One of the most beneficial things you can do when building a small business is pay close attention to your finances. Strong money management skills are essential for generating profits, keeping expenses in check, and maintaining enough liquidity to keep your business solvent.
Here are five financial planning tips to guide you toward small business success.
1. Balance Personal Financial Decisions with the Needs of Your Business.
Your small business may be a personal ambition, but your business-related financial needs are different from your personal ones. As a business owner, you can’t ignore the needs of either side of this equation. Instead, you need to balance those needs and make decisions after considering the implications for both your personal life and your business.
For example, you might want to think twice before buying a fancy new car with money that could instead be reinvested in your business. At the same time, though, you don’t want to ignore your retirement savings or your children’s college savings fund for the sake of business growth.
2. Consider All of Your Options When Seeking out Funding.
The funding sources you choose will have a big impact on the cost of that funding, the strings attached to each deal, and your freedom when it comes to making business decisions.
An SBA loan is a great way to fund your business, but you’ll need to be able to provide a strong business plan as well as collateral. Outside investors can be a helpful resource, but they may require more involvement in decision-making than you’re willing to offer.
Choose your funding carefully; it will have long-term implications for your business.
3. Make Sure You Have Enough Cash Flow to Keep Operations Running Smoothly.
When you raise funds for your business, you need to cover more than just start-up costs. Businesses need to have enough cash in their bank account to cover charges, invoices, and other costs associated with day-to-day operations.
If you own a restaurant, for example, you can’t sink all of your funding into kitchen equipment. You also need money to pay food vendors for the ingredients to make your meals, and you’ll need cash on hand to pay wages for your staff. It is not enough to have a lot of assets under your business name—you also need enough liquidity to cover expenses and maintain all revenue-generating activities.
4. Have a Plan for How You Will Pay Yourself—Eventually.
It is normal for small business owners to forego income in the early days of building a business. This is a great way to keep business expenses lean and start the company off on the right financial footing.
Eventually, though, you’ll want to take home a paycheck, and it is smart to have a plan for when that will happen and how much you plan to earn. Make this plan before you open the small business because it may affect how much you save before investing yourself full-time into your business.
5. Create a Business Succession Plan Before You Think You’ll Need It.
A business succession plan helps lay out how business leadership and management will be transitioned either in the case of the owner’s involuntary departure or for other reasons requiring a change in leadership.
Selling or transferring a business can involve a number of tax and financial implications that need to be accounted for. A business succession plan can provide a blueprint for how these financial considerations should be addressed, allowing for a seamless transition.
Because of the complexity of some of these financial implications, it is recommended that business owners develop this transition plan with the help of a small business expert or financial advisor.
5. Connect with a Financial Advisor—Even If Your Finances Are Manageable.
You might be an expert in your specific field of business, but small business finance is an area of expertise unto itself. A financial advisor can help you prepare for specific financial scenarios and strengthen your business plan.
When it comes to figuring out how to pay yourself or how much money to keep in your cash reserves, a financial advisor can offer a valuable perspective. Seek out an advisor who has experience working with other small businesses in your local community.
No matter how great your business may be, good money management plays a critical role in your ability to stay afloat. As you start a small business, take time to develop a financial plan that is strong enough to support your business and flexible enough to help you withstand unforeseen challenges you may face on the path to success.