Financial management is a vital part of running a successful business, but often entrepreneurs start their business with little understanding of how to make solid financial decisions. Managing your finances is about more than bookkeeping and paying taxes—although those are also important to a sustainable business. It’s about managing cash flow, preparing for income fluctuations, and having the resources to take advantage of opportunities.
Here are 6 money management tips first-time entrepreneurs should follow to increase their chances of success.
1. Have a budget
A key step in being on top of your finances is having a budget. Knowing how much money you have, how and where you spend it, your limits on how much you’ll spend, and where the money is coming from gives you crucial information about your profitability. That data can then help you make vital operational decisions about your company—such as where you need to save money and where you can spend more.
Having a budget and accurate records helps you keep your business—and your finances—on track. In fact, every important financial decision should be weighed against your budget.
2. Start an emergency fund
Your emergency fund doesn’t have to hold a large amount of money, but it is there for you in case of sudden emergencies. Even highly successful companies have periods where they struggle financially—often due to circumstances well beyond their control, such as market shifts. An emergency fund can help your business survive during times when income drops. It can also provide you with needed cash to take advantage of an unexpected opportunity.
3. Don’t spend too much
New entrepreneurs might feel tempted to grow their business too quickly, make significant but unnecessary purchases, or hire too many people before they have the financial stability to do so.
Wait until you have a steady, reliable cash flow to make big changes to your company. At least in the beginning, it’s important to take time to focus on the necessities for running your business, and get to know your business cycle. Don’t spend large amounts of money until you know when your busy periods are and when the slower times tend to occur—and how drastically they affect your finances.
Plan ahead for any massive expenditures and establish guidelines for when you’ll start spending more money, for example after a set period of stable income. Then, stick to the rules you’ve set out for yourself.
4. Hire an accountant
An experienced accountant can help you understand tax laws and take advantage of deductions. Without an accountant, you could find yourself facing an unwelcome and unexpected surprise when your taxes are due. You can also make costly mistakes if you do your own taxes. Don’t forget to put funds aside to cover tax when it is due later.
Tax regulations can affect everything from your company’s ownership structure, to the best ways for you to spend your money so you can decrease your financial obligations at tax time. Hire an accountant and get to know them well, so they can give you tax advice that meets your specific needs.
5. Keep your business and personal finances separate
It can be enticing to mingle your business and personal finances, especially if your business is very small. Doing so, however, means you don’t have accurate financial information either about your business or about yourself.
It’s also vital to make sure you pay yourself an income from your business. This helps ensure you’re financially stable. Combining your business and personal finances means you aren’t paying yourself. You’re just keeping whatever is left over after everything else is paid for. This leads to situations where your business becomes unsustainable because all your money is going into the company, leaving you with nothing to live off.
Open a business bank account and draw your salary from that.
6. Maintain a good credit score
Good credit is essential for entrepreneurs. It establishes your credit worthiness and enables you to apply for loans, open accounts, and maintain a steady cash flow. It’s crucial you know your credit score and maintain a good rating.
If your credit score is poor, focus on paying bills on time and double check to ensure that your credit report is accurate and up-to-date.
Mistakes with your finances can be a recipe for disaster. By following the six tips above, you can protect yourself from making devastating financial errors. You’ll also have solid information about the financial health of your business so you can make informed decisions.