Starting a business can be an exciting and fulfilling journey, but it can also be daunting. One of the key factors that determines the success of a new business is proper financial management. Without sound financial practices, a business can quickly find itself in debt, unable to cover its expenses, and failing.
Successfully growing your business isn’t all about increasing sales and exceeding goals. A combination of several factors will generate value and make your business not only sustainable, but also scalable and (eventually) sellable. In this blog, we’ll cover five important financial best practices for starting a business.
- Develop a Comprehensive Business Plan
Before starting a business, it is crucial to have a comprehensive business plan. A business plan is a document that outlines the goals, strategies, and financial projections of a business. It is an essential tool for securing funding from investors, banks, and other financial institutions. A well-crafted business plan should include the following:
- Executive Summary: This is the big-picture summary of your business, team, growth plans, and financial needs, if applicable.
- Business Overview: Include some detail on your products/services, who you’ll serve, and why you’re different.
- Sales and Marketing: What strategies and tactics are you using to promote and sell your products or services, and how will you compete?
- Operations: Covers the business structure, along with the people, processes, and systems involved in running the business today and as you grow.
- Financial Model: This includes your financial projections, including revenue, expenses, profitability, and cash flow, usually presented in spreadsheet format.
- Determine Your Legal and Business Structure
Establishing a professional identity is crucial for your business, but you’ll also want to create the right legal structure and secure appropriate business registrations, licenses, etc.. The four most common business structures are sole proprietorship, partnership, limited liability company (LLC), and corporation (S corp and C corp). This is where advice from an accountant or lawyer (or both) may help you understand the the tax and legal implications of your decision. It’s best to make the right decision now, rather than making potentially expensive changes later.
- Separate Personal and Business Finances
Your business should have separate bank accounts and books from your personal life – no exceptions! Comingling of funds can make it difficult to track business expenses, leading to financial mismanagement and potentially putting your personal finances at risk. It is best to open a separate business bank account and credit card and use them solely for business purposes. Document all transactions made between your busines and personal accounts.
- Maintain an Accurate Budget and Financial Records
Keeping accurate records is essential for the financial health of any business. Tools like Quickbooks Online are easy to use (we can help), and you can review financial reports with a couple of mouse clicks. A budget helps you determine how to spend money based on projected revenue, so you can allocate resources appropriately. Review results and budget each month, and make budget adjustments when needed to maintain accuracy. This also makes tax filing easier, including payroll, sales, business, and personal pass-through taxes.
- Plan for the Unexpected
Unexpected things will happen to your business as you launch and grow – that’s a given. Examples range from natural disasters to supply chain disruptions to personal health issues. Your contingency planning and preparation will determine your business’ ability to succeed long-term. Identify potential risks, and make sure you have contingency plans in place to limit their impact. This includes insurance coverage for property loss, and cash reserves to weather any short-term disruptions to revenue, equipment, etc.
Proper financial management is crucial for the success of any business. Developing a comprehensive business plan, choosing the right structure, maintaining accurate business accounts and records, and contingency planning are all essential financial best practices as you start and grow. By following these practices and having a great accountant (like us) in your corner, you can increase your chances of success and build a strong financial foundation for your business. If you have questions, or would like to discuss your business with a financial expert, please give us a call.