6 Financial Steps to Take When Starting a New Business

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Starting a new business is an exciting and scary time. There are so many different things to do that it can be overwhelming. If you're not careful, some important details can fall through the cracks. 

It's not always very exciting to put together a financial plan for your small business, but that planning is essential. Putting your business idea into action without thinking carefully about the financial details can be a recipe for disaster.

That's why you can't rush into this. Before you dive into the work that excites you the most, you need to lay the groundwork. Put together your startup financial plan and be prepared to follow some basic steps to manage your finances.  

What's Your Startup Financial Plan? 

Money is a crucial element for any business startup. As a small business owner, you might be more concerned with the goods and services you're offering. However, the first question any observers and investors ask will be about money. Where will the money in your business come from, where will it go and how will it be returned?

Before you hit the ground running with a new business, you should be able to answer those questions about your business plan. The financial section of your business plan should go into detail about how you will spend the money you have and how your business will sustain itself financially. 

Steps to Success

Here are the steps that go into a sound financial plan and help keep a business sustainable and growing: 

Step 1 - Choose the Right Entity

This decision is fundamental to building a financially stable new business. When you file with your state to establish your business officially, you need to decide what business entity or structure is best for your small business. The most common business entity options are:

  • Sole Proprietorship
  • Partnership
  • Limited Liability Company (LLC) 
  • C-Corporation
  • S-Corporation

The entity you select will depend a lot on your plans and goals for your business. You could make your business a sole proprietorship if you want to pass the business on to others. Alternatively, a limited liability company lets you protect your own assets if the business doesn't succeed. 

Each possible structure has benefits and drawbacks, and each will have different effects on the operation of your business.   

Step 2 - Financial Modeling

It's not enough to think about where the money will come from and how you're going to spend it. Be specific and detailed with your projections and expectations. Investors won't accept vague wishful thinking, and you shouldn't either. 

Financial modeling for startups is about looking at the expectations you have for your business and doing the math. How much money do you need to stay afloat? How much do you need to make in your first year to be able to grow? How much do you need to sell to succeed? Are you including the wages for employees, the expenses on marketing and advertising? Financial modeling is an exercise in thinking realistically about what it will take to keep your business stable.

financial analysis

Step 3 - Monitor Your Spending

One of the risks of enthusiastically starting your business without stopping to plan is overspending. You don't have an unlimited supply of money, and it often takes a company quite a bit of lead-in money before you can expect new cash from customers to start coming in. 

Therefore, you need to be very cautious and intentional about your spending. And this isn't only important for new businesses. A healthy, well-managed cash flow is critical for any business's continued growth. A healthy cash flow requires carefully observing inflows and outflows in your company to make sure have the money you need, right when you need it.  

Step 4 - Set Financial Goals

As a new business owner, you have to have a vision. You need to know where your business is going and how it's going to get there. Set benchmarks and milestones for yourself, both in the short and long term.

These goals give you chances to celebrate your wins and plan your next steps, but they'll also allow you to evaluate your progress. If you aim to make a certain amount of sales and bring in a certain amount of cash by a given month, but you fall far short of that goal, that's a sign you need to stop and reassess your plans and expectations. 

Step 5 - Keep Your Books Clean

Bookkeeping for small business owners is another critical task that can quickly fall by the wayside when things start to get going. It's not enough to simply monitor your spending. You need to keep track of and record all of the money that goes in and out of your business.

Keeping your records thorough and accurate will be an enormous benefit to your company. Having precise information will help you evaluate your progress and make better decisions. If you're not well-informed, you can't count on your choices being the best for your business. 

Clean recordkeeping will also be a huge help when tax time comes around. Filling out and filing your tax return will be relatively simple if you have all the information together and in one place.    

Step 6 - Work With an Accountant to Start a New Business

Running a business is a lot to handle. There are so many moving pieces and variables, and not every small business owner is equipped to work with the numbers. As the owner, there's also always going to be something else beyond bookkeeping that needs your attention.

One option is to delegate. If you feel overwhelmed by the accounting worries, or you'd rather focus on the core of your business, you might consider working with an accountant to help you outline an effective financial plan. 

You can hire an accountant to help with your small business taxes, work on your recordkeeping system, or even put together projections for you. If you're the sole owner of your business, it can also help get a second opinion by bringing in a professional to look objectively at the data.

 

Images: Shutterstock

 

No information contained in this post should be construed as financial advice from Web.com Group, Inc.