Launching a brand-new business is an exciting experience. It’s usually just you and a blossoming idea against the world. However, with so many unknowns, the beginning stages of a startup can be anxiety-filled and tricky.
Whether you like it or not, business success ultimately comes down to cash flow—is your business making more than it’s spending? If the answer is yes, then you’re on the right track. If the answer is no, then you need to start making some fixes.
In the early stages, you’ll likely burn more cash than you’re making—that’s common. Nonetheless, you need to have a plan for how you’re going to eventually turn a profit.
Running out of cash is the second biggest reason most startups fail. It’s not that businesses don’t get enough financing or sales—it’s that they don’t strategically and responsibly manage that capital.
Getting your financial ducks in a row is critical to the short-term and long-term survival of your business. The sooner you get your financial situation established, the better. Below, we’ll cover the 10 critical financial steps you need to take to build a durable business foundation.
1. Establish Financial Goals
Everyone wants to build a multi-million dollar business, but you need to set realistic financial goals for how you’re going to get there. Ask yourself a few questions to get your mind thinking of the possibilities—don’t worry, there are no right answers:
- Do you want to keep your business small forever, or would you like to eventually scale it to something bigger?
- Do you plan on owning this business for the long-term, or do you want to grow and then sell it for a quick buck?
- How much do you plan on paying yourself?
- How much revenue would you like your business to generate in the first year? What about the first 3 or 5 years?
- When would you like to start turning a profit?
You don’t need to have answers to all these questions just yet, but keep them in the back of your mind as you build your business. Soon, you’ll begin making important business decisions that may permanently steer your business in a specific direction—and it’s essential you know where you’re going.
2. Determine How You’ll Fund Your Business
It takes money to make money, especially when you’re just getting started. Initial investments in your business will require a significant sum of money. Real estate, renovations, website hosting, product molds, marketing material, software, payroll—operating a business isn’t cheap.
To get your business off the ground, you’ll likely need a healthy pile of cash. How you fund your business is just as important as what you spend your funds on. Here are a few financing sources for you to consider:
- Debt financing: Borrow money and repay it with interest. Maintain complete control of your business
- Venture capitalists: Trade equity for cash. Lose a portion of ownership of your business.
- Angels: Share ownership of your business with a wealthy individual in exchange for capital.
- Friends and family: Mixing personal and business life can get a bit thorny, but mom, dad, and your high school best buddy may be willing to lend you some cash without contracts and collateral.
- Crowdfunding: Harness the power of the internet to raise funds for your business in exchange for future products, rewards, acknowledgment, or good-Samaritan points.
- Bootstrapping: Build your business from the ground up with only your personal savings and cash from initial sales.
Before you give away expensive equity or lock yourself into a 10-year loan, consider all your financing options. Take a look at our Top Financing Options for All Your Business Growth Needs guide for more details.
3. Separate Your Business and Personal Finances
While it might seem easier to just carry around one piece of plastic, it’s not easier come tax time. Trying to remember which expenses were for your business and which were for your personal life can be a nightmare—especially 9–12 months later.
Right from the get-go, do everything you can to separate your business and personal finances:
- Apply for an Employer Identification Number (EIN)
- Set up your business entity type
- Open a business bank account
- Obtain a business credit card
- Separate all your expenses
Separating your expenses doesn’t just make tax season easier (though, that’d be reason enough)—it also can help you claim valuable tax deductions, shield your personal assets, and build your business credit.
The longer you wait, the harder it becomes to separate your finances. Set yourself up for success early to avoid major accounting headaches later.
4. Build an Emergency Fund
In the beginning, every dollar counts. Every sale, every saved expense, every penny-pinched—it all matters. However, it’s never too early to start building your emergency fund.
Get into the habit of setting aside a portion of your weekly or monthly revenue toward a cash cushion. COVID-19 was a rude wakeup call for all businesses solely reliant on future cash flow—don’t let an uncontrollable disaster destroy your business.
As a rule of thumb, try to save at least 3 months (or more) of liquid funds. These rainy-day funds could help you survive future calamities and unexpected expenses without having to wait around for government loan programs.
Another great way to build an emergency fund is to obtain a business line of credit. A business line of credit is a flexible form of financing that you can keep in your back pocket for downtimes—it’s there when you need it, but you have no obligation to use it.
Whether you need to make immediate repairs to a vital piece of equipment, cover payroll during a slow month, or restock your inventory, a business line of credit can handle it all. The credit is revolving, so when you use it and repay the borrowed portion, you’ll get immediate access to your full credit line again. Plus, you only pay interest on funds you use, not the full amount.
5. Get a Business Credit Card
You’re going to start accruing expenses here and there even before opening day. Get a business credit card as soon as possible so that you can keep your personal and business expenses separate.
Unlike other business loans, you don’t need to wait to apply until you’ve been in business for 12 months or until you’ve sustained thousands of dollars in annual revenue. Lenders will look at your personal credit score, meaning you can qualify for a top-notch business credit card starting day one.
Business credit cards can give your new business a huge headstart:
- Use your card to pay for practically any business expense
- Start building your business credit score so that you can qualify for bigger loans down the road
- Enjoy a 0% introductory APR for the first 12 months with most cards
- Qualify for higher credit limits to pay for expensive equipment or other startup costs
- Earn points, rewards, cashback bonuses, and other great perks
- Automatically separate and track your expenses
6. Track and Monitor Your Expenses
You don’t need to become an accounting wizard, but you need to learn a few bookkeeping basics. First, create an account on a free bookkeeping tool, like Sunrise. Connect your bank accounts and credit cards, and voilà—Sunrise will automatically begin importing, tracking, and categorizing all your income and expenses.
Meticulous monitoring of your finances will also ensure no money slips through the cracks. Sunrise can help you create, send, and automate your invoices, so you never forget about a delinquent customer. Plus, you’ll always know where your money is going, so you’ll never be surprised at your end-of-the-month numbers.
7. Strategically Set Your Prices
Pricing your products right is a Goldilocks conundrum. Too high, and you’ll practically be marketing for your competitors. Too low, and you’ll come off as a cheap brand. You’ll need to find the sweet spot to outprice your competitors, maximize ROI, and maintain your brand integrity.
Setting your prices is hard on day one. Further down the road, you’ll have more historical data, reliable break-even points, and research to help dictate your prices. In the beginning, however, you’ll have to rely on forecasts, estimates, market trends, and (admittedly) a bit of guesswork.
To get baseline prices, you’ll need to do some homework:
- Know your costs: Get down in the weeds with exactly how much it costs to source, produce, store, market, and deliver your products and services. Once you determine your costs, you’ll know the absolute bottom limit to your pricing.
- Know your financial goals: Look back at the financial goals you established in Step 1. What price point do you need to set to make those goals a reality?
- Know your competition: Analyze the market and see how your competitors are pricing complementary and substitute products and services. In this day and age, regardless of where your customer is, they can whip out their smartphone and get instant price comparisons—and research says they do it all the time.
- Know your market: How important is price to your customer demographic? For example, if you’re selling breakfast cereal, some customers will fuss if your price is 15 cents more than a competitor. On the other hand, if you’re selling Ford F-150s, your customer might not think twice that your truck costs $5,000 more than a leading competitor.
Once you’ve done your research, price your goods with confidence. Continually reevaluate your price point—it’s never set in stone. Over time, you may build up operating efficiencies that dramatically decrease your costs, or your competitors may get caught up in a pricing war. Keep an eye on your sales, and don’t be afraid to experiment with pricing changes.
8. Invest in Professional Services
When money is tight, you might be tempted to try and do everything on your own: bookkeeping, marketing, sales, recruiting, designing, and the list goes on. However, your most valuable asset is your time.
First, track how you spend your time. Record everything you do: answering emails, fly-by chit chats, scheduling, meetings, screening candidates, etc. Now, attach a dollar value to each of these activities—how much would you need to pay someone to do any of these tasks for you? Next, determine how much your time is worth—attach a dollar figure to it.
If the value of an activity is less than your time is worth, outsource the task. Hand over the minutiae and start spending your time doing what nobody else can do for you—growing your business.
The most successful small business owners know when to do and when to delegate. Penny-pinching here and there could save you a buck or two, but you might be leaking more cash than you’re saving. Consider which tasks you could easily hire a professional to do:
- Web development
- Content marketing
- Data entry
- Social media
- Customer service
- IT support
You can offload a lot of time-consuming activities to a freelancer or digital assistant. While learning new skills is valuable, it’s not always the best use of your time as a small business owner to learn the ins and outs of WordPress or how to troubleshoot Mac issues. Start building a team (whether that’s freelancers, employees, or other professional services) early on—you’ll always have more than enough to do.
9. Remember to Pay Yourself
Don’t forget that you’re a business expense, too. Some entrepreneurs pour their heart, spirit, and bank accounts into their businesses at the expense of their families and livelihoods.
You don’t need to take home a big fat salary every month, but pay yourself enough to live comfortably (at least). Eliminating personal financial stress from your life will help you focus on your business and make more objective business decisions.
How you pay yourself will depend on your established business type. Owners of LLCs, partnerships, and sole proprietorships are viewed as self-employed, so they’re paid through something called an owner’s draw. If your business is a corporation (like a C-corps or S-corps), then you’ll pay yourself through a set salary.
As the owner, it’s easy to neglect yourself. Plan for this expense in advance so that you leave sufficient budget for your pay. Start a good habit from day one of always making yourself a priority—this practice will go a long way in the future business decisions (big and small) that you make.
10. Plan for Taxes
Your first tax season is right around the corner. Unfortunately, many small business owners forget to calculate their tax burdens when they’re budgeting startup and operating costs. The reality is that your potential tax obligations could make the difference between profitability and financial loss.
As a full-time employee, your taxes are automatically deducted from your paycheck—no planning, no budgeting, no hassle. However, as a small business owner, you must take the initiative to calculate, set aside, and pay your taxes.
The best way to avoid any future tax surprises is to pay quarterly taxes on your income. Doing this will give you a clearer picture of your month-to-month financial situation—plus, it’ll make tax season much less of a headache.
Sunrise makes it easy to prepare your company’s taxes with a nifty feature called Sunrise Tax Assist. Sunrise Tax Assist is a free tool that helps you organize and estimate your taxes so you know how much money you’ll owe in advance.
Sometimes taxes can be tricky, and that’s why accountants are paid the big bucks. Still, they’re almost always worth the cost. Consider hiring an accountant, especially for your first tax season. They’ll save you time and money, as well as maintain your relationship with the IRS.
Let’s Get Down to Business
Now that you’ve taken care of the essential financial steps, you’re ready to start growing your business. Yes, these steps can be time-intensive, but they’re well worth the initial investment—they’ll pay dividends in time and money in the long run. With a solid financial foundation, you’ll avoid many of the mistakes that kill new businesses.
Remember, business success is rarely the result of spontaneity (especially for entrepreneurs). You need a plan—let us help.
If you need capital to get your business off the ground, our personal funding managers can help make it happen. Just start your no-fee, no-obligation 15-minute application to see what small business loans you qualify for. Then, a funding manager will help walk you through your options so that you don’t walk away with any ol’ loan—you skip and hop away with the very best loan.
It takes a little cash to make big things happen. Get the capital your small business needs to start off on the right foot.