I consider myself a personal finance nerd. So when I started my own business as a freelance writer, I was unconcerned about financial management.
My focus was on finding clients, and everything that came after would surely be small potatoes.
But as any small business owner knows, getting clients is only a fraction of what actually goes on.
No matter if you’re the owner of a local landscaping business, pioneering the next big app from your garage with your college friends, or just a girl behind a laptop writing for a living, business owners have a lot to think about when it comes to finances.
And smart money-management habits are essential to the bottom line and eventual growth of your business.
In this article, we’ll cover:
- Financial considerations before you start a business
- How to develop healthy money habits
- Saving and investing for long-term business growth
Before You Start a Business
It’s no secret that starting a business takes money. But not every venture requires that you run to the local bank to secure a small business loan.
Before you think about your first sale, here are 4 things to do to prepare financially.
Get Your Personal Finances in Order
If your household is weighed down under mounds of consumer debt or you’re struggling to make ends meet, starting a business may not be the best option for you right now.
Be honest with yourself about your personal finances and take time to pay off high-interest debt, and create emergency savings. This might mean you need to start your business on the side initially.
You can always turn it into a full-time venture when your personal financial situation looks a little better.
Before I left full-time employment, I made sure our emergency fund was fully funded, and we were primarily debt-free (except for our house).
That way, I knew that I had the runway to burn even if I didn’t make a single penny for the first several months.
That security blanket freed me up to pursue my business full speed ahead without wondering if I’d need to go back to full-time employment after a few weeks of trying.
Ballpark How Much You Need
There are certain capital concerns for every business.
But it’s going to look a lot different if you need to purchase all new equipment for a landscaping company vs. signing up for the premium version of Grammarly.
This number also indicates whether or not you’ll need to seek out that small business loan. You may end up realizing you can save up a few hundred bucks to cover business expenses for the year, and you can actually get started sooner than later.
Separate Your Finances
Overlap between business and personal finances can create tons of confusion. Starting from a clean slate with a new business account and separate budgeting, expense tracking, etc., can alleviate that.
I stuck with my same bank and added a business checking account for free.
From the start, I was able to filter client payments into the business account and “pay myself” by transferring funds to my personal checking. It made my life so much easier, and I can’t imagine how I would have struggled if business finances were in the same account as day-to-day expenses.
Smart money management means tracking everything that goes into the business. You’ll want to track income, expenses, and overall cash flow as your business grows.
And since small business owners can write off many business-related expenses, keeping track of every dollar flowing in and out is critical come tax time.
I’m a fan of old-school spreadsheets and pen and paper tracking. Whatever you choose to do, make sure you keep receipts and can justify expenses as being essential to the running of your business.
Developing Healthy Money Habits
Every dollar counts for a small business. So figuring out ways to save and manage money effectively is top of mind. Adopting these healthy money habits can help.
- Take an active role in your finances: Small business owners who sit back and wait for spring when their CPA reviews the finances are in for a world of hurt. Us business owners need to be on top of what is coming in and leaving our accounts each month and why. Cash flow is everything for a small business, so make it a habit to be in the know, not waiting for others to tell you what’s going on.
- Spend on critical items only: Limit spending to what you need and will use right now. Don’t fall for the new technology that promises instant marketing success. You can create your own content or use word of mouth for now and mess with the shiny new tech tools when you’re in a more stable place financially.
- Don’t be afraid to raise prices: If you realize that you’ve underpriced your services, don’t be afraid to raise them. Customers who are receiving value from your product or service won’t mind paying a fair market price.
- Keep payroll costs low: Payroll can be one of the most significant expenses for a small business. Keep costs down by hiring enthusiastic employees with less experience. Or opt to use contractors who will work hourly and not require benefits or other perks granted to full-time employees.
- Pay Yourself: I know firsthand how hard it is to pay yourself when you’re starting out. When you’re just not making much money, it can be tempting to dump every penny back into the business to try and get more customers. But to sustain your company, you need to make sure your needs are being met too.You will likely have to scale back in terms of your consumer spending during the first few months or years. I know I did. But you should still be taking a paycheck. Sadly, your passion and desire for success alone aren’t going to put food on the table. And without you, the business may go under too.
Saving and Investing for Long-term Growth
Making money is a critical part of keeping a business alive. But what you choose to do with that money is what ultimately decides the fate of a business long-term.
These strategies can help you ensure future financial success.
Create Business Financial Goals
Just like you have savings and debt paydown goals for your household, create goals for your business.
Your goals may be to build up the petty cash fund to $2,000, save $10,000 to buy new equipment next season, or expand to another, larger location down the street by the fall. Write down the goals, give them a deadline, and track progress each month.
When I was just starting out, one of my business financial goals was to invest $200 per month in a retirement account. And I wanted to be able to do so within 6 months of starting my business.
I made this goal specific instead of simply saying that I wanted to contribute to my 401(k). That enabled me to track progress and know when I hit the mark.
Invest in Your Business and Employees
The reality of starting a small business is that you will need to pour money back into it to keep it afloat. Investing in your business means putting funds into marketing and acquiring new customers.
But it also means investing in employees if you have them. Empowered employees who feel cared for and able to expand in their craft are more likely to stick around.
Think about setting aside money for personal development, which may look like taking courses, attending conferences, or participating in local networking events.
Always have an emergency stash
Every business owner should have an emergency fund for their personal lives and business.
The amount of operating cash you keep on hand depends on how much you’re making and how much runway you need to feel comfortable. I generally find that 4-5 months of cash to cover my income and recurring expenses puts me at ease.
The Bottom Line
Starting a small business is a challenging, expensive, but rewarding endeavor.
And those who can figure out money management by creating sustainable habits are the ones who have the best chance of surviving. Remember to:
- Make sure your personal finances are in order before you try and build a business.
- Keep sufficient funds set aside in case things don’t take off right away.
- Set financial goals that are realistic and attainable, then check in on those goals regularly.
- Re-invest in your business and employees to ensure long-term success.
Trust me when I say these money management techniques don’t become habits overnight. It’s going to take a lot of months and nearly constant iteration to figure out what financial methods work best for your business.
Just know that as your business grows, you’ll be grateful for the time you spent putting the right processes in place to make sure money is serving your business, not holding it back.