Start Your Business on Strong Financial Footing
Starting your own business can be an exciting and stressful experience. You have a lot riding on your success, both personally and financially. While it can be tempting to focus solely on your company’s core functions, it’s also important to slow down, be thoughtful and make sure your finances are in order. The following tips can help you start your business off on the right financial footing, which can significantly improve the odds of your business succeeding. A flourishing business can be extremely rewarding, both professionally and personally, and has the potential to create tremendous financial flexibility.
#1 – Separate your personal and business finances.
If you’re like many entrepreneurs, you’ve probably put a significant portion of your own assets into your business. While this is common practice among business owners, it’s important to maintain a clear delineation between your personal and business assets.
As a starting point, establish separate accounts for each. Business income and expenses should flow through your business account, and personal assets should flow through your personal account. This separation of assets is especially important at tax time, as it allows you to more easily document the income and expenses that apply to each area of your life.
#2 – Establish a budget.
Establishing a budget for your business can help you stay on track toward achieving your goals. Start by estimating your monthly income and documenting all your business expenses, including rent, utilities, inventory costs, computers and phones, employee salaries, supplies, payments to vendors, marketing expenses, etc.
Once you have a list of your expenses, determine which expenses are fixed and which are variable. Fixed expenses will remain relatively stable from month to month, while variable expenses will fluctuate.
Next, compare your anticipated income to your expenses. Are you bringing in enough income each month to cover your expenditures? If so, great! If not, you may need to find ways to either increase your revenue or reduce your expenses. Your wealth manager can help you establish a realistic budget that makes sense for you and your business.
#3 – Carefully manage your cash flow.
Cash flow is the lifeblood of any small business, and it’s crucial to manage it effectively. Start by creating a cash flow statement that tracks the money coming in and out of your business. Money coming in includes sales revenue, investment income, loan income, etc. Money going out includes, expenses, payments to vendors/suppliers, loan payments, inventory costs, etc.
Next, work with your accountant to create cash flow projections. Ongoing, regularly compare your income and expenses to these projections to help ensure you remain on track. Actively manage outstanding invoices, and consider establishing an emergency fund to cover any unexpected expenses or periods of reduced revenue.
#4 – Protect yourself and your business.
It’s important to make sure you have the proper insurance in place to protect yourself, your family and your business. Work with your wealth manager to conduct a detailed risk assessment of your business. Consider the following:
- What insurance coverage is appropriate?
- What equipment and/or inventory is essential for your success? How can you protect those important assets?
- How can you protect against cyber threats, theft and other unexpected circumstances?
- What would happen in the case of a business interruption, such as a natural disaster or the loss of a key employee?
- How can you minimize the impacts from potential lawsuits?
- How can you protect your personal assets from your business risks?
#5 – Document everything.
Maintaining accurate financial records allows you to make informed business decisions, understand progress toward your goals, attract quality investors and partners, streamline your tax filing process, etc. Take time to document your expenses, income and financial transactions. Consider implementing accounting software to help you organize your finances, generate reports and streamline your recordkeeping capabilities.
#6 – Plan for taxes.
Tax planning as a business owner can be one of the most complex financial functions you’ll face. Take time to understand the potential impact of taxes on your bottom line, and implement strategies to help lower your tax exposure. Consider working with a qualified accountant to help you identify tax saving opportunities and avoid costly mistakes.
#7 – Implement an estate plan.
What does a personal estate plan have to do with your business? Potentially, a lot. If you don’t take the necessary steps to secure your personal and business interests prior to your death, you leave a lot to chance.
A well-constructed estate plan helps protect your loved ones, business partners, employees, vendors/suppliers and more. It can also help streamline the business transfer process and minimize the amount of taxes owed by your beneficiaries.
