Many people think starting a business is highly risky. You’ve likely heard the daunting statistic that “half of all startups fail.” It’s true that financial problems like running out of cash, not being able to pay employees, or low product sales often lead to business failures.
To avoid these pitfalls, it’s crucial to set up a solid financial plan before jumping into your business venture. Here are six key financial steps to consider before you start your business:
1. BUILD A LARGE EMERGENCY FUND
Your business will inevitably face slow periods where expenses outweigh income. To handle these times, save up a substantial emergency fund before starting. How much you save will depend on your financial situation. Consider keeping separate funds for personal and business needs, like setting aside five months’ worth of personal expenses and three months’ worth of business expenses in different accounts. Review your regular spending and save enough to cover emergencies comfortably.
2. SETTLE OUTSTANDING DEBTS
When I started my online business, I had some debts, although they were minimal. I aimed to clear as much debt as possible to ease financial pressures. Starting a business requires capital for things like official registrations, startup supplies, and equipment. It’s best to fund these expenses with cash flow, but paying off high-interest debt first can help. Create a plan to repay these debts, and once a debt is cleared, you can reallocate that money back into your budget or savings.
3. START SELLING TO YOUR TARGET AUDIENCE
I’ve seen many new business owners get caught up in perfecting their website, branding, and social media presence, neglecting a crucial question: Will their products or services sell? Focus on identifying your target market and start marketing and selling to them. Understand their needs and tailor your offerings accordingly. Test your products or services by working with clients alongside your current job to gauge potential profitability. I waited until my business income significantly surpassed my full-time job income before fully committing. Knowing you have a viable concept and a supportive customer base is key to your business’s success.
4. CONSULT A TAX EXPERT
As an entrepreneur, you’ll be responsible for handling your taxes. When I started, I knew little about this aspect, but I was lucky to get advice from a CPA who guided me through it. Connect with a reliable tax professional early on. Their advice on monthly tax savings, quarterly contributions, and more is invaluable. It will save you a lot of trouble come tax time.
5. CALCULATE AND MONITOR BUSINESS EXPENSES
Before you launch your business, create a detailed budget. List initial setup costs, recurring monthly expenses, and occasional yearly expenses. For example, my business requires payments for software, training courses, email marketing, and contractors, with monthly expenses staying under $1,000. An accurate and realistic budget helps manage your finances and provides a clear picture of your business’s financial health.
SUMMARY
Starting a business is hard work but also incredibly rewarding. Make sure to thoroughly consider the financial aspects before diving in and take the necessary steps to prepare yourself financially. Pick one piece of advice from above and start focusing on what’s most relevant to you.