We’ve touched briefly on the topic of money. Not only does establishing good bookkeeping practices make it easier to apply for a loan and file your taxes, but it also helps you to assess how your business is doing overall.
By keeping track of financial details, you’ll be able to see the bigger picture. Let's cover some helpful pointers for doing so...
Tip #1. Take note of which seasons are fast and slow. While some businesses are impacted by the actual seasons (spring, summer, fall, and winter), most companies have busy and slow times. This affects your "revenue stream," or how much money is coming in. Put some cash aside when times are good to account for the slower periods.
Tip #2. Don’t overestimate your “net income.” This is a common mistake among new entrepreneurs. Your net income = total revenue minus total expenses. Even if business is booming, costs will pop up that you didn’t anticipate. When you’re figuring out your budget, it’s a good idea to look at the numbers rather than rely on an estimate.
Tip #3. Keep an eye on your “cash flow.” This refers to money flowing in and out of the business. Simply put, you don’t want your company to be spending more than it makes! Keeping an eye on your cash flow will also help you to spot anything fishy, like missing or mismanaged funds.
Tip #4. Set prices based on costs/competition. When you are deciding what to charge customers, think about your daily expenses. You might want to give buyers a deal—but you don’t want to break even! Look at what your competitors are charging, too, since your customers might compare prices.
Tip #5. Take a “no frills” approach. Cut back on unnecessary expenses—at least when you’re first starting out. Ask yourself if you really need more “stuff,” or if you’re just trying to project an image of success. (This approach shouldn’t apply to your human relationships, though. Treating your employees to a hard-earned lunch is money well spent!)
Tip #6. Adapt if need be. It’s easy to fall into patterns and not weigh alternatives. But if something’s not working for the company financially, acknowledge it. This is referred to as "pivoting"—changing up some part of your business model. Maybe the market has shifted, or your customers want something different. Adapting allows your company to grow, even if it means heading in a new direction.
Tip #7. Don’t forget to pay yourself! You can either collect a regular paycheck or take an “owner’s draw.” If you choose the first option, then you should deduct taxes from each paycheck. The second option means that you periodically take a percentage of the money from the company’s net income. If you choose the latter option, then you will have to pay all of your taxes at the end of the year.
Tip #8. Establish good credit and good relationships. Try to pay your bills on time, and keep chipping away at any company debt. This is important for taking out future loans. Do your best to maintain working relationships with key partners, like your vendors or distributors. Then they will keep doing business with you, and you can continue to grow your network.
Tip #9. Minimize risks. Being an entrepreneur involves taking risks, but you can still make wise choices. Have a "Plan B" for if something goes wrong. What happens if your manufacturer shuts down, or you lose your biggest client? There are other steps you can take to protect your business, too. These include buying insurance, investing in cybersecurity, and keeping your financial statements up-to-date.
Tip #10. Ask for help. The SWOT Analysis might have been useful in highlighting your weaknesses. Don’t feel like you need to do every task yourself—especially tasks that you’re not skilled at. If you’re unsure about some aspects of the business, seek out guidance from a mentor, the SBA, or SCORE, which is a free network for entrepreneurs. Experts can help guide you in the right direction.
As you learn more about handling your finances, keep reflecting on your choices: what expenses can I cut? What parts of the company should I invest more money in?
Hands-on experience is, of course, your best teacher. But thinking carefully about financial decisions will also increase your chances of success.