You may have a great idea for a business, but coming up with an innovative concept is only one part of successful entrepreneurship. The other part is effective financial planning. According to a 2018 survey of more than 2,000 entrepreneurs conducted by Xero, a company that offers cloud-based account software, 65 percent of participants cited that financial issues were one of the leading reasons that their businesses failed. And while any business can experience financial hardship, you can give yourself a better chance at success and increase your likelihood of weathering those inevitable storms by laying the proper financial foundation from day one. Here are 10 steps to get started.
Start with clean books from the beginning
First and foremost, commit to keeping your personal finances and business finances separate, advises Brittany Davis, Accredited Financial Counselor (AFC®) and host of Freedom Focus podcast.
“If you’re serious about starting a small business, go ahead and open a business checking account and use it to start saving for your business expenses,” Davis told MadameNoire. “There’s nothing worse than starting your business and having to clean up your books because you’ve mixed personal finances with business finances; especially around tax time. Make things easier by starting and keeping business and personal finances separate.”
Research the best banks for small businesses
Of course, before you open that business account, you’ll want to do a little research to determine which institutions are ideal for small business owners. Don’t assume that just because you’re happy with a particular bank for your personal banking needs that they will also be a great fit for your business accounts. Many commercial banks impose high monthly fees, overdraft penalties, and require minimum balances for business accounts while many online banks do not.
Work on your personal credit
If your personal credit has taken a hit, devise a plan to repair it.
“The reason for this is you’ll want to be prepared for anything,” Davis adds. “More often than not, business owners are surprised by a sudden influx of growth — for example, Beyonce’s Black Parade list during Juneteenth — that they aren’t prepared for, and to keep up with demand, they needed more capital to sustain. If your personal credit is poor, it is unlikely for you to be approved for some credit options, especially if your SSN is required on the application.”
Don’t quit your day job
When starting a side business, Davis says you need to stay at your day job until you have at least “12 months worth of personal expenses saved and 6-12 months worth of consistent business revenue. That means revenue that covers your business expenses completely. If 2020 has taught us anything, it’s better to be safe than sorry and this certainly applies with a decision such as quitting your day job, especially if you’ve been able to keep it this year. Confirm that your business is lucrative and create a cushion of savings for those inevitable times of feast and famine in the business cycle. You might also consider getting a part-time job to stretch your savings as your business grows.”
Estimate your expenses
A solid financial plan is proactive, not reactive. Conduct some research and determine what the fixed expenses associated with the operation of your business will be. Next, do the same for potential variable expenses. By maintaining a running list of these anticipated costs, you will be able to sketch out a budget more effectively during the planning stage.
Create a budget
Once you’ve estimated your expenses, it’s a good idea to create a budget to see how these operational costs will add up from month to month. This will help give you a sense of direction once it’s time to actually start funding your business and will help you to avoid overspending.
If managing a spreadsheet requires too much effort, take advantage of budget resources that might be built into your online banking site. You can plug in numbers for your budget and have transactions automatically tracked so you can see whether you need to make any adjustments.
Register your business
If you’re serious about your business venture, make it official by registering with your state so that no one else in your area is able to operate under your business name. Once your business is registered, you will have the ability to open a business account, apply for loans, pay taxes, receive wholesale discounts, hire employees, and establish a more solid reputation with future customers.
Save for start-up costs
When you first launch your business, you’ll be putting much more money into your business than you are getting out of it. Some businesses can actually take two to three years before becoming profitable. As a result, it can be beneficial to set aside some capital for start-up costs so that you aren’t constantly draining your personal accounts to keep your business afloat.
Draft a business plan
As defined by Investopedia, “A business plan is a written document that describes in detail how a business — usually a startup — defines its objectives and how it is to go about achieving its goals. A business plan lays out a written roadmap for the firm from each of a marketing, financial, and operational standpoint.” Business plans don’t have to be written in any particular way and they can be as detailed or minimalist as you want them to be.
Determine how you will manage your finances
Many successful business owners will opt to hire a professional accountant, but this likely won’t be the case when you’re first starting out. As a result, it’s a good idea to determine how you will handle bookkeeping. While some may opt to simply use a spreadsheet, others choose to invest in accounting software. Figure out what’s best for you early on so that you don’t have a mess come the end of your fiscal year or tax time.