- The success of your business depends on how well you manage its finances.
- Learn about each aspect of your business's finances, making financial projections so you can anticipate rough patches and profitable times.
- Banks, alternative lenders and peer-to-peer lenders are sources you can turn to when you need money to help your business grow.
- This article is for entrepreneurs who are running a new business and want to know how to manage their startup's financial health.
In the beginning stages of managing your startup, the nitty-gritty of finances might be the last thing you want to think about, but letting financial planning fall by the wayside is a troubling habit for new business owners.
The pressures of success and profitability can weigh down a new business. But no matter your level of familiarity with business finances, you should keep certain key questions and resources in mind. Here are seven steps to take for the successful management of your startup's financial health.
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1. Open a business bank account.
A business bank account is one of the most important pieces of getting your startup's finances in order. Whether you open a checking account, cash management account, or savings account, opening a business bank account is a wise move for these reasons:
- It prepares you for tax season. Keeping your business and personal expenses separate will make it easier to file taxes. If you skip this step, come tax season, you might have a hard time untangling your business and personal expenses from each other. This can result in you losing out on deductions or cause a logistical nightmare later.
- It offers legal protection. A business bank account can offer you limited personal liability protection depending on your business's legal structure. If your business gets sued, for example, a business bank account may help prove that your business is a separate entity from you, which can protect your personal assets.
- It makes you appear more professional. A business bank account allows clients and customers to pay your business rather than making payments to you personally. This lends your venture an air of professionalism.
Key takeaway: A business bank account is key, as it separates your personal and business finances.
2. Recognize your financial literacy.
Gathering the proper tools and educational resources to understand and manage your business's finances takes time, but it'll save you a lot of stress and money. Don't be afraid to admit when you don't understand something.
"A very low percentage of new business owners actually go over every number in their finances every month, and even fewer actually understand all the numbers on the page," said Barry Moltz, financial advisor, author and public speaker on small business management.
Key takeaway: You don't need to be a complete expert on business finances, but you should understand what everything means and how it should be tracked and managed.
3. Manage your cash flow.
Cash flow is the money that moves in and out of your business. When you make more money than you spend, you have a positive cash flow. With 61% of small businesses struggling with cash flow globally, you need to pay close attention to yours. These are a few ways to avoid negative cash flow:
- Send invoices as soon as possible.
- Closely monitor your debt and savings.
- Borrow money before you need it.
- Evaluate your business operations to see where you could cut expenses.
- Adjust your inventory for cost efficiency.
Key takeaway: Manage your business's cash flow by creating invoices and sending them out quickly, cutting costs and debt where you can, and adjusting inventory when necessary.
4. Determine your startup's financial and market logistics.
Once you have a working knowledge of business finances, you have to ask the tough questions specific to your enterprise:
- How much money do I need to start this business?
- How long until my product or service will become profitable?
There is no perfect answer to these questions. It depends on your niche, which should be as narrow as possible in the beginning.
"Entrepreneurs often try to target as broad of a population as possible," Moltz said. "That will just lead to more competition." [Interested in finding the right accounting software for your small business? Check out our best picks and reviews.]
Understanding your niche will help you answer these more concrete questions. Service-based businesses, for example, take much less money to start than product-based businesses. No matter your market, the key is to not overspend.
"New business owners spend way too much money in the startup phase," Moltz said. It seems logical – the more money you spend getting customers, the more customers you will get. Unfortunately, that is not usually the case. That's where profitability comes in.
Key takeaway: Make sure you have a strong grasp on your business niche, how much money you need to get started, and how long it should take before your business becomes profitable.
5. Conduct financial forecasts to gauge profitability.
Similar to how much money you'll need to start your business, your future profitability depends on many different factors.
"A business can take its time becoming profitable for however long you have the cash flow to support it," Moltz said. However, he added, most small businesses need to achieve profitability in the first year to be sustainable.
If you take time for financial forecasting – a management tool that estimates profitability based on your past and present financial conditions – then you should know ahead of time when you're supposed to be cash-positive.
"Over-forecast revenue and under-forecast expenses," Moltz said. In your forecast, cut your revenue in half and double your expenses for the first six months or year to avoid overspending. In this vein, Moltz's go-to piece of advice for his clients is that "revenue is vanity and cash flow is sanity." It doesn't matter how successful you appear from a sales standpoint if you aren't generating revenue.
Key takeaway: To gauge your business's profitability, conduct a financial forecast based on your past and current financial conditions.
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6. Carefully research your funding needs.
While some business owners bootstrap their ventures, others turn to outside funding to grow their businesses. There's a lot to consider if you go this route, including how much money you need, the loan's repayment terms, your credit score and when you need the funds. Not every kind of funding will work for your business, so determine exactly what your business needs in order to make an informed decision.
These are some of the financing options available to small business owners:
- Traditional loans from banks
- Grants
- Business lines of credit
- Invoice factoring
- Merchant cash advances
- Peer-to-peer lending
Key takeaway: Small businesses have several funding options, including bank loans, grants and alternative lenders.
7. Utilize experts.
At the end of the day, your most reliable tool for financial planning is old school – the expertise of another person. Consultants, financial advisors, your accountant, a CPA and a bookkeeper are all potential resources.
"A lot of business owners don't manage their finances because they don't understand it," Moltz said. An expert's help with putting together your financial statements, evaluating your expenses and forecasting your profits can save you a lot of time and money in the long run.
Your time and money are precious, so you want to ensure they are spent effectively. You should take this same attitude with your business's financial health. Rushing your business's potential for success will only hurt it in the long run. Instead, dedicate significant time, energy and maybe even money to maintaining the financial health of your enterprise.
Key takeaway: If you aren't a true expert in managing finances, consider hiring experts like financial advisors and accountants to steer you in the right direction.
Yara Simón contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.