Starting your own business is a complex but exciting endeavor. The payoffs can be incredible, but the risks are high. In fact 30% of businesses fail in the first two years, so it’s clear that there are likely to be difficulties. One of the main risks is financial. As setting up a business doesn’t mean you’ll be making profit straight away, many businesses don’t turn a profit in their first couple of years. So here are some financial aspects to consider if you’re thinking of starting a new business:
1. Have A Business Plan
You need to have a business plan if you’re starting a business. This includes a revenue model, which will show you your projected profit and loss, cash flow and balance sheet. It’s important to be realistic when making your business plan, wildly ambitious goals won’t get investment. Plus you’ll actually know what you’re dealing with and whether your plan is achievable. It’s worth speaking to someone who understands modelling who can make sure you don’t miss anything.
2. Have Short Term Goals
As well as having a business plan that looks into the future, but you should also have short term financial goals. Monthly, weekly, or even daily goals will allow you to stay on track and make any adjustments that are needed for your business to grow.
Having short term milestones that you can hit will help you to gain confidence too. And confidence is vital if you want your business to grow.
3. Know Your Funding Options
New businesses are likely to have overheads. You might need office space or equipment, for example. Although these overheads will be different for each type of business, it’s likely that you’ll need to invest something to start your business (and the same will be true if you want your business to grow in the future). There are various ways to raise money for your start-up, you could raid your savings or get a loan. There are plenty of alternative funding options for new businesses. Whatever route you take, be sure you know all the implications beforehand.
4. Keep Your Personal Finances Separate
This might not seem important at first, but if you don’t do this when you start a business, it makes it harder to do later on. So set up separate accounts for your business and personal finances. Doing this when you start a business will save you a lot of time later on. It also means that you can track your business expenditures more easily (as they will all come from one account), though you will still need to keep your receipts for the taxman.
5. Be Careful With Your Fixed Expenses
Fixed expenses can’t be avoided, no matter what stage your business is at. This can include things like office rent, insurance, marketing and stock. Even though they can’t be avoided, at the beginning it’s important to minimise them. Keeping these expenses low to begin with is key to longevity.
Do you really need a fancy office with all the mod cons? Or can that wait until you are turning a decent profit? There’s no point in spending all that money if the office will only end up being empty by next year.
Check what you actually need and go for function rather than style, at least to begin with.
6. Expect The Unexpected
Although you need to be optimistic when you start your new business, it also pays to be prepared. Small failures are likely to happen when you first start out, but you can’t let this stop you. Instead, be prepared. Have extra savings and financial security so that the small roadblocks won’t cause your business to fail.
Also make sure you have personal emergency savings accounts in place. That way if the worst should happen you will still be able to have a roof over your head.
Being prepared for little bumps is basically an insurance. Have the preparations in place and hope you never have to use them.
7. Track And Monitor You Cash Flow
Managing your cash flow is an important part of starting a business, especially with many start-ups, as they will spend more than they make for the first few years. Though this is easily overlooked when you get caught up in the day to day running of your business. But if you don’t look after your cash flow, you can put your business in a dangerous position. You may have an incredible business idea, but if you run out of cash, that idea is going nowhere.
Make sure that you are strict with payments. If you offer services to clients, agree to a pay-by date once the work is completed.
You also need to establish a budget and stick to it. As long as you account for all possible expenses in your business plan, you should be able to cover your costs until you start to make a profit.
Another part of cash flow management is to track and monitor your spending. Include everything, small stationary purchases, equipment hire, everything. Be sure to keep your receipts for your taxes too.
8. Remember To Pay Yourself
This may sound obvious, but many people neglect paying themselves. What’s the point of putting in the work if you don’t pay yourself.
Though don’t get greedy, you don’t need to pay yourself a big salary to begin with. But make sure you have enough to live and allow yourself a little bit of comfort. That way you can focus on building your business as your personal finances won’t get in the way.
9. Think About Your Long-Term Goals
Long term goals don’t just mean for your business, but for your personal situation as well. It’s always important to think about the future. What are your plans for supporting your children? Or your retirement? It’s vital that you have plans in place to achieve your goals here, whether your business goes well or not. If you are using your own savings to set up a business, what happens if it folds? Think about both best case and worst case scenarios and have a plan for them.
Also, be sure to have an exit plan. Would you prefer to leave your business to future generations, or sell it? Have that long term goal in mind from the beginning.
When starting up a business, it is a risky time, but one that can be very rewarding. Finances are a vital aspect for every start up-to consider.
