Starting your own business can be an exciting time. However, with all of this excitement, many new business owners make several mistakes, especially with managing finances. This article covers personal finance tips while starting your own business because establishing good financial habits and structures from the beginning is the key to success in the long run. After all, finances are what will drive the company forward or set the company back. There are several things you should implement into your financial planning that can lead to success.
A very common mistake that small business owners often make when starting out is not paying themselves. It is common to throw every dollar into the business and to pay employees. However, if something goes amiss, the business owner will have nothing to show for it as they never paid themselves for their work. Business owners play a critical role in the company and should be compensated accordingly. This will also promote the separation of personal and business finances.
Planning for the future is critical for business growth. This requires setting aside money and looking for areas of potential growth. Having money to invest in a possible opportunity can open the doors for substantial growth in the future. A business owner cannot invest without having capital and this is why it is important to set aside a predetermined amount of money.
Another investment that should be considered is education. Not knowing how to do something can lead to months of delays and money lost. An alternative is to take a class or seminar that focuses on the particular task at hand. This is an investment but the knowledge gained will help grow the business and saves months of trial and error.
Another area of investment is in marketing. Potential clients need to be able to find the business and that cannot be accomplished just by having an open sign outside the window. There needs to be a reason why a client chooses this company instead of a competitor and that is where marketers come in. Marketing needs to be considered from the inception and cannot be skipped by any means. Without clients, there is no business.
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In order to grow any company, business credit needs to be established. This will play a major role in being able to purchase commercial real estate and insurance policies. Without established business credit or poor business credit, these pursuits can become near impossible. Establish good business credit by paying off any debt funding as quickly as possible and do not let business credit cards run balances for more than a few weeks. If taking out loans, ensure the interest rates are affordable for the current company’s financial status.
Many business owners try to avoid the use of loans like the plague. Mishandling of loans can lead to business debt and bankruptcy. However, on the other hand, without small business loans, it can be difficult to expand the team or purchase additional equipment. Business owners can also benefit from business loans to ensure that suppliers are paid promptly. It is important to consider all terms of the loan and to never take out more than the company can realistically pay back. Keep in mind that loans must be repaid and can affect business credit ratings.
Customers are the key to driving growth for any company. There must be an established billing and payment structure. Will invoices be sent out? Will there be a down payment system? And, will there be pay in full requirements? These are all questions that should be addressed and determined when creating a billing strategy. Business owners must also need to implement late payment policies. There may be times where a client is notoriously late, this may require a creative strategy to collect payment.
Taxes are unavoidable and for some new business owners, this can be difficult to keep track of. Businesses are required to make yearly payments. This can sometimes be done on a quarterly basis depending on the business’s particular circumstances. However, if quarterly tax payments are not feasible or are difficult to keep track of, they can be made monthly, on top of being done by a tax professional. This typically makes it easier for business owners to keep track of all expenses by including tax payments in their monthly operating expenses. This also makes tax filing easier at the end of the year.
It is also important to establish an LLC or other business entity. This applies to anyone who does not work under traditional circumstances like writers, coaches, and other freelancers. This is especially important for new businesses as it paves the way for the separation of personal and business finances. Without a business entity established there can be legal troubles not only from clients but also from the IRS.
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Look at the Books
This can sound obvious, but it is imperative to monitor finances, often referred to as the books. Each month business owners should set aside time to review the books and what is coming in and going out. Working with a bookkeeper can relieve some of the stress, but becoming familiar with the finances can help you catch any errors or potential problem areas. Businesses can see any outstanding invoices and prevent unnecessary spending from any party involved in the business.
One of the best ways to manage your finances while starting a business is by budgeting. This may sound simple, but many new business owners have a hard time with this concept. A budget acts as a base for where money should go and allows business owners to make rational and logical decisions on financial decisions. Some categories that should be implemented into a budget are:
Once these have been established, new business owners can then determine how much can be invested into the business and how much can be saved, which is the basis for establishing healthy financial habits. For business owners who are less financially savvy in terms of the nitty-gritty of budget, they may consider the benefits of a budget template until they have a better handle on their income and spending.
Planning ahead is the key to establishing and growing a successful business. Although there are many issues that need to be addressed expeditiously, it is important to plan financially for the future. It is advised that business owners plan at least five to ten years in advance. Failure to do so can put businesses far behind the competition.
Establishing good financial habits is important for any business owner and has several benefits. This can sound like a complex process but following many of the tips we have discussed thus far can play key roles in healthy financial habits. Simply reviewing and updating financial information can help protect the company from potential fraud or other risks. One of those risks that many new business owners fail to think of is employee theft or fraud. It is important to establish policies and take time to look over and adjust finances. Your company’s finances should be managed daily, not weekly, monthly, or quarterly to avoid any surprises.
The 80/20 Rule
The 80/20 rule has been long referred to as working smarter and not harder. The simplest way to describe this rule is that 80% of the outcome comes from 20% of the work. Applying this to a business is game-changing, to say the least. Time is of the essence when starting off and managing time is an important part of creating profits. Creating time-saving strategies helps promote efficiency and allows room to focus on other tasks.
There may come a time where outsourcing is a more cost-effective approach than hiring locally. Business owners must ensure that critical roles are not being outsourced and that the focus is on support functions. This saves money by allowing vendors and partners to provide support services on an as-need basis. The company only pays for the services when they need them. There may come a time when the business will need to hire an in-house position, but outsourcing can be critical for newer businesses.
The gig economy is another way to outsource services. This can reduce costs and help grow the company. For example, a new restaurant may be unable to afford a full-time driver but food delivery apps can fill that void while allowing the business to reach a larger clientele.
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Another way to take advantage of the gig economy is through freelancers. Through these types of workers, there is less money spent on benefits and salary as freelancers are not full-time employees of the company but instead consider independent contractors. Freelancers and other contractors may be the go-to source during the beginning phases of a new company. Of course, there may come a time when freelancers no longer cut it and in-house hires become an inevitable option. Hiring freelancers, in the beginning, can save money in the long run.
Having remote teams has become easier in the present day due to the abundance of tools available. This allows for teams to be located all across the globe which can also save money on labor costs and office space. However, one of the bigger downsides to consider is the potential issue of unbalanced time differences. When teams are found all across the world, there may be times when one team is working and the rest of the team is sleeping. Take this into consideration before establishing a remote team and determine which roles you will be able to leverage for remote work.
Separate Business and Personal Finances
Saving the best for last, separating personal and business finances is the first and most critical thing that should be done prior to anything else. A business owner should never accept payments into a personal bank account or place business expenses on a personal credit card. This can be difficult at first as income can be slow to come in. if a business account is not an option for any reason, setting up two separate personal bank accounts is an alternative.
One account should be solely for personal use and the other should be solely for business purposes. This will also help when filing taxes as the business will have its own tax laws to consider that are separate from business owners’ tax obligations. Having both accounts convoluted together can inevitably lead to an IRS audit. This can be one of the scariest things that any business can go through.
Starting a business is scary and difficult in any economy, but if you’re determined to become a successful entrepreneur, there are steps you can take to mitigate those difficulties. Finding new and innovative ways to manage your finances can make the process easier to handle no matter the industry in which you operate.