When starting a business, you can expect to spend a lot of money. The worst part is that you have to spend all this capital before you ever earn your first dollar.
Even once your business is running and you are taking in money, the chances are good that you will still pay out more than you earn, keeping your business in the red. You want to find a way to get into the black as soon as possible to give your business the best chance at success.
However, managing your finances in a start-up situation is not always easy. There are a few things you can do that can give you the best chance of keeping your financing under control.
Keep Accurate Records
You may feel like you have too many things to do as you start your business, but that does not mean you can avoid recordkeeping. If anything, this should be a top priority.
Only by keeping good records can you stay on top of your finances. You can’t see anything going wrong if you don’t know what is happening.
Keeping accurate records means updating them every day. If you go into your books to check something, you should be able to see up-to-date information at a glance. If you can’t do this, then you have a problem.
There are plenty of computer programs you can use to maintain your financial records. You can use a spreadsheet to keep the simplest of records. All you really need is a list of expenses and income so you can see your current operating budget.
If you invoice customers, you need a system to track that as well. Otherwise, you will have invoices go unpaid. Customers will gladly sit on an invoice if they know you won’t be demanding payment anytime soon. Have a solid collection process in place and make your policies clear to customers.
Manage Your Debts
You will probably have to take on some debt to start your business, but that doesn’t mean you should let it get out of control. You need to manage business debt just as you would manage your personal debt.
Make sure you understand each debt. Know the interest rate, note fees, know your balance, and have a plan to pay it off.
If you took on a debt with a high-interest rate, consider refinancing. When you refinance debt, you can lower the interest rate and therefore, reduce how much you’ll pay overall. It could help reduce your monthly payments, too, which can free up capital for other uses.
Pay Attention to Taxes
In the early years, you may not turn a profit, which means you probably will have very little tax liability. However, Forbes explains that does not mean you shouldn’t think ahead to your future taxes.
You should make sure you understand how your type of business taxation works. Know the possible credits you can get. Understand your liabilities and deductions. This also ties in with keeping good records because you will need information on assets you purchase to help with taxes.
Create a Budget
Just as you have at home, your business needs a budget. You can’t spend, spend, spend without paying attention to the consequences.
Planning your spending will help you keep it in check. It can enable you to get into the black much quicker while also reducing your debt.
Make sure you take any debt seriously. Do not accrue it without a good reason for doing so. For example, you may need to go into debt to secure your inventory, which is fine because once you sell that inventory, you will make back the money you need to repay the debt.
On the other hand, going into debt to decorate your business will not pay off as quickly and could be a bad move. Customers find a clean and tidy storefront to be suitable. Adding in high end and expensive décor will not likely have a huge impact on your earnings, so this type of debt may be better suited to later in your business timeline.
Make sure what you spend is reasonable and justifiable. If you can’t see how you will cover the debt, then it probably isn’t a good investment. Of course, emergency issues are different. For example, if your heating system does down and you have to replace it, then that is justifiable even though it will put you into debt that you may have to carry for a while.
Don’t Forget To Invest
As you manage your finances, don’t forget to invest in your business. Putting money back into the business can help to increase the money coming out of it. For example, the high-end furnishings you wanted to buy before may be plausible if you can do it by spending money you earn instead of going into debt.
Redecorating can help define your brand and may bring in more customers if you do it correctly. This is an investment that eventually will pay off if it works. It may not be worth taking the risk to go into debt over, but investing in this risk can be an excellent idea.
The best strategy to determine whether to take on debt or invest is to pay attention to your return on investment. This is how much profit you get from the investment you make. Ideally, if you go into debt for something, it will have a high ROI. If the ROI is lower, then it is better to invest.
Keep Your Focus
The best way to stay on top of your business finances, especially in the beginning, is to keep focused on them. You have to actively work on managing your financial statements so you always know what is happening with that side of your business.
Bad things happen when you aren’t paying attention. By keeping up records and making smart decisions with how you spend money, you can make it through those first few years that are often the hardest on a new business.
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- Record-Keeping: How to Keep Business Records
- Which Debt to Pay off First