Financial Planning for Startups: 6 Essential Tips for New Entrepreneurs

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Starting a business is not for the faint of heart. Bureau of Labor Statistics data shows that about 20% of all new businesses will fail in their first year. That represents a lot of hard work, passion and money that, for one reason or another, fails to result in a tenable business venture. If you’re an entrepreneur, you want to avoid that fate and have a thriving business — and not just a life lesson — at the end of your first year.

Keep reading for an in-depth look at six essential tips you’ll need to know to properly manage your new business, including things you can do to attract investors, knowing when to hire professional help and more.

Keep Your Business and Personal Finances Separated

This is the first item on this list because it’s an incredibly common error among startups. You’ll be tempted to cover business expenditures with your personal funds for a variety of reasons, whether it’s easier, more convenient or “no big deal” to pay for a small purchase now and then.

There are a lot of very good reasons not to do this. It muddies the waters when it comes to preparing accurate financial documents, makes proper management of your finances more difficult and can lead to tax and even legal complications. Always separate personal and business spending so that if your enterprise does fail, it doesn’t take you with it.

At the very least, you’ll want a business bank account with a debit card that you use exclusively for business transactions. Getting a business credit card is also a good idea to help keep your cash flows separated and build business credit.

Create a Detailed Business Plan

This is as much for your use as it is for lenders and investors. You won’t be able to make a compelling argument for why someone should trust you with startup money if you don’t understand every detail, and nothing shows understanding like a well-thought-out business plan.

There are various ways to create this essential financial document, but every business plan should contain financial projections for a few key elements. Those are:

• A sales forecast: This is an estimate of how much revenue you expect your business to generate. Though every financial projection is essentially a best guess, base this on as much hard data as you have at your disposal.
• An expense budget: This is a detailed list of your operating costs, broken down by category and including both fixed and variable costs.
• A balance sheet: This is a big one, and it can help you get a clear picture of how viable your business really is. List all of your business’s assets, liabilities and the value of any equity your business owns to understand — and demonstrate — the net worth of your enterprise.
• A profit and loss statement: Last but certainly not least, you’ll need a detailed profit and loss projection. Estimate your earnings, subtract forecasted costs and demonstrate reasonable and realistic profitability.

Remember, this is just as much a road map as a document to show the bank. Take your time on this step, double-check your figures and understand every detail.

Bootstrap Initial Costs

Bootstrapping, or using your own money to fund the initial phase of business growth, isn’t a bad idea — as long as you make meticulous records of how much money you invest in the business and keep your personal and business finances separated.

Bootstrapping usually helps identify the core components of your business and leads you to create a lean and efficient structure that can appeal to investors when you are in a position to seek outside funding.

Diversify Your Funding

Most businesses need to be able to raise external capital when it comes to scaling up their operations. Different options are available here, and you should examine each carefully to determine which ones you’ll want to pursue.

Whenever possible, try to get funding from as many sources as possible. This minimizes the amount you’ll need to secure from each source and improves your chances of successfully raising the money you need.

If you opt for venture capitalists or “angel investors,” be aware that the funds they provide usually come at the expense of equity and the right to influence business decisions. This can be a blessing or a curse, so proceed with caution.

Small business loans can be an option if you have some credit history and a solid business plan, but these come with the added cost of interest and represent additional monthly overhead.

Get Professional Financial Help

Unless the business you’re starting is an accounting firm, you’ll likely need support from experienced professionals when managing certain elements of your business’s finances.

You may not need full-time staff at first, but consider hiring an accountant or financial advisor on a contract basis. They’ll be able to guide you through some of the trickier aspects of running a small business.

Even if it’s only a quarterly or monthly review, it’s the best way to stay informed about your business’s financial health and to identify any problems before they get big enough to cause damage.

Stay on Top of Business Taxes

New business owners may not be aware of the different regulations governing business taxes. Many businesses are required to file quarterly taxes, and you’ll need to account for income, payroll taxes, sales and, in some cases, excise taxes. It’s a lot to keep track of, which is another reason professional help can make a big difference.

If you can’t afford to hire an accountant or other financial professional, at least consider hiring a tax preparer who specializes in small business taxes. To make that person’s job easier, keep detailed and complete records of all business transactions, including receipts and invoices.

Ask whomever you’re entrusting with your taxes about any deductions, incentives or tax credits your business may qualify for.

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