Starting a business can be an exciting opportunity for entrepreneurs or for teams of individuals looking to create the next successful startup. But one of the biggest challenges that new businesses face is in financial management.
Whether you need to secure capital, make the right investments, or generate cash-flow, there are a number of problems that you can potentially encounter. Here are some common financial mistakes and some helpful tips for how to avoid them.
1. Save money and build a cash reserve
Before you decide to start a business, make sure you have enough money and a cash reserve to cover your costs and keep you afloat during the early period when revenue and profits have not begun or you are slow to generate them.
Total all of your monthly expenses, including your personal expenses beyond your business. If you are still working another job, start setting aside a small percentage of your net pay to save toward your new business. Start right away and set goals to create a nice cushion of savings. Once you’ve started your business, whenever you draw cash from the company for compensation, always set aside money for taxes. This will help you avoid problems with a hefty tax bill in the future.
2. Pay attention to your debt-to-income ratio
Credit card debt, student loans, and other debts can hurt your chances of securing financing for your business. They can also create unwanted financial strains that limit your ability to invest personal capital in your business and put pressure on your to use profits to pay off debts.
Try to pay off or minimize your personal debt before you go into business or as soon as you can after starting up. Even if you’re not looking for business loans in the foreseeable future, you may want to pursue an injection of capital in the future, and a good credit score and debt-to-income ratio will give you a much better chance of success.
3. Minimize your investment and spending
Whether you are using cash reserves, credit cards, or personal savings to finance your new business, it’s critical to avoid unnecessary costs and over investment.
There are a number of common traps in expenditures including posh office space and expensive computers and software. Minimize your spending by starting your business from home or online and using refurbished or less expensive computer equipment. There are also many free and inexpensive online software solutions that can save you money in running your business.
For example, for invoicing and billing, use a free online invoice creator. A web-based solution like an online invoice creator can generate professional quality PDF invoices that help you automate your billing and streamline your accounting at no cost to your business.
An online invoice creator provides all the tools you need to implement the best practices to help you get paid faster and more reliably by your clients and customers.
4. Keep personal and business finances separate
To reduce your personal liability, especially if you are incorporating your business, and to make it easier to track and manage your accounting, keep your business finances separate from your personal finances.
This helps you manage your taxes, bills, and other payments, and it’s important in creating credibility for your business and keeping things organized.
5. Get financial advice
When you’re starting a new business, you may think that hiring an accountant or tax advisor is an unnecessary or excessive cost. But it often pays to consult an expert to make sure that you are compliant with all tax regulations and help you avoid the common problem of paying too much in taxes.
Many tax franchises like H&R Block offer free consultation and advice for basic questions, and they can help you understand your tax liabilities and also the potential tax right-offs, deductions, and savings that are available to you and your business.
6. Make sure to pay yourself
Of course, it’s always good to reinvest profits in your business to drive future growth and expansion. But never forget to compensate yourself and address your personal financial needs.
Pay yourself a sensible salary based on what you need to keep your personal finances healthy and to avoid any need to draw emergency funds from your business if problems arise.
As a general way to set your salary, you can base it on a percentage of your profits. But, if you don’t have annual profits or history to call upon, you’ll have to do your best to choose a tentative salary based on the data you have and future projections.
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Since 2012, InvoiceQuick.com has provided a free online invoice creator for startups and businesses of all sizes and stages of maturity.
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