By Devin Morrissey
Starting a successful business involves many considerations — but none more important than examining your financial situation. Financial success for your business is possible. You’ll just have to know which financial decisions to take into consideration to start your business off right. Being proactive in your financial choices will significantly increase your chances of launching a successful business.
The wrong financial decisions can tank your business before it even gets off the ground. Furthermore, you’ll have to continue making the right financial choices throughout the longevity of your business. In fact, seven out of 10 new businesses will last at least two years, but only a quarter of those will have the longevity to last 15 or more years. Starting a new business, and maintaining its success, is no small task. However, much of your success hinges on getting your finances in order.
Keep Your Personal and Professional Finances Separate
Especially for entrepreneurs, personal funds are often the first thing considered as venture capital when starting their new business. While this is common and not usually a problem early on, as your business grows and you start earning capital from it, it is vital that you separate your personal and professional funding for tax purposes, business credit, and to eliminate stress and unnecessary spending. Ideally, it is best to start this habit before your business grows, as it will get harder and harder to keep track of where every dollar goes — making keeping up with your books a nightmare. It may also add to your spending if you have to hire an accountant to sort through your personal and professional expenses.
Wouldn’t you like to write off business expenses and benefit from other tax deductions? Keeping your business and individual entities — in the eyes of the IRS — separate will allow you to do so, and separating your professional and personal finances may also carry many tax benefits. It in addition to write-offs, keeping your personal and professional finances apart can especially help you during an IRS audit, as the IRS will audit both your business and personal finances during an inspection if there is not a clear dividing line between the two.
Establishing a clear line between your personal and business records can also let you know where you stand regarding financial stability. For example, not keeping separate accounts can impact your business credit and ability to secure business loans. In these cases, if your personal income is tied with your business income, it will make it harder for banks to determine your business credit. Overall, your financial stability will be needed to calculate risks. Especially for entrepreneurs, calculating risks can make or break your business. Having the right figures can help you make a reasonably confident decision in taking a chance.
Business Insurance is Crucial
Accidents, legal claims, data breaches, and more are just part of the business of business. But keep in mind that, without insurance, it will be difficult to recover from covering the costs of these damages. Business insurance may seem like just another expense you can get away without paying, however, it will save you money in the long term and will protect your business from going under. Although you may be obligated to have some business insurance, understanding the insurance coverage you need for your small business is crucial in going forward.
Most commonly, you will need workers compensation insurance in the event an employee is injured on the job. To protect your own physical property, purchase commercial property insurance if damage is done to your property, or to cover lost equipment. If something should happen to your business, such as a loss of power, and you were unable to provide your services, you’ll want business income coverage to reinstate the money you’ve missed out on from lost business. You can even purchase data breach insurance to support your cybersecurity efforts.
Insurance will only become more necessary as your business grows, so it is better to understand which coverage you need right away as you go from a small to a large company.
Sometimes your small business grows to the point where legal advice is needed. In some instances, however, your insurance can save you from having to get a lawyer.
Track and Monitor Your Spending
No small business owner wants to run out of money. However, it is a common problem for small business owners to miscalculate what they are spending their money on, and how much money is coming in. This, naturally, is a recipe for disaster. If you don’t keep a keen eye on your spending, how else are you going to know how much money you have? Knowing where your money is coming from and is going is essential for cash flow management.
Monitoring your spending can also help you separate your personal and professional finances. As described above, mixing your finances can make your financial future much murkier. Understanding where and what you spend your personal finances on, and keeping them out of your business decisions, requires a continuous look at both finances.
To keep your spending in check, you can hire an accountant. Additionally, various accounting softwares are available to help you keep track of every dollar gained and lost. This will give you a firm grasp on where you need to cut costs, as well as if you can spend money to grow your small business. Tracking and monitoring your expenses will give you the financial stability needed in making the correct and necessary business decisions to maintain a successful company. It is also vital to keep you from dipping into your backup funding — saving it for rainy days.
Backup Funding AND Emergency Funding
You’ll want to have a backup fund to dip into when funds get low, along with an emergency fund when your backup funding dries up. Having these cash reserves can be the cushion your business needs to stay afloat in hard times. Fluctuating business can and will happen, and backup funding can be the difference between getting through these hard times or closing up shop. You understand that it is essential to have a savings account for your personal finances, so why not have a fallback reserve for your business?
Your backup, especially emergency funding, should be used as a last resort. In a perfect world, you will never have to take money from these reserves — however, the harsh reality is that you might. It is better to have it to retreat to than coming to the unfortunate conclusion that you simply have run out of money.
It is wise to set aside money when business is doing well, in order to rely on it when it is bad. When starting a company, you want to make sure you have more than enough to open for your emergency fund. Of course, you don’t want to need your emergency money, but you will have the peace of mind knowing that it is there. Just as in life, unexpected events can come up for your company as well. Make sure you are prepared for the unforeseen with backup and emergency funding.
You have to spend money to make money, right? When starting your company, you may want to save every dollar you can. However, smart investments can grow your success even further. Turning your profits into improving your business can also help your company develop. It may be hard to do right away, but divvy a portion of your earnings into expanding business operations to then gain more profits and expand again.
You may also want to invest a percentage of your profits into marketing your company and services. SEO and VEO marketing are incredibly important if you wish to grow. To improve productivity, and employee satisfaction and retention, invest in your employees. Spend money on your HR department to develop a hard-working and fun company culture. You can also provide great benefit packages to your employees to let them know you value them. Investing in your employees may cost money, but you’ll save money by keeping those employees instead of hiring new ones.
Many of the financial considerations above play into each other. For instance, if you are monitoring your spending, then you will be less likely to dip into your emergency funding. Or, if you make it a priority to continually invest in your backup funding (without using personal funds), you’ll soon have a large safety net for an unexpected event. In most cases, you’ll understand where you are lacking in one aspect if you are paying attention to another.
Of all your decisions that go into starting your small company, none is more important than the financial decisions you will make. Feeling and being confident in these financial decisions will give you peace of mind and the confidence to move forward in your company operations. The right financial decisions will need to be made daily for your business to not only just stay afloat, but to thrive. Knowing what economic considerations to take into account when starting your business ensures that your company will be a success from the get-go.
Devin Morrissey prides himself on being a jack of all trades; his career trajectory is more a zig zag than an obvious trend, just the way he likes it. He pops up across the Pacific Northwest, though never in one place for long. You can follow him more reliably on @DevMorrissey.