How To Prepare Financially For Building a Small Business
Making a leap of faith and leaving your main hustle for self-employment is an exciting and a big move.
You are entirely in charge of your activities as well as determining your financial future.
As exhilarating as it is, starting a business comes with its hurdles. A small business owner must be prepared financially to set the business off and grow it.
Taking time to prepare for your business ensures that your step of getting into business is as sure as it is realistic.
Once you’re financially set, you are left with optimizing profitability and your overall business success.
Here, we highlight six ways you can prepare financially to build your small business.
Have a savings plan
If you’re a business-minded person, you should know the value of every dollar you spend.
We know that as bills continue to pile up, it may make saving a non-existent vocabulary, yet your business needs finances to get it running.
Do you through in the towel? Certainly not! Get intentional about saving, develop a saving plan, and stick to it no matter what.
For example, you can commit 10% of every paycheck to a saving account.
To make it easy for you, instruct your bank to set aside 10% of incomes and to keep the rest available. You’ll be amazed at the results.
You will have funds for extra purchases, hiring the best talent, and securing the best software for managing the business.
Having a savings plan is key to building your small business.
Separate personal and business finances
As you strive to build your business, you’ll realize that you need to keep your personal and business finances separate.
This is because business should exist as a separate entity, whether it be a sole proprietorship or an incorporated business.
The first benefit of separating monies is taxation. You don’t want your personal monies to be subject to business taxation.
It would also make it easier to determine personal and business expenses and accordingly easier to file appropriate taxes.
Be sure to manage cash flow wisely
There are lots of reasons behind the failure of small businesses. But the most common one is a shortage of funds, often as a result of poor cash flow management.
Cash flow management involves understanding future expenses and comparing them with future revenues and accounts receivables/debtors.
By having a good awareness of your cash flow management, you will be able to keep your business financially healthy.
If there is a problem with cash flow, the business will likely suffer and risk closure.
It’s the cash that gives your business power—the power to hire the best talent, the power to purchase the best tools and machines, and the power to scale up business operations.
Build your credit score
Building business credit is important for building a strong business.
Even if you’re kickstarting your business, or you have some funds to help your business, at some point, your business will require a positive credit rating.
Sometimes a business would experience short term cash flow problems.
In such scenarios, a business can use credit rating to acquire financing.
A good business credit score can enable you to improve your cash flow and improve your credit rating.
Things that contribute to low credit rating include:
- Late payment of bills
- Applying for too high credit at the start
- Excessive usage of credit card
- Making massive credit cards purchases
- Laxity with checking your credit score report
- Canceling credit cards
- Missed loan repayments
The best thing to do to have a good credit score for your business is to pay bills and loans on time.
Always check your business credit rating twice a year to ensure that no errors or missing financial data.
Regularly review your credit score to ensure that your business is protected against identity theft.
In case you notice doors or missing data, you are free to launch complaints and have them rectified.
A good credit score is important as financial institutions look at your business through the lenses of your credit scores.
Automate your business accounting
As a small business owner, your business financial management is going to turn complex as the business leaps upwards.
You will soon need to track invoices, late payments, taxes, expenses, and others. This can get tedious, though it doesn’t need to be.
With the right systems, you can navigate the challenge with ease.
Some automation tools include:
- Freshbooks for invoicing;
- QuickBooks or Xero for income and expenditure recording and tracking income and expenses;
- Trello, Slack, or Basecamp for project management solutions.
These are just some of the many tools that are available. Many have free versions in addition to highly customizable premium versions.
As a startup, you may start with a basic version then upgrade to premium packages as your business scales up.
Get yourself a user-friendly business accounting system that is easy to use even if you are not an accountant.
You will be better able to manage your business with reports that can be generated at a glance.
Hire a certified public accountant
Finally, consider hiring a certified public accountant. Such professionals are versed with lots of knowledge concerning taxes and financial planning.
Most importantly, a financial expert will review your financial situation and provide advice on the best course of action to achieve the business’s long term plans.
She will help you to quickly identify gaps in your plans and points out any blind spots you might have missed.