Finance Factors To Consider When Starting A Small Business
Money management plays a critical role in the success of every business. You, however, don’t have to be a trained accountant to know how to handle money, and especially business finances. You can also find/hire a financial advisor to help you with any financial questions you might have. Simply understanding the basics of business finance makes you more than ready to take your business to the next level. Outlined below are a few tips and several factors to consider when starting a business.
1. Understand Your Family’s Tolerance for Financial Risk
Starting a business comes with several risks. One of those is the inability to generate profits for the first few months. The small amount the company produces goes towards paying for expenses, staff, leaving you the last to be paid. The volatile business environment can also make your life somewhat miserable at first. Although there are numerous benefits of owning a business, you still need to know what you and your family’s financial tolerance is. Be sure everyone involved can handle the risks involved both emotionally and financially, and especially during times of uncertainty.
2. Know How Much Is Needed to Fund the Business
Start up business consultants at Lend say, estimating realistic startup costs is one of the key elements of your financial plan. Look for ways to cut down on costs in favour of essential business processes such as marketing, inventory, and supplies. Consider second-hand equipment (but in excellent condition) rather than going for new equipment. This should see the business save a significant amount of money, which can be used to fund other processes.
You’ll also need to make realistic projections for the start-up. As promising as the market may seem, make it a habit of doubling expenses (and the cost of operation) and double/triple timeframes. This will provide some cushioning should the business take longer to pick, hence an excellent insurance policy, especially when running out of money, and time.
3. Understand the Relationship Between Various Business Structures and Taxes And Liability Protection
The legal structure of your business can affect your taxes in several ways. The most common types of business structures include partnerships, sole proprietorship, corporations, and LLCs (Limited Liability Companies), among others. You, however, should choose the right structure for your business to avoid tax implications and for liability protection. Identifying the number of owners, liability, and risk protection, as well as tax benefits and consequences, should help you identify the right legal structure for the business.
To understand this better, take an example of a sole proprietorship. You, the owner, will be liable to all taxes and everything that the company owes or does. A company, on the other hand, can have several owners, hence can only be taxed as an entity. This means the company will be taxed, and so are the owners according to their earnings. This might, however, mean double taxation for a C-corporation. Corporations, however, do offer some form of liability protection for the owners. Be sure to discuss the advantages and disadvantages of each entity with your attorney or tax accountant.
4. Learn How to Manage Cash Flow to Keep the Business Alive
This is the lifeline of any business. A business can lack cashflow while the paperwork shows profits trickling in. A good business owner knows how to manage cash coming in and cash going out of the business, and most importantly, keep the cycle going. The cash cycle starts from the moment you pay for raw materials or inventory, add value to the materials/inventory, and ends when you collect money in the form of sales. Many factors can, however, affect the flow of cash in the business. These include loans, how long it takes to turn your inventory into cash, and how long customers take to pay up. Formulating a cash flow projection can help you track transactions and even notice loopholes within the same. It can also help ensure you have the cash to pay your staff, vendors, and yourself.
5. Learn How to Use and Interpret Business Financial Statements
A business’s financial report card is made up of a cash flow statement, income statement, and balance sheet. The balance sheet contains everything about the company from equity (what it owes to the owners), liabilities (debts), and assets. You can use the balance sheet to track business progress, shoe its financial strength (in case you need a loan), and for forecasting. The profit and loss statement, also known as an income statement, provides a summary of expenses, income, and profits for a particular period. This is the document to look for to see if the business is generating profits or only making losses. The cash flow statement, on the other hand, shows the time taken from spending to getting the cash back. Allowing the shortest time possible to convert expenses into profits, or cashback is the key to staying in business. It also ensures there’s cash to pay your employees.
6. Understand the Importance of Business Insurance
Many business owners tend to overlook the need to have their businesses insured for liabilities. Business insurance is vital for the smooth running of a business. It protects you from factors such as property loss, general liability, professional liability, theft, hazards, life, commercial vehicles, officers, business interruption, and directors, among others. While buying cover for all these might be expensive, it would be wise to purchase protection for your business, at least against the most probable risks. Talk to a local insurance agent for more information on this.
These are just but some of the financial fundamentals that everyone should consider before starting a business. Having these in mind, and addressing them, increases your chances of success.
Article by John Pallister