Starting a business is an exciting venture. It can also be equally as challenging if you don’t have your finances in order. Of course, you’ll want to profit from your investment. So you’ll need to make sound decisions and establish a detailed financial strategy from the get-go.
Understanding your financial health and creating a business plan ahead of time will set you up for long-term success. Before launching your small business, here are five crucial financial factors to consider:
1. Startup Costs
Without careful planning, startup costs can quickly add up, impacting your bottom line. As you flesh out your business plan, you should calculate all costs associated with launching your business. This way you can have a better idea of how much funding you’ll need. You will know when you can expect to break even and your estimated profitability.
Expenses to keep top of mind include industry-specific licenses or permits, payroll, taxes, research costs, borrowing costs, and marketing efforts. If your business requires long-term assets, you should also factor in one-time expenditures like equipment, vehicles, and starting inventory.
2. Financing Options
Choosing the right financing option is essential to getting your small business off and running. Securing a sizable loan can be difficult. New businesses pose a higher risk to lenders. However, there are many small business financing options available for entrepreneurs.
For instance, you can tap into your personal savings, pitch to venture capital firms, or turn to crowdfunding. If you’re unable to secure enough funds through these, you may also be able to leverage assets. For example your house with a home equity loan. Just be sure to research how home equity loans work. This way you can determine if you’d qualify. Also, you can see whether or not an equity loan would be a viable option for your needs.
3. Expense Tracking
Having an expense tracking plan in place is crucial for keeping your business afloat during its first few years and beyond. Consistent income and expense tracking can help you keep tabs on where your money is going. This will also identify and cut down on unnecessary expenditures. In addition, you will establish a more realistic budget.
Whether you choose to keep track of business expenses in a spreadsheet or app, or you hire someone to manage your books, cash flow management is essential. This will ensure your financial health and guarantee that you don’t run out of money.
4. Financial Goals
While you may have dreams of launching a multi-million dollar enterprise, it’s important to take things one step at a time. Setting realistic, attainable goals will help keep you on the right track. Then you can build out specific action plans to reach critical milestones.
Focus on setting SMART goals that are tied to numerical values and a timeline (i.e. increase monthly recurring revenue by $10,000 in Q2). These goals can be set on a weekly, monthly, quarterly, or yearly basis to ensure consistent business growth and progression. They can also be used to drive your business strategy and finance-related decisions.
5. Cash Reserves
Building cash reserves early will ensure you’re prepared for any obstacles that may present themselves. With a savings plan in place, you can assure you have a financial cushion when you need it most. That way, if you want to expand your business or need support during economic downturns, you have the necessary funds to keep your business operating smoothly.
Some SMB owners make the mistake of funneling extra money into their own pockets. While it’s important to pay yourself enough to support your personal living expenses, consider allocating money toward your business’ emergency fund. This is an investment that could pay off down the road. If a crisis were to arise, an emergency fund could be critical in determining whether or not your business succeeds.
A financial plan is critical in launching a successful small business. With these tips in mind, you’ll set yourself up for long-term financial success.
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