If you want to start a business, the first thing you’ll need to do is create a business plan. You can do this even if you don’t have a company name or the training required to carry out the work – it’s a crucial component, and it must be in place if you want to move forward with your idea, especially if you think you might need to borrow money to fund your business either at the start or later as you grow.
However, although a business plan is crucial, it’s not the only financial element to consider as a new entrepreneur. There are many more, and each one is important. Therefore, you should understand as much about the financial side of your business as possible, even if you intend to outsource all of it to an expert. As a company owner, you must have your finger on the pulse of the money that goes in and out of your business if you want to understand how to grow and improve things. With that in mind, here are some financial pointers to consider that will help you on your entrepreneurial journey.
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Get Your Annual Accounts in Order
When you run a business, you’ll need to submit annual accounts. This is a legal requirement, and if you don’t do it, you could be subject to fines totaling a large percentage of your profits. Not only that, but your reputation as a business owner would be put in jeopardy.
If you’re not good with figures or not confident that you can do the right thing when it comes to all the complexities associated with tax, it’s wise to outsource this work. However, when you receive the reports back about what state your business finance are in – good or bad – you must read through them and try to understand as much as possible. This will help you decide what to do next and whether any changes are necessary. It will also mean you are paying the right amount of tax, which is crucial not just for legal reasons, but for additional borrowing too.
Track Your Income and Expenses
All business owners must keep track of their income and expenses within their business. Unless you do this, you might have the wrong idea about where your business is heading, potentially thinking it is doing better – or worse – than it is and making decisions based on that assumption.
Another reason for understanding your income and expenses is that, as a business owner, you’ll need to look at ways to reduce costs in your business to maximize your profits. If you don’t know what you’re spending your money on, or how much you’re spending, you won’t be able to accurately understand how to reduce costs. In the end, overspending in business is one of the main reasons many will fail, and if you don’t want that to happen to you, you need to understand your money better.
Create an Emergency Business Fund
Something that a lot of business owners won’t think about, either because they don’t want to acknowledge that things can go wrong or they genuinely haven’t considered that it might be a possibility, is having an emergency business fund in place. However, good business owners will create one of these funds to ensure that, if the business is slow for a short time or if there is an unexpected expense, they have the resources to deal with it. It can also help to prevent you from getting into too much debt; it would be better to use your savings than to borrow money, if that were a possibility.
Of course, it might take a little while before you can put any meaningful sum away into your emergency fund, but even a small amount each month – perhaps a percentage of your profits – will make a difference. If this sounds like it would be difficult to do, split your income differently. If you make most of your money through electronic funds transfers and only a small amount through cash, for example, put the cash element into your emergency fund. Don’t forget that every penny of income will be subject to taxation, however, so don’t forget to include in it your records, even if it is going into a savings account.
Reduce Your Debt
There is no shame in borrowing for your business. Many businesses would not be able to get started without some funding at the beginning, either through traditional lenders, investors, or peer-to-peer lending, for example. However, it is a good idea to pay back your debt as quickly as you can to reduce the liability on the company and free up your cash flow.
If you have any ‘spare’ income in any period and you don’t need it for anything else – always check that this is the case – then it can be a wise idea to use it to pay down your debt. Consider any early repayment fees, of course; they can be quite high. Make sure you are aware of what they are and budget for them. However, being debt-free in business, even if it means paying a little more when reducing your debt, will make any future borrowing much easier, and it will look impressive should you decide to sell the business at a later date.
Open a Business Bank Account
When you start a business, you want to go about things the right way. One of the things you’ll need to do in terms of your financials is to open a dedicated business bank account. Although it is technically possible to use your personal bank account for your business income and expenses, this is not a good idea. It can become very confusing, and you can easily overspend personally if you think you have money in your account that belongs to the business. This will then incur tax and cause cash flow issues that will have to be dealt with quickly, potentially through additional borrowing.
To solve these problems, and to look much more professional, it’s better to open a business bank account and keep it entirely separate from your personal one.