Surviving financially can be a challenge for people who are starting a business for the first time, so understanding the basics can become critically important. Below are 10 financial survival tips that can help!
Let’s begin . .
1. Develop a Budget
Budgeting for your business is possibly the most important thing you can do for long-term success.
A budget is a clear, detailed plan for expenditures, which can be done on either an accrual or cash basis. For a clearer picture on liquidity, a cash budget is usually more effective for a new business. A cash budget will only plan for items for which cash has flowed into or out of the business.
Start with expenses separated into three categories.
- Fixed expenses – these do not change (e.g. rent, leased items, and insurance).
- Variable costs – related to sales volume (e.g. raw materials and shipping to meet sales demands).
- Semi-variable costs – costs that can be adjusted depending on volume of business (e.g. advertising and salaries).
If creating a budget is new for you, there is good basic information originally posted by the Small Business Association that may be of help in this article: How to Build and Use a Business Budget That’s Useful All Year Long. Plus, check out a more recent article posted February 4 2020, A How-to Guide for Creating a Business Budget.
Maintaining a good short- and long-range financial plan enables you to control your cash flow instead of having it control you. During the first year or two, it is unlikely that you will realize much (if any) profit. This does not usually happen until you have built up a steady cash flow.
2. Review and Revise Your Budget
Review your budget on a monthly basis. Update it based on the activity of the last month. Make adjustments for changes – and there will be changes, such as new staff members (expense) and new clients (income).
3. Use Accounting Software
It is not possible to completely automate your financial operations, but automating what you can will make managing your finances much faster and easier.
4. Plan for Major Expenses
Take an inventory of what you have and what you will need over the coming year. List all major expenses, e.g. computer upgrade, necessary software, subscription services. Map out the purchases on your calendar as far in advance as possible so that you have time to budget for them – and have the money to pay for them. When you plan ahead this way, you eliminate some of the sudden surprise expenses that take money from other important areas.
5. Estimate High
When estimating variable costs – go high – things almost always cost more than you expect. After you have developed you advertising and marketing plan and estimated the cost – double it. Estimate Legal and licensing expenses – and triple them. They may not cost that much; but it is far better to have unexpected money left over than it is to have expected expenses that must be paid.
6. Establish a Line of Credit
When things are going well and there is no need for extra cash, arrange a line of credit with your bank. This is a preventative act that will cover the business when you experience a shortfall, which happens to every entrepreneur at some point. Setting this up when things are good is important because banks are hesitant to lend to creditors who need the cash immediately. It is much easier to establish a credit line when you don’t need it and then, have it available if you do need it.
7. Establish a Regular Billing Cycle
If you are not a cash up-front business, be sure that you have very clear billing policies. When you are set up to receive payments later, you are, in essence, extending credit to your clients. Like any creditor, you need to invoice them on a regular basis and have a solid, clear policy for dealing with late payments. Unpaid invoices (Accounts Receivable) can create huge cash flow problems if you allow them to get out of hand.
8. Plan for Taxes
Taxes are an absolute and must be part of your financial plan. Tax season comes around every year at the same time, so plan ahead. A huge tax bill can be financially devastating if you are not prepared.
You need to plan for income tax (federal and state), plus sales tax (if you business requires that you collect it). Set aside tax money regularly. Be generous in your income tax estimates and accurate on your sales tax collections.
Put together all the resources you need to keep you tax payments accurate and up-to-date, including a good accountant and legal help.
9. Keep Good Financial Records
Make sure your financial records are accurate and complete. As you set up your record-keeping, think in terms of preparing information for a banker who will be checking your records in order to provide you with a loan. In fact, thinking about a future banker’s perusal of your records can help you continually make sound financial decisions.
10. Backup your Financial Paper Work
Scan all financial paper work and back it up. This makes it easy to store and easy to retrieve. It also makes is simple to share the information with potential lenders, investors, and others who need to see them. You will be glad you took this step if you ever get audited.
Using these 10 financial survival tips wisely can mean the difference in the success or failure of your business. If you can’t implement them by yourself, be sure to get the necessary help.
Related Article: 2020 Small Business Marketing: Everything You Need to Be Competitive