There are a lot of factors that can contribute to your new business’ chances of success, but none are as important as financial management. You may have decided to open a restaurant because you can cook, or a photography studio because you’re great behind a camera, but starting a business won’t automatically turn you into an accountant. Here are five ways four entrepreneurs learned to manage their finances.
Budgeting is your best friend
The most important part of any financial plan is a budget. But how do you budget when you have no clue what’s going to come in? One of the easiest places to start is to minimize your personal expenses as much as you can. A budget shouldn’t be considered a plan for where to spend every dollar, but rather the framework to help you make rational decisions about how your money is going to be spent.
Create categories that include housing costs, transportation, groceries, memberships, and entertainment, and then come up with ways to reduce costs in each category as much as possible. Once you’ve done that, figure out how much you’ll need to make to cover those costs and still have money left over to save or invest back into your business; this should be your goal for profitability.
Holly Black, a Strategic Brand and Marketing Consultant, has spent her time as an entrepreneur learning how to manage her finances after deciding to pursue her dreams of becoming a “Digital Nomad.” She has found that a budget should be used as a guide, allowing yourself the flexibility to make adjustments when and where necessary as you go along. “But,” she says, “never abandon the budget.”
“Always know what’s coming in versus what’s going out. Make sure your essential overheads are covered, or that they can be covered by an emergency fund if there’s a revenue dip.”
Which bring us to our next tip:
Maintain an Emergency Fund
What do you do if (or more likely, when) your business goes through a slow period and you can’t turn a profit? Or, if your worst nightmare comes true and your business isn’t successful? These are scary thoughts, but the reality is they’re very common scenarios for a lot of small business owners who can’t ensure a steady or consistent income.
An emergency fund can help you get yourself out of a tough situation. Once you’ve figured out how much money you’ll need to cover your business and personal expenses for one month, multiply that by six, and make sure you always have that much in your emergency fund.
During slower months, or when you come across unplanned expenses, you may need to draw upon your emergency fund. That’s fine, (that’s what it’s there for!) but make sure you’re always replenishing those funds to protect yourself against future unforeseen costs or circumstances.
“I always ensure that I have a certain amount [of money] in the bank that makes me feel safe should things slow down. When I was still in school, a professor told me that if I wanted to freelance, I should get myself a good line of credit as a safety net. I have one of those too, just in case. Obviously, the goal is to never have to use it.”
Hire Professionals When You Need Them
Chances are, if you’re reading this list you’re probably not an accountant. While it’s common for entrepreneurs to try to handle everything on their own (especially when trying to minimize costs), attempting to manage your own books or file your own taxes could actually end up costing you far more in the end. Spending money on a professional will often help you save money (and will always help you save the headache). Accountants will not only find you more deductions and tax savings, but will also ensure you remain penalty-free and don’t get yourself into trouble inadvertently.
Tara Gosling opened her hair salon, Blind Tiger, over five years ago. Although she is confident in her skills as a hair stylist, she has never been confident with her bookkeeping.
“The hardest part for me has always been staying organized with my bookkeeping, and it’s something I still struggle with now. It makes a huge difference and relieves a lot of stress, especially come tax time, to have everything written down clearly. If taxes, bookkeeping, or numbers are not your strong points, pay a professional to help you! I wish I had done that my first year.”
Set Money Aside for Taxes
Getting your ducks in a row for tax season can be challenging, frustrating, and a few other adjectives we’d rather not spell out. Something as minor as a lost bill or receipt can have a damaging effect on your tax filing process and may even get you into big trouble.
Nobody likes paying taxes but the reality is, none of us can avoid it. The government isn’t forgiving; when you owe, you owe, and you don’t want to be blindsided by an expense you didn’t expect or see coming. Your rates will be different depending on your location, but the general rule of thumb is to set aside at least thirty-five percent of your income for taxes.
“Don’t neglect your taxes. I can’t stress that enough. It’s tempting to think, ‘I’ll just write off a bunch of expenses and that will cover it.’ Sometimes it won’t, and you should definitely be putting money aside for [your taxes],” says Izabela.
Holly agrees. “Do your taxes as early as possible, that way there will be no nasty surprises and you can forecast how much extra income you may need to cover when the payment is due.”
Make Sure You’re Getting Paid
There’s nothing that feels as good as knowing you’ve made a client happy with your services. Except of course, knowing that they paid their invoice for said services on time.
When you’re running your own business, client payments are your lifeline. If your invoices don’t get paid, your bills don’t get paid, and if your bills don’t get paid, your business can’t run. One of the most important things you can do is have a clear and defined payment policy in place. Your clients should know what payments are due, when they’re due, how they can be paid, and what happens if payments are late or missed.
You can’t force anyone to make a payment, but what you can do is:
- Send invoices as soon as you can
- Set payment timelines that ensure payments aren’t forgotten
- Follow up on sent invoices or late payments
Ancil Payne, co-owner of production management company Fountainhead Concept Ltd., helps us understand why getting your clients to pay on time is so important.
“The hardest part financially of running your own business is the unpredictability of client payments. In the beginning, when clients aren’t paying on time, you find yourself paying out everyone else, leaving you with just enough to keep your doors open. [When clients pay you late] you may find yourself incurring debts because you’re paying your own loans or bills late.”
Running a business isn’t easy; that’s why not everyone can do it. Successful entrepreneurship requires focus, dedication, and passion, and of course, a few ways to deal with the ups and downs of your cash flow. We’ve tried to help with the latter so you can spend more time focusing on the former.