5 Tips for Setting the Financial Foundation of Your Business
Updated: May 18, 2020
A company’s success isn’t promised just because of a unique product or an innovative owner. In fact, 20% of businesses fail in the first year while 30% fail in the second year. After five years, 50% of businesses close shop. Running a successful business isn't easy as there are many factors that impact the success of a company. One of the most important things to do as a business owner is to take the time to build a solid financial foundation. One faction of your business that you'll want to automate from the get-go- is accounting; specifically, invoicing and bookkeeping.
Money problems can quickly cause a business to crash and burn. Here are five tips for avoiding common financial pitfalls, giving your business the stability it needs to thrive now and long into the future.
1. Separate Business from Personal
One of the first financial tips to follow when opening a business and laying the financial foundation is to open a separate business account. You don't want to use your personal account for anything related to business expenses and income as this can create a nightmare come tax season.
What's good about business accounts is that you can accept credit card payments and have the ability to add multiple business account signers. These are benefits you don't have when using a personal checking account.
In separating business accounts and expenses from personal ones, you'll want to have a system for organizing and maintaining receipts and invoices so that you can reference them when it’s time to file taxes.
2. Define Your Business Structure
Over time, your business will start to generate revenue. But, before you open the doors and start hiring employees, it's important to define your business structure. In the business world there are many different structures to choose from including:
● Limited Liability Company (LLC)
● Sole proprietorship
● S Corp
● C Corp
But how do you choose the best business structure for your company? There are many factors to consider. First, figure out how many people will be involved in the business. If you plan to run the business alone, a sole proprietorship is ideal. Otherwise, if the business will be run with a partner or investors, other business structures are more suitable.
You’ll also need to determine which business structure is the most efficient for your tax needs. The accounting and tax method you use will influence the most suitable business structure. Last, you want to choose a structure that allows your company to expand as needed, such as adding partners or hiring employees.
3. Have a Solid Invoice Process
Thanks to the ever-growing list of tools designed to make business operations easier and more efficient, there are many businesses processes that can now be automated using a single piece of software. One faction of your business that you'll want to automate from the get-go- is accounting; specifically, invoicing and bookkeeping.
Let’s face it: bookkeeping is tedious, repetitive, and prone to human error. Financial errors can cause serious problems when determining expenses, deductions, and taxes. If you want to have all of your financial data organized in a central location, be sure to invest in quality accounting software.
Another way to make accounting more efficient is to use an online invoice generator. This tool will create professional and accurate invoices so that you can receive payment from clients and customers in a timely manner.
4. Create a Budget
Starting a business without a solid budget is problematic. One of the most important things to do as a business owner is to create a budget so that you have a detailed picture of where money is going and what money is coming in. By taking the time to develop a budget, you can plan for expenses and track expenditures.
A budget also allows you to:
● Plan for future financial needs
● Make financial changes as your business grows
● Create a business emergency fund
A business budget is fluid which means you can expect to make changes on a daily basis. Take the time to create a projected budget and then track actual expenses and cash flow so that you can analyze projections vs. actual data.
Once you have a budget, stick to it!
5. Practice Good Borrowing Behavior
As a small business, you’ll likely have to apply for a business loan in order to finance startup costs. Business loans are beneficial when you need to purchase IT equipment, physical office space, and other startup costs.
Before applying for a business loan, be sure that you’ve sat down and figured out not just the amount of money you need, but how much you can comfortably afford to pay back. Good borrowing behavior is crucial so that you can build your business' credit score and history.
By practicing good borrowing practices from the very beginning, you’re much more likely to get approved for larger loan amounts with better loan terms in the future.
Using these tips you can start off your business with a sturdy financial foundation. By having your finances in order early on in the game, you can focus on other business must-dos such as marketing, branding, recruiting, and hiring.
Last, you want to choose a structure that allows your company to expand as needed, such as adding partners or hiring employees. If you need help with your organizational structure, contact the organizational design firm, On The Mark.