Starting a business is no easy feat. Every year, countless entrepreneurs turn their aspirations into a successful venture. This involves having the perfect idea, the right team, hard work and the ability to manage different aspects of the business, such as their finances. A startup is a company or a project initiated by an entrepreneur to develop a unique product or service. They are typically early stage businesses and venture-backed.
Managing the finances of a startup is one of the greatest challenges every business owner must face. Navigation the day-to-day financial tasks is overwhelming, not to mention the long-term implications that must be taken into consideration. The year-end accounts, taxes, payroll, employee salaries... all of these need to be dealt with swiftly and accurately in order to ensure success.
Setting Up Your Business Structure
When first setting up your business, one of the most important decisions you must make is how to structure it. Whether you’re setting up a sole proprietorship, partnership, limited company, or any other business structure, selecting the right legal entity can mean the difference between success and failure. In this article, we’ll give a brief overview of the importance of setting up the right legal structure, choosing the appropriate legal entity, and selecting a business bank account.
The importance of setting up a viable business structure
There are many reasons why setting up the right legal structure for your business is important. Legally, if you are setting up an incorporated business structure, it will provide you with important liability protection. This is beneficial in that it shields your personal assets from legal and financial risks associated with the business. Additionally, the legal structure of your business can determine the type of taxes you must pay. Further, a well-structured business will enhance the credibility of your business, create the right kind of professional atmosphere, and help increase the customer’s confidence in the products and services you provide.
Choosing the right legal entity
When setting up your business, it is important to choose the right legal entity. Generally, there are three main types of business structures to choose from: a Corporation, a Partnership, or a Sole Proprietorship. Each of these structures has its own set of advantages and drawbacks, so it is important to research and consider the type of business that best fits your needs and goals. For instance, a Corporation will offer the most protection against personal liability, but it may also be the most expensive and complex business structure to set up and maintain.
Selecting a business bank account
Once you have settled on the appropriate legal structure for your business, it’s time to look into setting up a business bank account. Opening a business bank account provides a number of advantages to your business, such as enhanced security for your money, the ability to better track expenses and cash flow, and various tax incentives. Additionally, many banks offer specialized services designed to meet the needs of small businesses, such as business loans and merchant services. Before selecting a business bank account, however, it is important to research fees, services, and features associated with each account, to ensure you are getting the most out of your business banking.
When setting up your business, choosing the right legal structure and selecting the right bank account is essential for ensuring financial success. As such, it’s important to take the time to research the various types of business structures and bank accounts available, and to make sure you select the right ones for your business.
Establishing a Budget
Starting a new business requires diligent financial planning and money management, and one of the most important elements of that is creating a practical, realistic budget that reflects your needs and plans for expansion. Knowing when and how to allocate funds, estimate expenses, and account for large investments is essential to the success of a startup.
Establishing a Realistic Budget
The first step in creating a budget is to accurately estimate all necessary expenses. Include everything from employee salaries, rent and utilities to office supplies, software and marketing materials. Make sure to also set aside funds for short-term and long-term investments. Estimate low for the first year and review and adjust the budget as the business progresses.
Incorporating Profit/Revenue Goals into Budget
Profit or revenue goals should be taken into account when establishing a business budget. Estimate how much projection you think your business will make in the first year and factor in any additional income you think you can generate. These estimates should be realistic in order to make sure that you are not overspending and relying solely upon the projected earnings.
Plan for Financing Any Potential Cash Flow Gaps
It is essential to have a plan in place in case there is an unexpected lack of cash. Research loan options and other financing options in case of cash flow gaps as well as any potential tax deductions that can benefit your business. Make sure to have a knowledgeable accountant on staff who can assist you in exploring all financial options.
Utilizing Financial Software
As a startup business, managing finances is one of the most essential tasks. In order to make the process simpler and more efficient, utilizing financial software can be helpful. There are a wide variety of software solutions available to track financial information and staying organized is key.
Types of Financial Software Solutions
When choosing a financial software solution there are several types to consider. These include accounting software packages, online banking portals, cloud storage, budgeting apps and more. Depending on your business needs you will want to research what type of financial software best suit those needs.
Benefits of Using Financial Software
Financial software provides a variety of advantages to the business owner. It can easily generate accurate financial reports, provide information on financial trends, help manage accounts payable/receivable, assist in tracking income and expenses, and creating forecasts. In addition, it can help save time as it is often automated, eliminating the need for manual paperwork.
Keeping Track of Financial Data
It is essential to stay up to date with your financial data. Financial software can help achieve this by monitoring income, expenses and accounts. Ensuring proper analysis of the financial data is also important for long-term planning for your business. One way to do this is to regularly review reports that can be generated by the financial software. Additionally, it is important to keep any records of financial activity should they need to be reviewed down the line.
As a startup, it's essential to know your tax obligations and ensure that you are compliant with the laws of the land. Whether you're just getting your business off the ground or you've been in operation for a while, keeping track of the money you owe to government institutions is a key part of managing your business' financial health.
Knowing What Taxes You Have to Pay
First and foremost, you need to understand and keep track of the taxes that you need to pay for your business. Depending on the business entity structure, your taxes may be different. For example, an LLC would require different tax forms than a C Corporation for their taxes. Consult your accountant or a business attorney to ensure that you are filing and paying the correct taxes for your entity.
Understanding Your Payroll Obligations and Payments
If your startup is hiring employees, you also need to make sure that you are keeping up with your payroll obligations. This includes understanding and making any necessary payments for taxes like Social Security, Medicare and unemployment taxes, as well as withholding proper amounts from each employee's paycheck. Additionally, if your state requires it, you will also need to make sure you are submitting and paying any necessary state income tax.
It is essential to keep track of any expenses incurred in the running of your business, as you can use them to reduce your taxable income. Many expenses, such as travel, promotional materials, office supplies and more, can be deducted as business expenses. Talk to your accountant to find out what you can claim as a deduction and how much you can deduct. In addition, if you have employees, you may be able to deduct the cost of certain benefits, such as health insurance.
Expansion and Investment Strategies
One of the most important responsibilities of a startup founder is managing the financial health of their business. As a budding entrepreneur, you want to ensure you are investing your resources as wisely as possible. Expansion and investment strategies are critical areas of consideration and can be daunting, but following these guidelines can help point your business in the right direction.
Being Aware of When the Right Time Is to Expand
As a startup founder, you have to be extremely careful to not overextend yourself. In the early days of your business, it is usually prudent to remain conservative and strategic in terms of any expansion or investments. You need to make sure the timing is right and not be too hasty. Consider researching the potential keystones of a successful launch such as adequate funding and team capacity. Additionally, you will want to identify areas of opportunity to invest in that can help your startup continue to develop.
Knowing the Benefits and Risks of Investments
Growth and investments are important considerations for most startups. Evaluating the benefits and risks of any proposed investments is essential; knowing when to act and when not to, is key. Researching market trends and industry information can help to inform your decision-making process. Additionally, creating a formal, comprehensive plan to execute any investments that you ultimately decide on is vital.
Consulting an Expert
If you are considering expanding your business or making investments, consulting an expert or a financial advisor is generally recommended. A financial advisor can provide insights and advice to help you understand the different risks and rewards associated with different paths. They can also help you create a personalized plan that takes your specific goals and resources into account.
- Be aware of when the right time is to expand.
- Know the benefits and risks of investments.
- Consult an expert.
Operating and managing the finances of a startup can feel like a complicated endeavor. The goal of this blog post has been to bring clarity to the financial management considerations startups must face and to provide some actionable steps for entrepreneurs to begin or improve their financial management practices.
Recap of Financial Management Considerations
Starting from the basics, it is important that startups understand the small business tax code, regulatory requirements, and accrual accounting techniques. It is also important to set up the financial infrastructure of the startup, such as procuring the appropriate software and hiring the right people.
Once the financial infrastructure is in place, it is important to establish financial policies and procedures that clearly outline finance-related roles and processes such as cash management planning, time tracking and budgeting, and debt management.
Finally, it is important to stay up to date on the current financial trends and technology available to ensure the financial operations of the startup are running smoothly and efficiently.
Summary of Key Takeaways
In conclusion, below are a few key takeaways startups should keep in mind when managing their finances:
- Understand small business tax code, regulatory requirements, and accrual accounting methods.
- Set up the appropriate financial infrastructure which includes procuring the right technology and hiring the right people.
- Develop financial policies and procedures to manage operations.
- Stay up to date with current financial trends and advancing technology.
By keeping these considerations and suggestions in mind, startups can be well on their way to financial success.