Over the past decade, entrepreneurs and startup businesses have been formed to make their mark in their particular industry. From marketing to e-commerce, we’ve seen every type of company take their chance in the world of entrepreneurship. While there are many things to be excited about in the world of entrepreneurship, there are many challenges. For one, about 20% of startups fail within the first year of business. Why is this the case? Much of it comes from poor financial planning and uninformed decision-making.
So in order to help rising entrepreneurs and startups, I’ve put together some financial tips. Through these financial tips, you should have better odds of being part of the 80%.
Be Realistic About Your Funds
Whether you’re a dreamer or a realist, you must be honest with yourself with your finances. This is key because many owners fall into a tonne of misconceptions. Say you’re running a dishwasher repair company or some other service that requires a lot of tools. People get in their head they need to have every possible tool to do the job. This is a trap. I’d suggest you do the opposite.
As much as it might hurt, begin your operations with as few fixed costs and expenses as possible. Do what you can with what you got. Only after you get some cash flow going should you consider expanding your expenses. This method is smarter as you’re not digging into other funds to fuel your business. Rather you’re using your own profits to sustain the growth of your business.
Starting your company in this manner also leaves plenty of room for financial error. As an entrepreneur, you should expect to make mistakes often when starting out. This is fine. Especially when those mistakes are a low cost to you.
In the words of one-time CEO of Tripology, John T. Peters, “If you’re going to fail, do so quickly, cheaply, and often.”
Create Multiple Budgets
Before you ever gain a dollar in revenue from your company, you should create several budgets. Budgeting and cash flow management are essential in any organized and successful business. I would suggest designating a budget for your business itself and your own personal budget as an entrepreneur.
The business’s budget should include several categories like overhead costs, fixed/variable expenses, and expected income. As you start your business, many of these numbers will come from market trends and predictions. However, as your company grows, you will derive more accurate numbers in your budget based on company history. You should have a record of every dollar that goes in and out of your business.
Your personal budget, however, will be useful in predicting unexpected expenses and impacts on your own business income. As passionate entrepreneurs, many of us make the mistake of devaluing our own time and neglecting to pay ourselves. By creating your own personal budget, you can set predetermined work hours and income to ensure that you are paying yourself regularly. Your own financial stability is pertinent to the success of your startup.
RAMP – a financial company that automates and manages money – offers some further tips for financial management to consider as well.
Get Creative with Your Financing Strategy
After you have become stable in your business sales and profits, you will likely become interested in financial assistance. Without proper research and education, you may have thought that your only lending option as a startup is a small business loan; however, this is not necessarily the case.
Aside from small business loans, you can opt for business credit cards, crowdfunding, or personal loans.
According to the Federal Reserve Small Business Credit Survey, 59% of small businesses use a credit card for their business. They are helpful for entrepreneurs wishing to separate business expenses from personal expenses and develop the business’s credit.
Crowdfunding allows companies to attain a startup fund by campaigning business plans and objectives to groups of people in hopes of receiving financial assistance and donations. Also, it’s a great way to develop a following of people who believe in your company.
Personal funding doesn’t necessarily mean you should derive money from your own savings account. Instead, you can look into a variety of loan options to fund your business, like personal loans or second mortgages. For example, research home equity loans can cover personal needs like funding a startup or sending a child to college. Once approved for a loan amount, you can use it for just about anything. However, the loan is tied to your home as an asset. It’s important to assess the affordability of any personal loan before applying.
Whichever funding option you choose, seek advice in navigating each process. Without proper understanding of your options, you can risk putting your business in financial jeopardy.
Understand Business and Financial Terminology
As a startup company, you may be new to the entire corporate world — making it difficult to navigate at times. So a good financial tip is to be aware of the various terms that you hear. After all, most people’s money attitude isn’t the greatest. Getting financially illiterate people to run a business is a recipe for disaster.
For example, the term “write off” catches beginner entrepreneurs as some assume it means free. It’s free in the sense that you write off the expense during tax time. The problem is some entrepreneurs think since things can be written off, you can be frivolous with your expenses up to that point. This isn’t smart as successful business owners argue that a write off is a chance for reinvestment. Instead, reallocate the saved money into your business to increase cash flow.
“Burn rate” is another term that is useful in analyzing your business’s budget and accounting reports. Essentially a burn rate refers to the rate at which your company is losing money. Many entrepreneurs are not aware of such a calculation and can unknowingly overlook excessive spending. It would be wise to calculate your expected burn rate before each period. This will ensure that your behaviour works with your spending goals.
Educating yourself on small vocabulary differences like this can create plenty of long-term benefits for your company.
Plan for Emergencies
With the current state of the economy, I think we all realize, now more than ever, the importance of planning for emergencies. The sudden outbreak of COVID-19 caused businesses all over the world to have to shut down indefinitely; some to never open again. This is why it is so important to set aside money for emergencies both personally and as a company. One of the financial tips I hear about saving up is to have at least 3-6 months’ worth of expenses covered. Ideally in the form of cash, the most liquid asset. It is extremely important that your emergency fund includes liquid assets as these will be easiest to attain as emergencies arise.
While no business could’ve prepared for COVID-19, businesses still run into snags. You could lose a big paying client. Maybe your products aren’t selling so well this month. Because there is an ebb and flow to business, having a cushion to fall back on is smart.
Prepare More With These Financial Tips
Building your own company from the ground up is no easy task and candidly, you should be very proud of your determination to do so. Remember that your drive to start your company should be as strong as your drive to maintain it. Try these financial tips and make your business finances a priority to ensure that you are not only sustained but growing in the years ahead.
Eric S Burdon
4 thoughts on “5 Must-Know Financial Tips for New Entrepreneurs”
I definitely agree with the idea of being realistic with finances. No matter how lofty one’s goals are, there is only so much money that can be spend, so knowing how to allocate to different aspects of business is vital.
It’s another hat that the entrepreneur has to wear, but it’s one that helps things out immensely. As is the other different types of hats that an entrepreneur wears of course. Thanks for reading Rob!
Thanks for sharing! This was really insightful 🙂
No problem Chris! Thanks for reading! 😀