4 Financial Tips For Starting A New Business
New businesses crop up, and even in an ailing economy, it’s not surprising to see the sheer amount of entrepreneurs attempting to take a chance on the open market. As the Houston Chronicle informs us, only 51% of businesses survive past five years []. It may seem like a huge figure, but many of these businesses’ failure to make a go of it stem from their poor financial practices. Many new business owners don’t account for finances, cash flow, and even taxation. Owning a private company isn’t the same as being an employee in someone else’s business.
Before you register a business, you should consider the necessary financial steps you have to take to keep your business solvent. By intelligent managing of a company’s finances, a business owner can make decisions that both increase the company’s revenue and ensure that it can stave off tough times or a shrinking market. In this article, we’ll explore four of the most important factors that business owners should consider from a financial perspective.
1. Business Structure
Your business’s structure is a crucial part of ensuring it remains profitable and protecting your assets. Tax rates vary by location and knowing which place offers you the best returns on taxation can help you keep more of your hard-earned cash. Additionally, different business structures provide additional protections for you as the business owner. It’s not a good look to be responsible for a company’s liabilities. Something the business does inadvertently could drive you to bankruptcy.
Sole proprietorships are the simplest business structure to form, reports Entrepreneur. Many businesses initially start as sole proprietorships, but as they grow, business owners realize that they’re risking their income and reputation. Another option small business owners can explore is the limited liability company (LLC). An LLC offers many of the same benefits as a sole proprietorship but goes one step further. The business itself isn’t taxed either. The members of the LLC are taxed as individuals, which may mean that you can get a much better taxation rate for your income than employees. These considerations are crucial to ensuring that you maximize your take-home income every month.
Yet a third type of business structure that business owners usually overlook is the corporation. Corporations are not physical entities, but any company may be registered as a regular corporation. The IRS uses the corporation determination for tax purposes. You can register your business as an S-Corp, allowing you to lower your taxation rates. In an S-Corp, the business owner can also be registered as an employee. The taxation rate as an employee would follow the state standard, but gains from the company’s profits to the business owner would be taxed differently.
2. Limit Your Fixed Expenses
Thin margins are the best way for small businesses in their first year or two of operation to keep afloat. While it’s tempting to spring for a massive office in the center of town, you might be better served to keep your fixed expenses at a minimum. At least for the first year, you should cut back on any costs you don’t need to include on the business’s account. The income the company generates in this first year should be set aside for funding business growth.
Limiting fixed expenses also has the benefit of giving the business a little leeway. Disasters can strike at inopportune moments. In uncertain economic times, it’s necessary to plan for unforeseen issues like loss of clients due to business closure and lack of new customers to bolster income. Having a buffer zone coming from the money you save from limiting your fixed expenses gives you some “wiggle room” if you need it.
3. Think Long Term
It’s tiresome, but writing a business plan is an essential part of success, especially for startups. Harvard Business Review tells us that, according to the statistics, having a business plan will most likely help your small enterprise to succeed. A business plan is more than just a few ideas cobbled together to give you a statement of purpose. It’s a solid mission and vision for what the company should be today and what it needs to become in the future. It’s an essential part of long-term planning because it gives the business and its employees a goal to work towards.
Long-term planning is vital to financial success as well since it allows business owners to plot their growth through investment. By planning where they want the business to end up, an owner can decide what areas of the business need more investment to perform at that future expected level. Additionally, the financial feedback can help an owner determine if their business is on track to succeed, or whether sweeping changes need to be made to ensure the company doesn’t sink.
4. Manage Your Cash-Flow Situation
Money comes in, money goes out, but the money that stays with the business is what determines its success. All companies have expenses they incur during day-to-day operations. It’s easy for a business owner to get caught up in the day-to-day operations and miss the bigger picture. As simple as cash-flow looks from a broad perspective, it can be extremely labor and resource-intensive. Managing a cash flow solution requires figuring out how to automate the most rote of tasks and have skilled, competent professionals working on the human side of the equation. Without a proper cash-flow solution, a business can find itself serious difficulties.
Business Owners Need to Be Wary
For small business owners, the shift from an employee to a business owner can be life-changing. Things like taxes and registrations, even professional licenses that you never had to worry about before, become a core part of your considerations. Above all of these elements comes the need for sound financial decisions. Companies are not like people, and budgeting for their health is entirely different from developing and running a personal budget. If you have a skilled enough accountant on staff, you might be halfway there to having a financially solvent business. These financial considerations will give you the best chances of remaining in place past that five-year mark.
