The Bureau of Labor Statistics reports that 20% of all new businesses fail in the first year. And then the failure rate increases from there, with statistics showing that 50% of new companies don’t make it past the 5th year. There are several reasons for startup failure, but the chief culprit is an unhealthy cash flow. This article provides some of the top financial tips for new entrepreneurs to help you keep your new business in the success column.
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Gain Financial Literacy
As a new entrepreneur, you have limited time and no margin for financial mistakes. So one of the best ways to keep your new business open is to be financially literate. If you didn’t learn basic accounting and money management skills in school or at home, you must get started now.
- Learn about budgeting, credit, money management, and investing
- Visit the IRS knowledge base to learn about small business taxes
- Research your state and local business tax regulations
- Consult with an accountant or tax attorney before setting up your new business to take advantage of the best filing status to minimize your personal and business tax liabilities
- Learn how employees, equipment, facilities, and other expenses impact your tax obligations
- Sit down with a CPA, take an online course, or invest in books.
2. Avoid Debt, Or Keep it Low
High on the list of financial tips for new entrepreneurs is avoiding debt. The Small Business Association says that private funding is the most common source of capital for new entrepreneurs. According to their data, 64.4% of new businesses use personal funds (or family funds) to launch their startups. But, be careful with the use of your private funds. If you go bankrupt, your entrepreneurship will be short-lived.
If you don’t have money sitting in the bank, there are other options:
- ROBS (Rollovers for Business Start-ups): you can tap into your 401(k) and use that money to launch your new business or purchase a franchise. It’s a complex procedure, but depending on how much you have invested in your 401(k), it’s a non-debt way to finance your new business.
- Equity financing: angel investing, venture capital, crowdfunding, you’ll give up sole ownership of your business, but you won’t have loan payments or credit card bills.
3. Make Sure You Have a Good Credit Score
If you intend to borrow money to help get your new business off the ground, you’ll need to have a good credit score. Banks hesitate to lend to new entrepreneurs because they don’t have a business revenue and success history. Therefore, their decision will rest on your personal money management performance. Responsible credit card usage, on-time payments, low debt-to-income ratio, all of these are indicators that you know how to handle money. Based on this, lenders and creditors might assume that you’ll also be a good steward of any credit given to your new business. Therefore, maintaining an excellent credit score is one of our top financial tips for new entrepreneurs.
4. Time is Money
In the beginning, you want to be frugal. However, at the same time, remember “time is money.”
- Is whatever you’re doing the best use of your time?
- Does it take you away from revenue-raising tasks?
- Is there someone else better suited to the task?
Avoid the trap of thinking that you can save money by doing a project yourself. If it will take a professional one hour to do the job, but it takes you three hours, it’s more than worth it to pay a contractor. Those three hours you spent doing the job yourself could have been invested in growing your business, customer recruitment, marketing, and branding.
5. Top Financial Tips for New Entrepreneurs: Your Cash Flow is Your Lifeline
If you run out of money, you won’t be able to pay your bills. When you reach this stage, it doesn’t matter how great your product or service, your business is finished.
Businesses that did the best job of weathering the pandemic were those with a healthy cash flow. They had money in the bank and were able to draw from it. As a result, they were better positioned to secure bank loans to make strategic investments and take advantage of emerging opportunities in the market.
A healthy cash flow empowers you to take advantage of supplier sales, buying in bulk, purchasing a franchise, or taking over a competitor location.
What’s a cash flow?
Cash flow is not revenue. It’s the money that moves in and out of your business every month. You can pay your suppliers, rent or mortgage, employees, taxes, and other recurring operating expenses when you have a positive cash flow. On the other hand, negative cash flow means that you’ll have to delay critical purchases that could help you expand in the marketplace. As a result, you might lose an opportunity that will not repeat itself. More importantly, a negative cash flow prevents you from meeting your recurring obligations, such as paying your rent, employees, and suppliers.
An operational budget is critical.
- Create a realistic operating budget and stick to it.
- Track your money
- If you don’t know where the money is going, you’ll have no idea how to create a financial roadmap for the future.
- How much comes in?
- How much goes out?
- Where is it going?
- Are you getting the best deal from your providers and suppliers?
If money management is not your thing, hire someone. Financial success relies on excellent record-keeping. Hire a contractor who will keep your financial records and papers organized and quickly accessible when needed. Maintaining a healthy cash flow is that important.
6. Minimize Your Fixed Expenses
Don’t spend to impress customers. When you’re a new entrepreneur, you don’t need a fancy office, the most modern equipment, expensive signage, and other image-based assets. Of course, you want to build your brand, but you should keep your expenses to the basics when you startup.
Your fixed expenses, or overhead, would include:
- Rent
- Salary
- Supplies and equipment
- Insurance
- Marketing expenses
Your facilities costs can consume a large chunk of your budget. So can you launch your new business from home? You can spend the money you save on marketing, customer acquisition, product development, or expanding your service offerings.
7. Go slow
If you’re selling a product, there’s no need to fill a warehouse right away. Instead, create the product in rhythm with consumer demand, with just enough on hand to avoid delays that will result in unhappy customers.
Be strategic about equipment purchases and adding staff when you’re a new entrepreneur. A large team may look impressive, but in the beginning, you should stick with the minimum.
You might want to have everything perfect and may even have heard that consumers can be impressed by externalities, but this is a mistake. Your consumer base will appreciate your honesty, authenticity, reliability, and ability to provide them with the service or product they need. None of these are high-ticket expenses.
8. Don’t Scale Too Quickly
Start lean, going solo or with a small team. Outsource the tasks you can’t handle, such as accounting, marketing, website design, etc. When things start to move quickly and feel overwhelming, it might be tempting to scale up your team. However, this is precisely when you need to hunker down and focus on your business model.
During the first few years of your new business, your focus should be on keeping your cash flow healthy and building your revenue base.
9. Be Prepared for Delays and Set-Backs is One of the Top Financial Tips for New Entrepreneurs
According to Preferred CFO, 82% of new businesses that fail do so because of cash-flow problems. After living through more than a year of a pandemic, we’ve learned that nothing is guaranteed, no matter how brilliant your idea or business plan is.
Before launching your business, be sure you have an emergency fund or savings account. It could take longer than you anticipate to acquire customers and get money flowing to your bank account. And, as we have all seen, unforeseen economic disruptions can upend the best plans.
You need to maintain resiliency during the early years of your new business. An emergency fund gives you that for those days when you fall short.
What about when the unknown happens?
As a part of writing your business plan, you identified your strengths, weaknesses, opportunities, and threats. This knowledge prepares you to deal with the known. Yet, there’s the “unknown.” For example, let’s say you have spent months developing the next software platform to disrupt the world. Then, when you’re ready to roll out, a worldwide recession hits, and your potential customers postpone their orders? How will you cover the costs you’ve already invested in developing the product?
10. Set Financial Goals
How much do you want to earn in the first year? How will you get there? Then, repeat the process for years two and three. Keep your goals realistic, and set measurable milestones.
- For instance, a goal might be that you’ll earn $10,000 from your first Master Class.
- How much will the Master Class cost?
- How many people need to sign up to reach your goal?
- Alternatively, a milestone might be that you will open your first in-person shop on January 2, 2022.
- What do you need to do to make that happen?
11. Yes, You Should Pay Yourself
You might find founder tips that recommend not paying yourself until you pass certain milestones. If you can afford to live for free, it’s easy to pour your revenue into your business, paying only your fixed expenses. But, not too many entrepreneurs fit that description. On the other hand, your need to maintain a healthy cash flow, so be careful to pay yourself only from your profits and not your revenue.
A critical financial tip for new entrepreneurs: revenue minus expenses equals profit.
Bottom Line
According to all indicators, it’s an opportune time to start a new business. Whether you’re just planning to launch or you’ve already opened your business, these 11 financial tips for new entrepreneurs should help you avoid the pitfalls that bring down the best ideas.
- Maintain a healthy cash flow
- Budget and track your money
- Prepare for disruptions and the “unknowns”
- Go slow and wait to scale
- Pay yourself from your profits (not revenue)
- Avoid debt for as long as possible.
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