Most small businesses fail for one simple reason: running out of money. This can happen for a host of reasons and, whilst demoralising, will always be a risk for new start-ups.
However, you can significantly reduce your risk of being left without sufficient funds by managing money intelligently. Every business is different, but staying in control of finances is vital across the board; below are some tips for making the most of your funds.
- Be in the Know
Although it sounds obvious, knowing as much as possible about your inflow and expenditures is the single best way to make prudent financial decisions. Ensure that you keep track of your cash flow from the outset – in the early stages, it might be worth investing in accountancy software such as Quickbooks. This means that when it comes to growing your business, and your cash flow becomes more complex, you already have a system in place to keep track of things.
Alternatively, you could make use of software which you may already have – Microsoft Excel or something similar – to create a simple spreadsheet for recording monthly income and outgoings. Remember to find out how your business will be taxed as early on as possible, to avoid any surprises or headaches in the future.
If you intend to cover setup costs through a lender, you should carefully research your options. Using price comparison sites can be a great way to shop around, and decide which lender might be right for your business. Bank loans are not your only choice, though – your first port of call might be investment from friends and family, and you could also consider crowdfunding. Ensure that you have planned your debt management strategy in the long term when considering your choice of lender.
- Plan ahead
Successful entrepreneurs think carefully about the future; it is a good idea to produce forecasts for your business in its early stages. These predict your business’s income and outgoings for up to three years, since trying to predict any further ahead than this is generally unhelpful. These forecasts should be regularly updated as circumstances change, so you always have a good idea about what to expect in the near future.
These predictions should help you to plan your budget. This should be done carefully, and take into account all costs associated with your start-up, no matter how small – small expenses can quickly add up. When budgeting in the early stages of your business, fixed expenses, such as employees and office space, could be a good area in which to make savings. For example your budget might constrain the salary available for any staff, but this could be supplemented by offering equity in the company, or other perks depending on the nature of your business. You could also consider offering part-time work at this stage, or working from home if this is possible to save the expense of office space.
- Set some money aside
When your business is thriving, it can be tempting to re-invest all profits straight back into it for further growth, but this is not always the best strategy. Instead, it is sensible to set aside a portion of your profits so that, should the start-up falter, you have some funds available to cover running costs without taking on debt. Ideally, this monetary cushion will cover three to six months’ running costs.
Remember to allow enough money in your budget to give yourself a decent wage. You might feel obliged to pay yourself an uncomfortably small amount, so more of your profits are freed to grow the business, but this is not the best move. You will be less able to focus on your start-up if you are preoccupied with personal financial worries.
- Set realistic goals
Goal-setting is key to most endeavours, and establishing a business is no exception. Your goals should be realistic, measurable, and have a timeframe. They could be anything from a profit target, to reaching a product development goal, to getting a marketing campaign off the ground, as long as they are achievable and will help your start-up to grow.
Setting a series of smaller goals, rather than relying on one larger vision for your company, makes it easier to stay motivated, and will also let you keep better track of how things are progressing.
- Be prepared for the worst
Having a financial back-up plan is always advised. If you are currently employed as well as managing your start-up, ensure that you do not leave your job until your profits can comfortably replace your wages. Having an alternative source of income is a good back-up – if possible, you might consider going part-time as you transition from employee to business owner. The funds set aside from profitable periods should also be treated as a back-up, and could keep your business afloat during challenging periods.
Good money management
Taking the time to carefully plan, having a safety net, and always being aware of exactly what you have are simple ways to give a new business its best chance of succeeding. As common-sense as some of these tips seem, they are worth bearing in mind as you go forward with your start-up.