It’s not breaking new to learn that running a business involves keeping a constant eye on your finances. If you’re new to being an entrepreneur, however, you may not be aware of all the financial hurdles that lie in wait for you and your business.
There are some obvious costs you’ll have to cover in the beginning—things like rent and overhead if you have a brick-and-mortar location, or platform fees if you’re starting an ecommerce business. But there may be some surprises along the way as well.
This isn’t a list of dos and don’ts as much as a reminder to be careful and diligent about the following expenses and other financial burdens. Here are seven things to keep in mind about your finances when starting a new business:
Separating your business and personal finances
Whether you’re a sole proprietor working out of a home office, or the soon-to-be leader of a robust team working across several locations, this rule is the same: Your business and personal finances should be separate.
It’s tempting at times to put the occasional personal expense on your business credit card to get the points, or to forgo a business credit card entirely and put everything on your personal card. It can seem easier to have one card instead of two, or harmless to mix finances at worst.
But failing to separate your finances means that you’ll “pierce the corporate veil”—or become personally liable for your business’s debts, if or when those collect. You’ll also turn tax season into a nightmare as you parse out your occasional coffee or home decor expenses on your business credit card. Take the time to create a separate business banking option, avoiding this hurdle altogether.
Settling on the right business credit card
Speaking of business credit cards, they are one of the most powerful financial tools in an entrepreneur’s arsenal. But out of fear of owing too much to creditors, many small business owners avoid credit cards completely. That’s a mistake.
Even putting a few business expenses on a business-specific credit card each month can help you rack up reward points, add free insurance and purchase protections, and open the door to other perks. Plus, you’ll give yourself a small cash crunch cushion, with a few extra weeks to pay off expenses.
Your biggest dilemma? That might be choosing the right card. Do some research and decide what’s most important to you. Paying off existing business debt? Cash back on purchases? No annual fee? There are lots of options and they can all play a role in helping you succeed.
Getting paid on time
Unfortunately, your clients and customers may not always remit payment when you thought they would. Some clients will push your payment terms to the limit (paying you on day 30 of “net 30”), while others will promise to send the rest of what they owe “when they can,” which can be awhile.
Meanwhile, your cash flow (more on that in a minute) has come to a halt, and you can’t pay your own suppliers and employees.
To help move things along, use an online invoicing service that automatically bills clients, sends reminders, and gets your money into your account quickly. Also, create guidelines for your customers (including the addition of late fees or early payment discounts) that will encourage prompt payment.
Scaling production responsibly
Demand is spiking, and suddenly you need to boost production in order to keep up. This will spark some tough questions. For example: What if you don’t have enough cash on hand to get the order going? Or, what if you’re just experiencing a holiday rush and demand will subside come January—should you really invest in more warehouse space or machinery?
Rather than going through complete business upheaval in order to fulfill the orders, think carefully about how to proceed. Consider taking out a short-term loan (if the numbers work) to take advantage of the short-term spike. Explore more affordable and flexible deals with manufacturers who can scale with your needs. And start forecasting your demand so you don’t get caught flat-footed again going forward.
Building an emergency fund
Profit margins are often thin for small businesses, especially startups. So it can be difficult to justify the existence of an emergency fund.
But, just as in your personal life, you never know when a disaster might strike your business, from a website hack to a natural disaster affecting your storefront to robbery by an associate. And according to FEMA, about half of all small businesses never reopen after a disaster.
An excellent predictor of whether a business will stay afloat is if they get their doors open again right away—within five days, says FEMA. In order to do that, you’ll need an emergency fund or line of credit in your back pocket to order to fund repair and renewal costs.
An emergency fund is also useful in a cash flow crunch situation, in case you need to make ends meet at the last second.
Understanding your cash flow
Cash flow underpins most of the other hurdles listed here. If you don’t have a handle on your cash flow—the ratio of money going into and out of your business over a given period—then you can easily go bankrupt, even if your business is doing well.
That’s because cash flow is as much about when you get paid (or have to pay others) and how you pay them, than how much you’ll receive. You might have just closed a big deal with a new customer, but if their money doesn’t hit your account before it’s time to pay your employees or your rent, you’ll quickly find yourself under water.
Even the most cost-conscious small business owners invest in the help of an accountant for issues like these. Accountants can save you thousands of dollars by helping with budgeting, risk assessment, bookkeeping, and other services. Most small business owners consider their accountant to be their most important professional service, according to Wasp Barcode.
If you insist on doing everything yourself, make sure you know how to read a balance sheet, a profit and loss statement, and of course a cash flow statement.
Paying yourself a living wage
The easiest cost to overlook is the one you pay to yourself. Although it’s become romanticized to pay yourself next-to-nothing while starting your business, and while in many cases you won’t (or shouldn’t) pull a handsome salary until you are comfortable, it’s not true that you shouldn’t be able to live off what your business makes.
Figure out how much you need to live and pay yourself. You won’t last very long as a business owner if you don’t take care of yourself, and that includes giving yourself space (emotional as well as financial) to relax every once in awhile. Then, try not to touch that amount, even when times get tough—though your salary should never come at the expense of those who work for you.
***
Small business ownership is all about dealing with financial hurdles. Some of these issues may sneak up on you—and very few of these mistakes are ones you’ll be able to make more than once, if at
