Starting a business can be an overwhelming process, and that’s just considering the amount of work it takes to come up with an idea and put it into action. Thinking about financial best practices and how to manage money often gets pushed down the list of priorities, but it’s much easier in the long run to plan how you’ll manage your business’s money ahead of time. We asked Jeff Parker, Origin’s Senior Vice President of Commercial Banking, what an entrepreneur should know about managing his or her finances before starting a business. Here are his top 9 tips:
- Don’t commingle business and personal funds. It’s very important to ensure, both from a profitability standpoint and from a tax perspective, that your business accounts are separate from your personal funds.
- Buy accounting software and carefully track every business expense, even if you don’t keep detailed lists for personal expenses. It’s extremely important to understand exactly what it costs for you to run your business so that you can plan for the future. Plus, you want to keep tabs on your personal investment into the business. You’ll need to know this as you grow your business.
- Research your business structure carefully – your choice can significantly impact your finances in the future. At some point, you will need to decide if you need to incorporate your business. If you are unsure of how this will impact you, seek professional help from an attorney or a CPA.
- Get an unbiased opinion from a financial professional – don’t go it alone. Seek the counsel of a professional or someone who has been successful in your field. You may not think that you need help from a CPA or tax attorney as a startup company, but their advice can pay huge dividends down the road. Financial professionals can help steer you in the right direction because they have seen others take similar paths.
- Keep a safety net. Build an emergency fund before launching your business – don’t leave yourself without funds to fall back on should anything go wrong. You’ll sleep better at night. Unfortunately, unplanned events happen. Be prepared for them.
- Don’t build your business on credit card debt. For every story of a successful overleveraged entrepreneur, there are a handful of unsuccessful attempts that don’t make for interesting stories. Credit cards are not the way to finance a new company; they’re a very short term liability. They should be used as a tool to manage cash flow, not create cash flow. There is a big difference.
- Write-offs aren’t free. When you incur necessary expenses, writing them off is a benefit, but don’t make purchases simply because they can be written off. Deductions or write-offs are one thing that Jeff says drives him crazy. Just because you can write-off the purchase of a new vehicle or equipment does not mean you should buy it. You still have to pay for it! Take the time to compare the cost of the additional income tax versus the cost of the purchase. Most of the time it does not make sense to buy something just for a write-off.
- Separate your income into buckets: save for your taxes, save for the future, and set aside money for everyday life. Just like farmers set aside hay for the winter, so should an entrepreneur set aside money for future taxes or future needs. One suggestion is to set up separate accounts, then pay into these accounts when you can to save for future items like taxes, capital expenditures or personal needs/goals.
- Be realistic about the money you’re spending to get your business off the ground – your “burn rate” – so you don’t end up digging yourself a hole you can’t get out of. Always be honest with yourself. If you’re passionate about your business venture and can’t get it going yourself, sell your idea to others. Keep trying. You don’t have to do it alone.
At Origin, we always like to hear about people’s passion for their business. Even if the timing isn’t right for us to help with financing, we want to get to know you and your business and provide any expertise we can. If you have a question about small business finances we haven’t answered here, contact the Origin team here.