisfaction is high.
When using living health benefits (otherwise known as accelerated death benefits), buyers are allowed to pull money from policies early to pay for medical bills, living costs, etc. under certain circumstances. Most companies use a discounted death benefit, which reduces your final payout using two models. Columbus uses the lien method, which makes it easier to calculate the financial impact of pulling money out early.
Best Life Insurance for High Returns on Income: Allianz Life Insurance
Offers life insurance policies for foreign nationals with H-1B visas.
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Plans offer high returns on investment
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Great for investment and long-term retirement planning
Check mark icon A check mark. It indicates a confirmation of your intended interaction. May increase your income by as much as 20%
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Allianz offers plans for foreign nationals including H-1B visas
con icon Two crossed lines that form an 'X'. Plans are meant specifically for high-income adults, alternatives may not be offered
Best for investing and high returns on income.
Allianz Life plans are geared towards high-income adults looking for more tax-free income. Allianz offers a 40% multiplier bonus with a 1% annual assets charge. In short, the professionals managing your investments take 10%. Overall, your investments would pull in an extra 14%-1% asset charge. This means you end up with 3% more than what you deposit every year your life policy is active. This plan offers strong returns when using a life policy to supplement your retirement savings. Allianz also offers specialized plans to grow your income by as much as 20% according to some estimates.
Of note: Allianz also offers plans for foreign nationals, including those with H-1B visas.
Best Life Insurance for Agent Support: New York Life Insurance
Offers aggressive financial products and extensively trained agents.
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Strong life insurance options for financial planning and wealth building
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Policies available nationwide
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Knowledgeable life insurance agents
con icon Two crossed lines that form an 'X'. May require a medical exam
con icon Two crossed lines that form an 'X'. Buyers looking for more modest policies may not find the most competitive pricing
If you're preparing for a comfortable retirement or looking to build generational wealth, New York Life is one of the strongest options. If you have questions or genuinely want to understand your life insurance options, New York Life agents are among the most qualified professionals in the business.
Life insurance provider with policies available across the US
New York Life Insurance agents go through extensive training before they ever hit the sales floor. What does this get you? Policies vary widely, and New York Life offers both large and small payouts. Some policies have significant penalties for early withdrawal, but taking a loan offers more options. Whatever your questions, New York Life agents are trained to offer comprehensive support giving you accurate information about its policies every time. The company comes in at position eight in J.D. Power's latest life insurance customer satisfaction study.
Read our New York Life Insurance review here.
Best Life Insurance for Term Life: North American Life Insurance
Offers term policies alongside accelerated death benefits for critical, chronic, and terminal illnesses and more.
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Offers accelerated death benefits for critical, chronic, and terminal illnesses
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Offers conversion for life policies up to 70 years old
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Term policies can be renewed up to age 95 for qualifying applicants
con icon Two crossed lines that form an 'X'. Not all term policies qualify for renewal or conversion
Best Term Policy.
North American Company offers term policies alongside accelerated death benefits for critical, chronic, and terminal illnesses and more. The company allows one conversion on a 20-year policy at 15 years or 70 years old (whichever is earlier). The conversion cannot happen later than the five-year marker regardless of which policy you choose or the length. North American Company also offers a term policy with a lower premium renewable up to the age of 95 for qualifying insureds.
Types of Life Insurance
While there's many different types of life insurance policies , broadly speaking, there are two types of life insurance: temporary and permanent. Let's go over each in detail.
Temporary life insurance
Temporary life insurance is often called term life insurance. This type of policy covers you for a set amount of time before expiring, usually between 10-30 years. If you pass away after your policy expires, your family won't receive any benefits. Additionally, your policy won't accrue cash value like a permanent policy. That said, some term life insurance policies offer a conversion from term to whole life insurance, so you can extend your coverage.
Because its benefits aren't guaranteed, term life policies are generally cheaper than permanent life insurance. That said, the vast majority of term life insurance policies never pay out. on
Permanent life insurance
Permanent life insurance is an umbrella term for a variety of life insurance policies that will insure you indefinitely and guarantee a payout as long as you maintain your policy. Policy types that fall under permanent life insurance includes:
Whole life insurance
Universal life insurance
Variable life insurance
Variable universal life insurance
Simplified life insurance
Guaranteed issue life insurance
These policies vary widely in purpose and intended buyers, but all guarantee death benefits to your loved ones. Some permanent life insurance policies, like whole, universal, and variable have a cash value component , which you can use as a savings tool or to leave your heirs a larger death benefit.
How to Pick the Best Life Insurance Policy for You
Finding the right fit in life insurance starts with finding a trusted insurance agent. Because there are so many state regulations, shopping for homeowners or auto insurance can be easily done online. Life insurance is not required. So it's a voluntary purchase. Many buyers don't know what they need or when they need it. Before making your selection, consider a few things:
Some companies will sell you a policy for your child as soon as they're born. While this may seem morbid, early sign-up means lower rates for a policy your child could enjoy in the future. Regardless, early sign-up equates to more policy for lower premiums and a higher likelihood of acceptance. At 20, you may be healthier and be able to pay into the policy for a longer period compared to when you're 50 with more age-related conditions.
As a general rule, never agree to more than you can afford. For the average life insurance agent, their job is to sell you a large policy with a large commission. Consider not only how much you make now, but how likely your current income is to continue. If you work on a project basis and your project is scheduled to end in 12 months, you may want to reconsider a policy premium outside your monthly savings.
How much are you prepared to buy? Some people only want a small policy to cover funerals and other end-of-life expenses. Others build a life policy into their retirement plan. Whatever direction you're going, involving a financial planner could help you make the right decisions. Depending on the carrier, customers can also compare set limits with index universal life policies, which set no limit. These policies never expire, and the value builds over the entirety of your life.
Living Benefits
Life happens unexpectedly. You could be healthy one day and in the hospital the next. Many life policies offer living benefits. These allow you to draw a limited amount out of your policy to cover medical and other bills you cannot pay while sick.
Much like a 401(k), many life insurance policies have penalties for early withdrawal. No matter what policy you want, this question is critical to an informed decision. It's a question of how early you can withdraw and how much you'll lose from the total to have the money in 10 years instead of 30 or after death.
Some policies require insured parties to pay premiums for at least one year before any significant payout would be available. Suicide exclusions are common. Even with no medical exam policies, the company may still do a check for known conditions. An insurance company has to mitigate its risk.
Flexibility
Once you've been denied a life insurance policy, a mark goes on your record. No matter the reasons, other insurance companies may deny you coverage based on the first denial. So consider your whole situation and choose your policy carefully before you submit any applications. Some policies have greater flexibility if you lose your job or otherwise can't make payments. Others will lapse if you miss even one payment.
Payment Type
Even within whole life or term life insurance policies, customers have the option to choose guaranteed fixed or variable rates. Some have guaranteed payouts, but you'll need to ask your agent for details.
What is your intended use? Why are you shopping for a life insurance policy in the first place, and what are your goals? Many successful financial planners also have a background in life insurance. So while they may not be able to find you a specific life insurance policy, financial planners can help you set out a blueprint for your purchase.
Why You Should Trust Us: How We Reviewed the Best Life Insurance Companies
In life insurance, it's easy to get "sold a bill of goods." Many life insurance agents pass a state test to be thrown into the deep end. Agents sell the company product, but not all know the products. In this vein, we look at the products each company offers. We also look at agent training.
A good life insurance agent may not volunteer all facts upfront. But a company's agents should answer questions about its products accurately and in a way the average consumer can digest. Agents should be able to inform you about the long-term benefits and limitations. This will help customers find the right policy for their long-term plan.
We consider affordability, policy sizes available, and performance for a comprehensive assessment in our insurance rating methodology . If you can, we recommend also working with a financial advisor to make a plan for your future with life insurance.
Our Expert Panel for The Best Life Insurance Companies
To inform our choices for the best life insurance companies, we spoke with the following experts:
Paul LaPiana , head of product at MassMutual
Barbara Pietrangelo , CFP, CLU, and chair of the nonprofit Life Happens
Wykeeta Peel , Corporate Vice President and Market Manager, African American Market Unit at New York Life
The Experts' Advice on Choosing The Best Life Insurance for You
How much life insurance coverage do you believe the average buyer should have.
Paul LaPiana, Head of Product at MassMutual
"There are different approaches to determining how much life insurance you need. One is the 'human life' approach, which estimates the current value of your future earning potential. Another is securing specific coverage to pay off debts such as a mortgage or provide for the education of children. A comprehensive protection plan should provide the right amount of coverage over the course of your working life and into retirement."
Barbara A. Pietrangelo, Chair of Life Happens
"There is no one-size-fits-all life insurance policy because everyone is different. One way to get a rough estimate is to multiply your income by 10 to 15; another is adding $100,00 to that amount, should you have a child and anticipate college education expenses.
Your best bet is to talk to a financial professional or use the Life Insurance Needs Calculator on LifeHappens.org to analyze what's right for you."
Wykeeta Peel, Corporate Vice President & Market Manager African American Market Unit at New York Life
"As you consider what policy best meets your needs, it can help to answer four key questions: First, how much death benefit do you need? Second, how long will you need that coverage? Third, what is your budget (or how much monthly premium can you afford to pay?), and finally, what is your investment risk tolerance?
To determine how much death benefit makes sense, it's helpful to think beyond using life insurance to cover funeral expenses and consider whether anyone is relying on the policy owner's income to maintain a lifestyle, pay rent or a mortgage, or fund a child's education and for how long.
There are various rules of thumb regarding the right amount of Life insurance coverage. Some tips can be found online, but they only provide an estimate and don't necessarily factor in an individual's specific needs. In my opinion, human guidance, powered by technology, is required. Basically, it comes down to how much money your loved ones would need to remain on firm financial ground if your earnings were no longer in the picture and that is different for everyone."
What is the biggest opportunity you see for improvement in the life insurance industry?
"Increased accessibility through digital and other channels as well as through underwriting enhancements. Increased tailoring of products and features. And an increased emphasis on health and wellness programs."
"Having enough qualified insurance professionals to walk potential buyers through the multiple benefits of life insurance will be pivotal to the growth of the industry. Education is a key factor here, as professional agents also need to be able to explain life insurance and its benefits in an easy, digestible way, especially when there are so many misconceptions about life insurance."
"The need for life insurance is greater than ever. In fact, a recent New York Life Wealth Watch survey found that 37% of adults have been thinking about life insurance more often these days – and half of adults report that financial products that provide protection (50%) and reliability (50%) are more important now compared to last year. This may be especially true for middle-market and Cultural Market families.
Our organizational structure of having Cultural Market agents embedded in the communities where we live and work allows us to understand the needs of diverse communities and develop solutions that resonate with them."
What advice would you give to buyers who are debating whether or not to buy life insurance?
"It is difficult to say with any certainty how healthy you will be years from now. That's why securing life insurance, and insuring your insurability, today, when you are the youngest you'll ever be again, and perhaps your healthiest is a wise decision."
"Do you love someone? If the answer is yes, then life insurance is certainly something you should consider. Many buy gifts and experiences to express their love, but haven't considered that life insurance is just another way to say I love you. Nothing says support like ensuring your family's financial security and peace of mind."
"If you have someone depending on your income, you should consider purchasing life insurance. A death benefit from a life insurance policy can replace income from the loss of a breadwinner, ensure a family can stay in their home, fund educational or retirement expenses, address debt and so much more.
A life insurance policy can also help you grow your family's wealth over time. Once the risk of an unexpected loss has been managed, you can begin to think more broadly about your family's financial future. Life insurance can enable your mindset to shift from death to growth."
What's the most important thing buyers should look for when choosing a life insurance agent/company to buy from?
"With life insurance, you are securing a future commitment that may be decades away. Research the company behind the policy to ensure it has high financial strength ratings, longevity, and an excellent track record of paying claims."
"When looking for an insurance agent or company, be sure to do your research. When comparing companies, be sure to remember that the policy features that fit you and your loved ones best is the most important factor. Don't automatically assume you should buy from the higher-rated company.
If the policy from the other company has more of what you're looking for, it might be the better choice. If you're unsure where to start, try the Life Happens Agent Locator to find an insurance professional in your area."
"The insurers' track record: At its core, life insurance is protection - a hedge against the unexpected - and you are paying premiums in exchange for the promise that the insurer will be there when you need them, so the financial strength and track record of the company backing your policy is critical.
Customer service: Are service professionals available by phone and digital channels? Is there is an online dashboard where you can manage your policy? Beyond ensuring assistance is available after you purchase a policy, it's also critical to ensure you have access to trusted advice and guidance before you buy.
Flexibility in conversion: How easy is it to change? Life can be unpredictable and while term insurance can cover your loved ones through a critical period of time, you may decide that access to cash value is an important piece of your strategy.
Accelerated online applications : Online applications are convenient but don't replace human guidance. Keep in mind that accelerated online applications may have a maximum coverage amount, meaning that you may not be able to get all the coverage you may need exclusively through an online process.
A range of payment options: It's important to understand how often you're required to make premium payments and whether and how often you can change the frequency of payments."
Best Life Insurance FAQs
According to JD Power's 2023 life insurance study, State Farm is the highest-rated life insurance company when it comes to overall customer satisfaction. However, you still may want to shop around for quotes from various insurers if you're looking to purchase a new policy.
There isn't one best life insurance company, because the best option for you will depend on the type of policy you're looking for. It's best to work with a qualified insurance agent to help you find the best coverage. If you're deciding between multiple similar options, it's also worth consulting J.D. Power's life insurance customer satisfaction study . The latest study ranks State Farm as the top pick for individual life insurance, outpacing Nationwide by three points.
The best type of life insurance policy for you will differ from someone else's, as your policy should be tailored to your needs. The best policy for you will be affordable and will offer the benefits best suited to your situation. For example, some policies are only meant to cover end-of-life expenses such as burial and funeral arrangements, whereas others include living benefits like a cash value insurance plan , which you can borrow against during your lifetime.
Some life insurance policies are advertised as "no medical exam." This doesn't mean the insurer won't ask you about known conditions or look at medical records. Policies with no medical exam also tend to offer lower benefits with higher premiums. Most companies have a network of medical examiners, some of whom can come to your home. You can find our guide on the best no exam life insurance here.
Each situation is different and requires a knowledgeable life insurance agent to assess your best options. Bring all your questions and the coverage you're looking for to an insurance agent near you to explore your options.
Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards .
Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.
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A 401(k) is a form of retirement savings plan in the U.S. with tax benefits that are mainly available through an employer. It is named after subsection 401(k) in the Internal Revenue Code, which was made possible by the Revenue Act of 1978. Self-directed 401(k)s exist for people who can't participate in employer-sponsored 401(k)s. Contributions to a 401(k) are made as pre-tax deductions during payroll, and the dividends, interest, and capital gains of the 401(k) all benefit from tax deferment. This means that assets in a 401(k) grow tax-free and won't be taxed until a later point, usually during retirement. Employees, sometimes called plan participants, can contribute a certain percentage of their pre-tax salaries to their 401(k) plans. However, in addition to the annual limit set by the IRS, it is possible for employers to set limits on the percentage of their paychecks that employees can contribute. In addition, as part of a 401(k) plan, employers can choose to match employee contributions, usually up to a certain percentage of the employee's paycheck. The IRS contribution limit increases along with the general cost-of-living increase due to inflation. The 2023 deferral limit for 401(k) plans was $22,500, the 2024 limit is $23,000.
General Pros and Cons of a 401(k)
Tax-deferred growth–Similar to traditional IRAs or deferred annuities, growth of investments with a 401(k) are tax-deferred, which means earnings on interest, dividends, or capital gains accumulate tax-free. This gives these retirement plans an advantage over other methods of saving for retirements, such as cash, active investing accounts, or real estate.
Employer matching–401(k)s are known for often including an employer matching program. A survey has shown that 43% of employees would prefer to take a pay cut for a higher employer contribution to their 401(k)s, rather than the other way around. Experts have likened the aspect of employer matching of 401(k)s to "free money" or "pay raises" that should never be left on the table. Different employers use different methods of matching, such as a percentage of salary up to certain levels, or as a percentage of contributions up to a certain limit.
Tax-deductible–Contributions to traditional IRAs and other retirement plans may or may not be tax-deductible, as they can depend on tax brackets and other retirement plans in which an employee may be involved. On the other hand, contributions to a 401(k), both from employees and employers, are always tax-deductible because they reduce taxable income, lowering total taxes owed.
High contribution limits–401(k)s have relatively high annual contribution limits. For 2024, the limit is $23,000 for those under 50, and $30,500 for those over 50. On the other hand, the combined annual IRA limit is $7,000 for those under 50, and $8,000 for those above 50.
Creditor protection–401(k) funds are generally protected from bankruptcy. This is also the reason why it is normally not recommended to use 401(k) funds to avoid foreclosure, pay off debt, or start a business.
Few investment options–Generally speaking, 401(k)s have few investment options; because they normally originate from employers, they are limited to what is offered through employers' 401(k) plans, as compared to a typical, taxable brokerage account.
High fees–Compared to other forms of retirement savings, 401(k) plans charge higher fees, sometimes as a percentage of funds. This is mainly due to administration costs. Plan participants have little or no control over this, except to choose low-cost index funds or exchange-traded funds (ETFs) to compensate.
Illiquid– 401(k) funds can only be withdrawn without penalty in rare cases before 59 ½. This includes all contributions and any earnings over time.
Vesting periods–Employers may utilize vesting periods, meaning that employer contributions don't fully belong to employees until after a set point in time. For instance, if an employee were to part ways with their employer and a 401(k) plan that they were 50% vested in, they can only take half of the value of the assets contributed by their employer.
Waiting periods–Some employers don't allow participation in their 401(k)s until after a waiting period is over, usually to reduce employee turnover. 6 month waiting periods are fairly common, while a one-year waiting period is the longest waiting period permitted by law.
A 401(k) is a Defined Contribution Plan
Unlike a defined benefit plan (DBP), also known as a pension plan, which is based on formulas for determining retirement withdrawals, defined contribution plans (DCPs) allow their participants to choose from a variety of investment options. DCPs, 401(k)s in particular, have been gaining in popularity as compared to DBPs. Today, the 401(k) defined contribution pension plan is the most popular private-market retirement plan. The shift in the choice between DBPs and DCP can be attributed to a number of reasons, one of which is the projected length of time a person is likely to stay with a company. In the past, it was more common for a person to stay with a company for several decades, which made DBPs ideal since deriving the most value out of a DBP required a person to stay with their company for 25 years or more. However, this is no longer the case today, as the workforce turnover rate is much higher. DCPs are highly mobile in comparison to DBPs, and their values do not drop when a person switches companies. When an employee with a 401(k) plan changes employers, they generally have the option to:
Leave their assets in their previous employer's 401(k) plan
Rollover their previous 401(k) to their new employer's 401(k) plan
Rollover their old 401(k) to an Individual Retirement Account (IRA)
Cash-out their 401(k), but pay taxes and a 10% penalty
Keep in mind that different employers may have rules regarding what is permissible. In general, 401(k) rollovers can only be requested once every twelve months. For more information about DBPs, DCPs, or to do calculations involving pension plans, please visit the Pension Calculator .
401(k) Investments
In general, most 401(k) offerings allow an individual to invest in a variety of portfolios. These vary between mutual funds, index funds, or exchange-traded funds, all of which have an assorted mixture of stocks, bonds, international market equities, treasuries, and much more. All have different pros and cons. The above options usually provide slow and steady growth of assets over time. Automated portfolios that adjust exposure to risk based on projected retirement age, such as target retirement funds, are also common. Participants who want to use their 401(k) retirement funds to actively invest in individual stocks can do so if their plan is set up a certain way. If permitted by plan administrators, investors can transition an employer plan to a self-directed 401(k) or roll a 401(k) into an IRA, which, as a form of saving for retirement, is less stringent with investment options.
Employer Match
A 401(k) match is an employer's percentage match of a participating employee's contribution to their 401(k) plan, usually up to a certain limit denoted as a percentage of the employee's salary. There can be no match without an employee contribution, and not all 401(k)s offer employer matching.
As an example, an employer that matches 50% of an employee's contribution for up to 6% of their salary would contribute a maximum of 3% of the employee's salary to the employee's 401(k). Another common matching scheme is a dollar-for-dollar employer match, up to a certain percentage of salary.
Taking full advantage of an employer's match by contributing to a 401(k) can make even more financial sense than the opportunity cost of many other things, such as paying off high-interest debt. To illustrate, a 401(k) that matches 100% of contributions up to a certain amount generates an immediate 100% return on investment for the contributor (even more if considering tax-deferred growth over time), which is pretty hard to beat!
Employers mainly offer 401(k) matches in order to attract and retain a talented workforce and to incentivize saving for retirement. Annual contributions to an employee's account cannot exceed the lesser of 100% of the participant's compensation, or $69,000 in 2024. Contributions from both employee and employer go into 401(k) plans untaxed, and the funds grow tax-free over time. The funds are taxed when withdrawn from a presumably advantageous standpoint since retired account holders are most likely in lower tax brackets than they were while working.
401(k) Vesting Periods
Some employers require a vesting period for their 401(k) plans in order to incentivize employees to stay long-term. Vesting refers to how much of a 401(k)'s employer contributions are owned by an employee. An employee that is fully vested has full ownership of the funds in their retirement plan. Unlike employer matches, employee contributions are always 100% vested.
A 4-year vesting period is fairly common. After the first year of employment, an employee is entitled to 25% of employer contributions even if they leave the company. This increases to 50% in the second year and 75% in the third year, with the employee becoming fully vested after 4 years. This is referred to as graded vesting. Some companies do not have schedules that increase vested amounts each year, but instead allow employees to become fully vested after a certain period of time. This is called cliff vesting, which means all of the vestings take place at a certain point in the vesting schedule. In this case, an employee that leaves a company before becoming fully vested will have to forfeit all employer contributions. Different 401(k) plans have different rules regarding vesting. For more accurate information, it is best to speak with human resources or 401(k) plan administrators.
Early Withdrawal
Contributions and their subsequent interest earnings as part of a 401(k) plan cannot be withdrawn without penalty before the age of 59 ½. In some cases (described below), exceptions are made, and early withdrawals are permitted. Under these circumstances, early 401(k) withdrawals are still subject to ordinary income taxes, but not the 10% penalty.
401(k) Hardship Withdrawal
Some 401(k) plans allow for withdrawals if there is proof of hardship. In order to qualify, a person must submit substantial proof of hardship to administrators who will decide whether or not to grant a withdrawal. A hardship withdrawal cannot be returned to an account once a disbursement is made. Not all employers or plan administrators offer hardship withdrawals. Some of the conditions under which an early withdrawal might be granted are listed below:
Unexpected, unreimbursed medical expenses, or medical expenses that exceed 7.5% of adjusted gross income
Costs related to the purchase of a principal residence
Post-secondary tuition and education expenses for the next 12 months
Expenses to prevent foreclosure on or eviction from the participant's home
Burial or funeral expenses
Expenses for the repair of damage to a principal residence
Non-Financial Hardship Withdrawal
Not all early withdrawals have to be classified as financial hardship in order to be granted. Examples of these include the account holder:
passing away resulting in the account being paid to their beneficiary
having a qualifying disability
terminating employment when they are at least 55 years old
withdrawing an amount less than what is allowable as a medical expense deduction
withdrawing an amount that is related to qualified domestic relations orders, such as a court order to provide money to a divorced spouse, a child, or a dependent
beginning substantial equal periodic payments. See IRS rule 72(t) for more information
It is important to consider the true costs of taking an early distribution from a 401(k). Taxes, penalties, and the reduction of assets that enjoy compounding, tax-deferred growth within the 401(k) should all be considered.
401(k) Distributions in Retirement
Anyone older than 59 ½ can begin receiving distributions from their 401(k)s, but they can also choose to defer receiving distributions to allow more earnings to accumulate. Distributions can be deferred, at the latest, until the age of 73 (72 if you reach age 72 before Dec. 31, 2022). Between the ages of 59 ½ and 73, participants have several options:
Option 1: Receive Distributions
Distributions can be received in the form of either a lump sum or in installments. A lump-sum distribution allows a person to receive all of their 401(k) funds immediately, but forfeits the benefits of tax-deferred compounding while also incurring income tax on the distribution on the year it is withdrawn, which can be a significant amount.
Installment plans allow a person to receive a set amount from their 401(k) periodically. The payment amounts can be typically changed once a year, but certain plans allow for more frequent changes. When choosing the installment option, one of the hardest decisions to make is exactly how much to withdraw each month or year. There are many factors to consider, such as life expectancy, investment performance, how much a person may need to live comfortably, and Social Security. A common rule of thumb is the 4% rule, which suggests withdrawing 4% annually. Note that each distribution must be at least the required minimum distribution (RMD) in order to avoid a penalty. RMD is calculated based on life expectancy and the account balance at the end of the previous year.
Option 2: Rollover
It is also possible to roll over a 401k to an IRA or another employer's plan. No taxes will be imposed on rollovers. Both Roth and traditional IRAs generally offer more investment options. Moving after-tax money into a Roth IRA can help diversify retirement portfolios. Keep in mind that traditional IRAs also require minimum distributions at age 73.
Option 3: Annuity
Some plans allow 401(k)s to be converted into annuities, which are usually offered through private insurance companies. Similar to rollovers, no taxes will be imposed on conversions. The annuity will pay a monthly benefit for the duration of the owner's projected life expectancy. If a joint-and-survivor annuity is involved, the primary account holder and the designated beneficiary will receive monthly payments for the duration of both their expected lifetimes.
Option 4: Do Nothing
The distribution of funds can be postponed if the retiree wants to take advantage of the benefits of tax-deferred compounding for as long as possible. This is possible up until the age of 73, after which the government will require mandatory annual distributions.
Required Minimum Distributions
Anyone that reaches age 73 (72 if you reach age 72 before Dec. 31, 2022) is required to take distributions from their 401(k). This is called a required minimum distribution (RMD). Traditional, SIMPLE, and SEP IRAs have similar rules imposed by the IRS. The exact date at which RMDs are required is April 1st of the year after a retiree reaches the age of 73. In order to determine the exact amount, retirees can take their 401(k) retirement assets and divide it by a life-expectancy factor, which changes slightly every year.
The federal penalty for not taking the RMD is a 50% tax on any amount not withdrawn in time. The amount of the required distribution is based on the prior year's December 31st account balance and an IRS life expectancy chart. In some cases, a person who has not withdrawn the necessary amount can attempt to avoid the penalty by withdrawing the shortfall immediately, filing Form 5329 with the IRS, and providing valid reasons as to why the deadline was missed. The IRS may forgive the missed withdrawal.
There is one exception to the RMD rule: any employee with an employer-sponsored 401(k) when they turn 73 can get out of the RMD as long as they remain employed. This is only if their plan doesn't mandate RMDs and they don't own 5% or more of the company. However, as soon as they retire from the company, they will be subject to RMDs.
Self-Directed 401(k)
A self-directed (SD) 401(k), sometimes called a solo 401(k), is a way for self-employed individuals to participate in a 401(k) plan. Although their purpose is aimed specifically at the self-employed, SD 401(k)s can also be offered to employees as an alternative to a traditional 401(k) plan through their employers, though it is uncommon.
For the most part, SD 401(k)s share the same characteristics as traditional 401(k)s, including:
Tax-deferred contributions
Specific contribution and distribution amounts
Early withdrawals penalty before 59 ½
Required minimum distributions after 73 (72 if you reach age 72 before Dec. 31, 2022)
The main benefit of a solo 401(k) is that, for the most part, they can legally be used to invest in almost anything, which can include real estate, tax liens, precious metals, foreign currency, or even money lending. Keep in mind that there may be limits on types of investments as set by individual plans. The ability to expand investment horizons is one of the SD 401(k)'s main features.
SD 401(k)s allow plan participants to borrow from their funds as personal loans for any reason, such as for credit card debt, mortgage payments, investments, or even a vacation. The limit is usually up to 50% of their account value, or $50,000, whichever is less.
Roth 401(k)
The Roth 401(k) is somewhat different from the traditional 401(K) as a retirement savings plan. It combines some features of the traditional 401(k) along with some features of the Roth IRA. The main difference is the timing of taxation. Similar to Roth IRAs, Roth 401(k)s are retirement plans that utilize after-tax contributions instead of pre-tax income. What this means is that taxes are paid upfront, and during retirement, qualified withdrawals are tax-free. The same annual contribution limits of $22,500, or $30,000 for individuals who are 50 or older still apply.
However, unlike the Roth IRA, contributions can't be withdrawn from a Roth 401(k) without penalty until five years after the plan starts, while a Roth IRA's contributions (not earnings) can be withdrawn at any time. This rule for the Roth 401(k) applies even after the age of 59 ½, when tax-free distributions are generally allowed. Also, unlike the Roth IRA, it has required minimum distributions (RMD) at age 73, though at that stage, a Roth 401(k) could be rolled into a Roth IRA to avoid RMDs, without any tax penalty. The ability to withdraw contributions at any time, penalty and tax-free, as well as not having an RMD are two significant advantages of a Roth IRA that are missing in Roth 401(k)s.
It is possible to contribute to both forms of 401(k) simultaneously, as long as the sum of contributions is still within the annual contribution limits, similar to the treatment of the sums of traditional and Roth IRA annual contributions.
How to Write a Financial Plan for Your Business Plan in 2024
50 Professional Financial Plan Templates [Personal & Business] ᐅ
Financial Section of Business Plan
50 Professional Financial Plan Templates [Personal & Business] ᐅ
VIDEO
Business Plan
How to Write Financial plan and Projection in Your Business Plan
Business plan
How to Create a Simple Income and Expenditure Worksheet
Financial Planning for Your Business
Financial Planning Process: The 5 Steps to Success
COMMENTS
How to Write the Financial Section of a Business Plan
Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest ...
How to Prepare a Financial Plan for Startup Business (w/ example)
7. Build a Visual Report. If you've closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using "what-if" scenarios. Now, we'll prepare visual reports to present your numbers in a visually appealing and easily digestible format.
Crafting Your Business Plan Financials: A Step-by-Step Guide
Maintaining a Healthy Balance Sheet Over Time. Step 4: Forecasting Cash Flow. Why Cash Flow is Your Business's Weather Forecast. Step-by-Step Method for Creating a Cash Flow Forecast. My Great Cash Flow Mishap. Step 5: Bringing It All Together for Financial Analysis. How to Use Your Financials to Calculate Key Ratios.
How to Write a Financial Plan: Budget and Forecasts
Financial ratios and metrics. With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While including these metrics in your plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.
Guide to Writing a Financial Plan for a Business
The balance sheet portion of the financial plan aims to give an idea of what the business will be worth, considering all its assets and liabilities, at a future date. To do this, it uses figures from the income statement and cash flow statement. The essence of a balance sheet is found in the equation: Liabilities + Equity = Assets.
Business Plan Essentials: Writing the Financial Plan
For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a short-term loan, or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business ...
4 Steps to Creating a Financial Plan for Your Small Business
Whether the business is starting from scratch or modifying its plan, the best financial plans include the following elements: Income statement: The income statement reports the business's net profit or loss over a specific period of time, such a month, quarter or year.
How To Create Financial Projections for Your Business Plan
Collect relevant historical financial data and market analysis. Forecast expenses. Forecast sales. Build financial projections. The following five steps can help you break down the process of developing financial projections for your company: 1. Identify the purpose and timeframe for your projections.
The Financial Analysis for a Small Business Plan
The financial analysis section should be based on estimates for new businesses or recent data for established businesses. It should include these elements: Balance sheet: Your assumed and anticipated business financials, including assets, liabilities, and equity. Cash-flow analysis: An overview of the cash you anticipate will be coming into ...
Business Plan Financial Templates
This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business. . Download Startup Financial Projections Template.
How to write the financial section of your business plan
As you grow your business, a financial plan becomes a tool to better manage your business, to adapt your business plans and goals and grow. Financial planning will give you the insights you need to: ... Shareholder equity (the amount of money generated by your business): Use this formula to calculate it: Shareholder Equity = Assets ...
Writing a Business Plan—Financial Projections
The financial section of your business plan should include a sales forecast, expenses budget, cash flow statement, balance sheet, and a profit and loss statement. Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board, a private-sector organization responsible for setting ...
Calculate your startup costs
The key to a successful business is preparation. Before your business opens its doors, you'll have bills to pay. Understanding your expenses will help you launch successfully. Calculating startup costs helps you: Estimate profits. Conduct a break-even analysis. Secure loans. Attract investors. Save money with tax deductions.
How to Create a Business Budget: 6 Simple Steps
2. Subtract fixed costs. The second step for creating a business budget involves adding up all of your historic fixed costs and using them to reliably predict future ones. Fixed costs are those ...
Business Financial Plan Example: Strategies and Best Practices
A well-developed business financial plan, therefore, doesn't just portray the company's current financial status; it also serves as a roadmap for the business's fiscal operations, enabling it to navigate towards its financial goals. ... It subtracts the total expenses from total revenue to calculate net income, providing valuable insights into ...
How to estimate figures for your business plan
There are a number of ways to calculate your sales but the following approach can be useful: List each of your products or services. Work out the price for each of those products or services. Think about the market and how many sales you may achieve each month. This might be as a percentage of capacity (e.g. available hours or tables occupied ...
Financial Projection Online Calculator
This 3 year financial projection calculator is a free online tool. The calculator produces income statements, balance sheets, and cash flow statements for the next 3 years, and provides a quick and easy way to test the outline feasibility of your business idea. Simply enter the amounts in the highlighted input cells and hit the 'Calculate' button.
How to create a financial plan for your business
COGS = Starting inventory costs + additional inventory costs - ending inventory. For example, say your business' inventory costs at the start of the year add up to $200,000. You make $500,000 worth of additional inventory purchases throughout the year and finish with $100,000 worth of inventory at the end of the year.
How to Calculate Financial Ratios for Your Business Plan
Step 4: Calculate Ratios: The actual calculation is the next step, where the relevant two or three financial variables are related for achieving the desired ratio. Step 5: Analyze Ratios: After calculating the ratios, the results are hyperlinked with the goals and results are analyzed and discussed.
How to Make Financial Projections for Business
This will ensure you get accurate insight, which is vital for existing businesses and new business startups alike. Here are the steps for creating accurate financial projections for your business. 1. Start With A Sales Projection. For starters, you'll need to project how much your business will make in sales.
How To Calculate Financials For Business Plan?
In this article, we will provide a step-by-step guide on how to calculate financials for a business plan. 1. Calculate Start-up Costs. The first step in calculating financials for a business plan is to determine the start-up costs. Start-up costs refer to the expenses that an entrepreneur will incur before the business starts generating revenue.
How to write a business financial plan
Try this simple balance sheet formula: In one column list all your assets (e.g. cash, inventory, buildings) On the other side list your liabilities (e.g. accounts payable and loans) Subtract your total liabilities from your total assets to determine your equity. Your balance sheet can help you evaluate the financial health of your business ...
How To Create Financial Projections for Your Business
How To Create Financial Projections for Your Business. Learn how to anticipate your business's financial performance. Financial projections can help you anticipate business performance and gain funding opportunities. Use this guide to help you understand and create these projections.
Develop your business plan
Use our detailed business plan template if you are seeking finance. Lenders and investors will want to know if your finances are in order and your business is in a strong financial position. They'll want to know how much money you currently have, how much money you need and how much you expect to make in the near future.
How To Start A Business In 11 Steps (2024 Guide)
Even if you intend to self-finance, a business plan can help you flesh out your idea and spot potential problems. When writing a well-rounded business plan, include the following sections ...
Estimated taxes
If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments.
How to Get The Best Car Insurance
Investing and retirement calculators Retirement calculator 401(k) ... Managing business finances. Running your business. General business tips. Small business guide. Small-business loans;
Fidelity's retirement calculators can help you plan your retirement
Roth Conversion Calculator: Understand the potential outcomes that a Roth Conversion could have on your financial outlook so you can decide whether one is right for you. Savings Planner: Take a few minutes to tell us your priorities and we'll help you create a plan to save and pay down debt. Small Business Retirement Plan Contribution Calculator
Best Life Insurance of June 2024
Compare the best life insurance companies of April 2024 and get a quote today. Find out which one suits your needs and budget.
401K Calculator
Free 401K calculator to plan and estimate a 401K balance and payout amount in retirement or help with early withdrawals or maximizing employer match. ... funds to avoid foreclosure, pay off debt, or start a business. Cons. Few investment options-Generally speaking, 401(k)s have few investment options; because they normally originate from ...
IMAGES
VIDEO
COMMENTS
Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest ...
7. Build a Visual Report. If you've closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using "what-if" scenarios. Now, we'll prepare visual reports to present your numbers in a visually appealing and easily digestible format.
Maintaining a Healthy Balance Sheet Over Time. Step 4: Forecasting Cash Flow. Why Cash Flow is Your Business's Weather Forecast. Step-by-Step Method for Creating a Cash Flow Forecast. My Great Cash Flow Mishap. Step 5: Bringing It All Together for Financial Analysis. How to Use Your Financials to Calculate Key Ratios.
Financial ratios and metrics. With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While including these metrics in your plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.
The balance sheet portion of the financial plan aims to give an idea of what the business will be worth, considering all its assets and liabilities, at a future date. To do this, it uses figures from the income statement and cash flow statement. The essence of a balance sheet is found in the equation: Liabilities + Equity = Assets.
For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a short-term loan, or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business ...
Whether the business is starting from scratch or modifying its plan, the best financial plans include the following elements: Income statement: The income statement reports the business's net profit or loss over a specific period of time, such a month, quarter or year.
Collect relevant historical financial data and market analysis. Forecast expenses. Forecast sales. Build financial projections. The following five steps can help you break down the process of developing financial projections for your company: 1. Identify the purpose and timeframe for your projections.
The financial analysis section should be based on estimates for new businesses or recent data for established businesses. It should include these elements: Balance sheet: Your assumed and anticipated business financials, including assets, liabilities, and equity. Cash-flow analysis: An overview of the cash you anticipate will be coming into ...
This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business. . Download Startup Financial Projections Template.
As you grow your business, a financial plan becomes a tool to better manage your business, to adapt your business plans and goals and grow. Financial planning will give you the insights you need to: ... Shareholder equity (the amount of money generated by your business): Use this formula to calculate it: Shareholder Equity = Assets ...
The financial section of your business plan should include a sales forecast, expenses budget, cash flow statement, balance sheet, and a profit and loss statement. Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board, a private-sector organization responsible for setting ...
The key to a successful business is preparation. Before your business opens its doors, you'll have bills to pay. Understanding your expenses will help you launch successfully. Calculating startup costs helps you: Estimate profits. Conduct a break-even analysis. Secure loans. Attract investors. Save money with tax deductions.
2. Subtract fixed costs. The second step for creating a business budget involves adding up all of your historic fixed costs and using them to reliably predict future ones. Fixed costs are those ...
A well-developed business financial plan, therefore, doesn't just portray the company's current financial status; it also serves as a roadmap for the business's fiscal operations, enabling it to navigate towards its financial goals. ... It subtracts the total expenses from total revenue to calculate net income, providing valuable insights into ...
There are a number of ways to calculate your sales but the following approach can be useful: List each of your products or services. Work out the price for each of those products or services. Think about the market and how many sales you may achieve each month. This might be as a percentage of capacity (e.g. available hours or tables occupied ...
This 3 year financial projection calculator is a free online tool. The calculator produces income statements, balance sheets, and cash flow statements for the next 3 years, and provides a quick and easy way to test the outline feasibility of your business idea. Simply enter the amounts in the highlighted input cells and hit the 'Calculate' button.
COGS = Starting inventory costs + additional inventory costs - ending inventory. For example, say your business' inventory costs at the start of the year add up to $200,000. You make $500,000 worth of additional inventory purchases throughout the year and finish with $100,000 worth of inventory at the end of the year.
Step 4: Calculate Ratios: The actual calculation is the next step, where the relevant two or three financial variables are related for achieving the desired ratio. Step 5: Analyze Ratios: After calculating the ratios, the results are hyperlinked with the goals and results are analyzed and discussed.
This will ensure you get accurate insight, which is vital for existing businesses and new business startups alike. Here are the steps for creating accurate financial projections for your business. 1. Start With A Sales Projection. For starters, you'll need to project how much your business will make in sales.
In this article, we will provide a step-by-step guide on how to calculate financials for a business plan. 1. Calculate Start-up Costs. The first step in calculating financials for a business plan is to determine the start-up costs. Start-up costs refer to the expenses that an entrepreneur will incur before the business starts generating revenue.
Try this simple balance sheet formula: In one column list all your assets (e.g. cash, inventory, buildings) On the other side list your liabilities (e.g. accounts payable and loans) Subtract your total liabilities from your total assets to determine your equity. Your balance sheet can help you evaluate the financial health of your business ...
How To Create Financial Projections for Your Business. Learn how to anticipate your business's financial performance. Financial projections can help you anticipate business performance and gain funding opportunities. Use this guide to help you understand and create these projections.
Use our detailed business plan template if you are seeking finance. Lenders and investors will want to know if your finances are in order and your business is in a strong financial position. They'll want to know how much money you currently have, how much money you need and how much you expect to make in the near future.
Even if you intend to self-finance, a business plan can help you flesh out your idea and spot potential problems. When writing a well-rounded business plan, include the following sections ...
If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments.
Investing and retirement calculators Retirement calculator 401(k) ... Managing business finances. Running your business. General business tips. Small business guide. Small-business loans;
Roth Conversion Calculator: Understand the potential outcomes that a Roth Conversion could have on your financial outlook so you can decide whether one is right for you. Savings Planner: Take a few minutes to tell us your priorities and we'll help you create a plan to save and pay down debt. Small Business Retirement Plan Contribution Calculator
Compare the best life insurance companies of April 2024 and get a quote today. Find out which one suits your needs and budget.
Free 401K calculator to plan and estimate a 401K balance and payout amount in retirement or help with early withdrawals or maximizing employer match. ... funds to avoid foreclosure, pay off debt, or start a business. Cons. Few investment options-Generally speaking, 401(k)s have few investment options; because they normally originate from ...