As you start developing your business idea, you need to consider tons of operational logistics, such as sourcing your products, hiring staff, and running your storefront. However, one essential component of ensuring your business succeeds is ensuring your financial requirements are met.
One thing that many entrepreneurs don’t anticipate is that it can take months or years to turn a profit. While some businesses can experience exponential growth almost overnight, the vast majority of companies take time to make money. So, if your finances aren’t in order, you could be setting yourself up for failure before you have a chance to thrive.
To help you avoid the most common financial pitfalls, we’ve compiled a list of the top six requirements to know about before starting your business. This knowledge can serve as a solid foundation upon which to build a successful brand.
Map Your Finances
Just as you developed a business plan for your new enterprise, you must also create a financial plan. This multi-page document can help you figure out where your money will be coming in and how it will be spent. If you haven’t started your business yet, you’ll need to do a lot of estimating at first. However, you can look at similar businesses and market demand to get relatively accurate projections of potential sales.
Also, don’t forget to update your financial plan when you’re able to get cold, hard data. As long as you have the framework in place, it’s much easier to make adjustments and correct any issues that arise.
The fundamental aspects of a financial plan include:
● Strategic Plan – In this section, you need to look at the various elements your business needs right now and within the next six or 12 months. As a startup, these components may include retail property, product inventory, employees, accounting software, and more. Make sure to put a price tag and a deadline on each element. For example, you need $10,000 to secure a storefront lease in the next six weeks and another $5,000 for equipment within two weeks after that.
● Financial Projections – As a new business, it’s hard to say what your earnings will be as soon as you open your doors. The best way to get accurate numbers is to look at competitors within the same area and see what they’re averaging. You should also look at market demand, the demographics within your region, and even the season. For example, if your products are in higher demand during the summer months, you shouldn’t open in the winter.
● Financing Sources – Realistically, you won’t have buckets of cash on hand to pay for everything your new business needs. But are you trying to secure a business loan or seek investors? Or are you planning to partner with a financier in exchange for a majority share of your company? Outline all the different ways you’ll get financing and how much you can expect from each source. You should also create a repayment timeline for each source so you know how much you have to pay back and how often.
● Contingencies – What happens if one of your financing sources backs out or doesn’t provide as much capital? You need to have backup plans in place so you know where you can borrow from and how much you can get. It’s much better to know these things ahead of time than to scramble when a problem arises.
Understand the Tax Burden
Your tax setup will change depending on your business entity. For example, as a sole proprietor, your finances are tied to the business, so you’re liable for any debts your company may accrue over time. Conversely, if you form an LLC, you’re not responsible for business liabilities, but you’re still able to enjoy pass-through income, meaning you don’t get taxed twice.
If you start a corporation, it’s treated as an individual entity, so you have to pay corporate taxes and individual income taxes. There is a way around this by starting an S-corp, but there are specific rules as to how it works and how you can qualify.
Overall, we recommend speaking with a tax professional before finalizing your entity, so you know what to expect. Also, while you may be in charge of your daily finances and accounting, it’s best to consult with a pro when tax season arrives. This way, you can not only be sure you pay everything you owe, but you can potentially discover tax savings and rebates.
Business Bank Account
Even if you’re starting a sole proprietorship, it’s best to separate your business and personal finances. If you put your business earnings in a personal bank account, it’s much harder to separate everything for tax purposes.
So, starting a separate business bank account makes the most sense. Fortunately, there are many options for doing this, and some accounts come with perks like company credit and debit cards that come with rewards.
Another reason to separate your business income from personal earnings is to avoid any penalties or liabilities. If all of your money is mixed, it can be nearly impossible to tell which is which, so you might be on the hook for business debts, even if you have an LLC or corporation.
Finally, if you’re going into business with multiple partners, a separate account is a must to ensure that all transactions are above board. For example, if you’re using your personal account and a partner has access to it, how will they know how much is available?
Cash Flow Management
Your company’s cash flow is a measurement of how much money is coming in and how much is going out. Ideally, you’ll have a positive cash flow, meaning you’re earning more than you’re spending. However, as we mentioned, most new businesses will have a negative cash flow at first, so you have to be as strategic as possible. Here are some ways to manage your company’s cash flow better:
● Keep Track of Payment Terms – Many vendors will offer payment terms of 15, 30, and 60 days. If your account is in excellent standing, you may even get 90 days to pay off your bills. Instead of trying to pay them off as soon as possible, you can take advantage of these terms and make payments when they make the most sense. Also, don’t forget to set your own payment terms for clients that make sense for your cash flow. If they’re too long, you could have a zero balance for extended periods.
● Try to Have Immediate and Long-Term Revenue Streams – Many businesses have daily earnings, such as restaurants or retail stores. However, other business models may be working on longer contracts, meaning they need to have enough cash on hand to run operations until clients pay the invoice. If possible, try to have both types of revenue so you’re never strapped for cash to pay bills.
● Make it Easier to Accept Payments – The more options you have for customers and clients to pay an invoice, the faster you can get paid. Credit cards, checks, and online payment portals like PayPal allow you to keep money coming in and make it easier for customers to pay for their favorite products. It’s a win-win situation.
● Focus on Flexibility With Suppliers – Many small businesses try to find deep discounts for their supplies, but in many cases, it’s better to have flexibility with repayment plans. If you’re open and honest with your suppliers, you may be able to negotiate longer terms, even if temporarily. Remember that businesses are run by people, so it’s crucial to build relationships with everyone in the supply chain.
Raising Funds (if Applicable)
Most small businesses get startup capital from a bank or other financial institution. However, you may try to raise funds from investors to get more money and have more flexibility with how you can use it.
But how can you reach out to investors and raise capital? Here are some steps:
● Look for Venture Capital Investors – These firms typically don’t offer loans. Instead, they’re looking for an equity stake in your business. High-end firms may only want to work with scalable companies, but some investors might specialize in other types of small businesses. Research some firms online and read reviews from clients to see what they’re saying.
● Have Your Business and Financial Plan Ready – If you don’t have these documents on hand, it’ll be much harder to secure a loan or investment fund. Make sure you can pitch your company’s unique value proposition (UVP) that sets you apart from the competition. This way, investors can visualize how you’ll succeed.
● Read Everything – Before signing for any funding, make sure it makes sense for your needs. For example, don’t give up too much equity for immediate financing. If your business blows up and becomes a massive hit, you could lose a ton of money in the long term. If necessary, work with a financial attorney to read through any contracts before signing.
Work With a CPA
A certified public accountant (CPA) can help you manage each step of your financial plan to ensure that you’re starting on the right foot. Yes, a high-quality CPA can be expensive, but they can also help you build a much stronger bottom line. Think of a CPA as an investment in your company’s future.
Before choosing an accountant, conduct some research to ensure they have experience working with small businesses like yours. This way, you can feel confident that they’ll guide you through all the right steps that make sense for your situation.
Overall, taking care of your company’s finances now will save you from a lot of headaches later on. It’s much better to organize your financial situation before starting than it is to fix it after the fact.
Starting a business can be very frustrating, especially since there is so much information you need to know. This is particularly the case with financial requirements. Fortunately, the tips above will help you take all the right steps as you open a business. But, it is very important to highlight that there will be moments when you might have questions, like in regards to taxes and accounting. This is where you should refer to specialists since you do not want to risk the future of your company.