Launching a new business is an exciting but challenging endeavor. While passionate about their ideas, many entrepreneurs struggle with the financial management aspects. This article outlines critical tips for budgeting, funding, accounting, spending, and managing the monetary side of entrepreneurship.
Creating a Budget
Budgeting allows you to allocate resources efficiently. Best practices include:
- Calculate both one-time startup costs and ongoing operational expenses. Include room for unexpected costs.
- Break costs down in detail rather than budgeting lump sums. Know exactly where money goes.
- Establish separate budgets for essential spending categories like salary, rent, inventory, marketing, outsourcing, etc.
- Use past spending patterns of similar businesses to estimate realistic amounts for each category.
- Maintain a separate emergency budget with extra cushion to handle unplanned expenses or shortfalls.
- Continually monitor and adjust your budget against actual spending. Achieve consensus with partners on any changes.
- Optimize the budget to spend less on non-essential items and direct maximum funds toward growth.
Budgeting is vital for entrepreneurs both for managing limited funds and for seeking investors. Rigorous financial diligence signals business acumen.
Exploring Funding and Financing
With a budget set, you can calculate exactly how much funding you need and explore financing options:
- Personal savings – tapping your own reserves lets you retain full control but limits scale.
- Business loans – banks offer small business loans but can be difficult to secure without existing assets.
- Crowdfunding – websites like Kickstarter and Indiegogo pool small investments from many backers.
- Angel investors – high net worth individuals who exchange funding for equity.
- Venture capital – established VC firms provide substantial funding but may dictate decisions.
- Business partnerships – joining forces with aligned entrepreneurs can expand capability.
- Grants and incentives – federal or state programs offer non-dilutive funding in some cases.
Likely the ideal approach combines multiple sources appropriate for your needs and growth stage.
Maintaining Bookkeeping and Records
Meticulous financial record keeping is imperative. To start:
- Establish an accounting system like QuickBooks for managing income, expenses, payroll, taxes, and invoices.
- Set up merchant accounts as needed to accept credit card payments from customers.
- Send out invoices immediately upon delivering work or products to customers. Follow up on late payments.
- Sync accounting software with business bank accounts and credit cards. Scrutinize every transaction.
- Organize receipts and documentation supporting all expenditures if needed for proof or taxes.
- Hire a qualified freelance accountant or bookkeeping service to handle record keeping.
- Stay current on taxes, securing an Employer Identification Number, filing quarterly, and setting aside a percentage of revenue to cover taxes owed.
Robust bookkeeping habits prevent headaches at tax time, helps spot problems early, and establishes credibility.
Be judicious and strategic with spending without unnecessarily depriving essential growth functions:
- Allocate the majority of resources toward activities directly generating revenue like product development and marketing.
- Automate workflows for order fulfillment, customer onboarding, and other processes to lower labor costs.
- Scrutinize recurring software subscriptions and terminate any not utilized sufficiently to warrant the costs.
- Pay close attention to waste and overspending on supplies, consumables, fees, and other operating expenses. Cut any excess.
- Take advantage of free marketing channels when possible like social media, organic SEO, and word of mouth.
- Negotiate vendor and supplier contracts aggressively to lower per unit costs on recurring purchases.
- Set policies on employee travel, expense reimbursement, and petty cash funds limiting unnecessary discretionary spending.
Continually optimizing spending prevents margins from deteriorating over time as businesses scale.
Managing Income and Cash Flow
Aside from containing costs, also boost income:
- Conduct sales training to maximize conversions and order value. Offer incentives for top performers.
- Diversify your revenue streams across multiple products, service tiers, markets, and even business models if appropriate.
- Focus sales and marketing during periods that typically see seasonal spikes in your industry.
- Extend payment terms for clients without hampering relationships to sustain cash flow.
- Offer small discounts for annual subscriptions versus monthly payments.
- Explore business loans or lines of credit to bridge cash flow gaps and handle unexpected dips.
- Monitor aging accounts receivable reports and immediately follow up on late customer invoices.
Healthy cash flow is imperative to cover ongoing operating expenses, payroll, taxes, and other obligations in leaner months.
Comparison Between Bootstrapping and Venture Capital
|Funding Source||Founder’s own funds and cash flow||Institutional investors|
|Cash Needs||Can scale slowly with less funding needs||Requires large upfront financing|
|Founder Control||Full strategic control by founders||Investors gain voting shares and influence|
|Exit Prospects||Lower startup valuations and slower growth on average||Higher growth and exit valuations expected|
|Risk Tolerance||Less risky since less outside investment at stake||High risk – investors expect large returns|
|Industry Fit||Better for businesses with lower overhead||Often vital in high upfront cost industries|
Bootstrapping offers full creative freedom but scaling is slower. Venture capital fuels rapid expansion yet founders sacrifice some control and ownership.
Comparison Between Debt and Equity Financing
|Metric||Debt Financing||Equity Financing|
|Structure||Loan with principal and interest payments||Investors gain ownership stake|
|Collateral||Often required to secure loans||No collateral required|
|Loss of Control||No loss of control||Investors gain voting rights and control|
|Payments||Fixed loan payments regardless of cash flow||No set payments to investors|
|Risk Tolerance||Lower risk aversion needed||Requires accepting further dilution of ownership|
|Tax Treatment||Loan interest is tax deductible||No tax deduction for equity investors|
Loans must be repaid on fixed schedules while equity does not. But equity involves relinquishing partial ownership and control of your company.
Frequently Asked Questions
What is the #1 cause of small business failure?
Running out of cash and poor financial management cause the vast majority of small business failures. Insufficient capital and lack of budgeting undermine success even for promising ventures.
Should entrepreneurs pay themselves a salary?
Yes. Pay yourself enough to cover living expenses from the start. For bootstrapped companies, founders often take low salaries until growth supports higher pay. With funding, market rate salaries help secure top talent.
How much financial oversight is needed?
Significant oversight is essential. Review budgets weekly, key metrics monthly, quarterly taxes, and conduct audits annually. Use business software to manage finances, run payroll on time, carefully select your accountant, and keep detailed records.
What financial projections are required for investors?
Thorough pro forma financial statements modeling costs, revenue, gross/net margins, cash flow, and profitability for the next 3-5 years. Be conservative with assumptions and detail the key drivers. Demonstrate appealing growth and profit over time.
Should entrepreneurial ventures be structured as LLCs or corporations?
Startups typically incorporate as C-corps which enable issuing stock to investors. LLCs offer pass-through taxation and less paperwork but don’t facilitate equity financing needed for rapid expansion.
How much accounting should entrepreneurs learn?
Mastering basic accounting like financial statements, taxes, recording transactions, and cash flow gives you greater oversight. But advanced topics like auditing or managerial accounting can be handled by an accountant.
What government resources help small business financial management?
The Small Business Administration provides tutorials on accounting, budgeting, taxes, financing and other aspects of entrepreneurial financial management through local SBA offices and accelerators.
Should entrepreneurs avoid debt?
Not necessarily. Responsible debt like term loans or lines of credit can provide needed operating capital. But avoid high-interest, short-term financing like credit cards or payday loans. Seek advisors to structure debt beneficially.
Which financial metrics matter most?
Focus on cash flow, operating costs, gross and net margins, customer acquisition costs, customer lifetime value, revenue growth, burn rate, accounts receivable, and any other metrics directly driving profitability.
What are red flags to watch for in financials?
Burning through funding too quickly, lack of cost controls letting expenses balloon, stalling revenue growth, accounts not being paid on time, debt payments being missed, and changing financial projections frequently are all worrisome indicators.