Money management is an essential part of running any successful business, but entrepreneurs often start their business with little understanding of making solid financial decisions. Managing your finances is about more than paying taxes and bookkeeping — although those are also important to have a sustainable business. It’s about managing your cash flow, preparing for income fluctuations, and having the resources to take advantage of opportunities.
Here are six money management tips first-time entrepreneurs should follow to increase their chances of success.
Have a budget
An essential step in being on top of your finances is having a good budget. Knowing how much money you have, where and how you spend it, your limits on how much you want to spend, and where the money is coming from gives you vital information about your profitability. That data can then help you make operational decisions about your company—such as where you should save money and when you can spend more.
Having a budget and accurate records helps to keep your business—and your finances—on track. Every important financial decision should be weighed against your budget.
Start an emergency fund
Your emergency fund doesn’t need to hold a large amount of money but will be there for you in case of a sudden emergency. Even highly successful businesses have periods where they can struggle financially—often due to circumstances out of their control, such as shifts in the market or even a pandemic. An emergency fund can be what helps your business survive during these times. It can also provide you with the needed cash to take advantage of unexpected opportunities.
Don’t spend too much
New entrepreneurs can feel tempted to grow their business too quickly, make significant but not needed purchases, or hire too many staff before they have the financial stability.
Wait until you have a steady, reliable cash flow to make significant changes to your company. At least in the beginning, it’s essential to take time to focus on the necessities for running your business and get to know the business cycle. Avoid spending large amounts of money until you know when the slower times are and when the busy periods tend to be —and how drastically they will affect your finances.
Plan ahead for any large expenditures and establish guidelines for when you will start spending more money, for example, after a set period of stable income. Make sure you stick to the rules you’ve set out for yourself.
Hire an accountant
An experienced accountant will help you take advantage of deductions and understand tax laws. Without an accountant, you could find yourself facing an unexpected and very unwelcome surprise when your taxes are due. Unfortunately, it’s also easy to make costly mistakes if you do your own taxes.
Tax regulations and laws can affect everything from your company’s ownership structure to the best ways for you to spend your money to help decrease your financial obligations at tax time. Spend time finding the right accountant for you and your business. Once you have found them, hire them and get to know them well. They will be the ones to give you the right tax advice.
Keep your business and personal finances separate
It can be tempting to mingle your business and personal finances, especially if you are only a small business. But, unfortunately, doing this means you don’t have accurate financial information either about your business or yourself.
It’s also important to make sure you pay yourself an income from the business. This helps ensure you’re financially stable. Unfortunately, combining your business and personal finances means you aren’t paying yourself. Instead, you keep whatever is left over after everything else is paid for. This leads to situations where your business becomes unsustainable because all your money goes into the company, leaving you with nothing to live off.
Open a business bank account and draw your wage from that.
Maintain a good credit score
Good credit is vital for entrepreneurs. It establishes your creditworthiness and helps you apply for loans, open accounts, and maintain a steady cash flow. Therefore, it’s crucial you know your credit score and maintain a good rating.
If your credit score is low, focus on paying bills on time and regularly double-check to ensure that your credit report is accurate and up-to-date.
Final thoughts
Mistakes with your finances may be a recipe for disaster. By following the tips above, you can protect yourself from making devastating financial errors. You’ll also have factual information about the financial health of your business so you can make informed decisions.
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