Launching a startup business can be daunting. A simple, captivating idea can grow into a business plan that attracts investors and inspires the imaginations of entrepreneurs who want to create something unique and forge their own path.
Whether a startup is doing something revolutionary or following a proven business model, there are many potential hazards, and they lurk behind financial uncertainty. I’ve talked before about how to effectively combat uncertainty.
Establishing and maintaining processes and systems that keep business owners financially aware is a prerequisite to sustained, reliable success.
For the same reasons you look both ways before crossing a busy street, I urge you to have a firm grasp of your finances before launching your business. Here are some actions and processes your new business can enact to ensure profitability and avoid common pitfalls:
With the right plan in place, a business can achieve the profits it needs for daily function, payroll, and investments. But how do you know if you’ve developed a viable business plan?
When I’m approached about my Entrepreneur Advisory services, I usually find myself talking to people who are passionate about what they do. They’re beginning the exciting, sometimes risky work of organizing a business without an established record of income and expenses, or they have been operating for some time without clear direction.
An experienced accounting professional can provide customized projections using estimates based on research of comparable businesses. Once projections are made, stay on top of the numbers. Track transactions and expenses, and revise projections accordingly.
However, before those projections can be built, there are some basic elements of the business that the owner must consider. Namely:
Using these metrics, you can set up your financial statements with a simple and clear format. This allows startups to know, in a measurable way, if their performance will result in a sustainable model with reliable profits. It also makes clear what changes can be made to correct course or improve performance going forward.
If you’ve ever used QuickBooks, or have seen their advertising, you know that accounting tools are accessible to just about anyone. There is some truth to Intuit’s messaging about their software’s ease of use. However, the average user who is just beginning to understand the accounting piece of their business will not have the expertise needed to get the most out of QuickBooks and run the risk of creating an incomplete record.
As I’ve mentioned before, incomplete or inaccurate records can be detrimental to a business’s ability to plan and adapt.
To avoid this, start simple. Understand what you need to know to determine your startup’s profitability, and build records accordingly.
Of course, I recommend you hire an accounting professional to perform your bookkeeping functions and make sure your systems are set up correctly. In the long run, this will save you time and money, and provide peace of mind that will help you focus on the day-to-day responsibilities of running a business.
If you’re a business owner who isn’t ready to hire ongoing financial services, I still strongly suggest you work with a professional to help with the following:
Thorough setup of these systems is necessary for any business and it’s an essential service I provide to my startup clients.
With processes in place to anticipate costs and income, plan accordingly, and measure results, a startup has the financial clarity it needs to function successfully. But another piece of the puzzle business owners must understand is “the how.”
How you collect payments and handle expenses will impact your bottom line and the reliability of your financial projections. First, look at your invoicing process. How quickly can you collect on accounts receivable?
I have helped several clients get their books up to date. More than one of them had several aged receivables, with some over five years old. Not only did they miss out on those payments for years, but the likelihood they would be able to collect on those accounts decreased with time.
To keep this from happening in the future, a method can be developed for collecting monthly fees reliably. For instance, one of my clients now collects 99% of her payments by the 5th day of each month!
When you institute a payment procedure that gets you paid in a timely manner, you will strengthen your ability to predict income and, importantly, ensure you get paid for the goods and services you provide.
Contracts that require credit card or ACH authorization can help regulate your income. If your startup provides a service in the form of large projects, you may consider collecting half of your payment in advance to make sure you have enough cash on hand to pay the costs associated with providing your service.
That way, you can avoid high-interest credit card debt as a means of funding your business expenses. You may have great credit, but even if you do decide to utilize credit to cover costs early on, I recommend you seek lower-interest lines of credit through your bank.
Note: Banks often require years of financial projections in order to approve loans and lines of credit.
The work I do with startups to develop a profitable business plan will shape the processes we put in place to keep the books balanced. When you have those custom processes set in motion, you know exactly how much to set aside for payroll each month. And remember: set up a separate bank account for payroll!
When you run payroll, move all of the cash for taxes and full pay into that separate account and act like you don’t have access to it anymore. That way, you don’t accidentally spend money that’s needed to sign paychecks and pay payroll taxes.
If you use QuickBooks, steer clear of the minimum-cost payroll service and make sure to upgrade to “Premium” or turn on auto pay for taxes and filing. This way, Intuit will calculate and take responsibility for the accuracy of your payroll taxes.
How you make smaller purchases also matters. Use a single account (separate from your payroll account) to make all purchases. Keep one card for payment, and avoid using your personal accounts as you make business-related purchases.
Keep your bank statements complete and accurate. This will smooth out your bookkeeping processes and help you avoid confusion.
Financial clarity and a resultant plan is fundamental to operating a successful business, especially in the early stages of growth. Much of what you need to know when you launch your startup has to do with the particulars of your industry, your business plan, and your own personal goals.
Set up strong processes and practices for managing income and expenses. Take a detailed look at the ins and outs of day-to-day operations. Even if you aren’t ready to hire full time accounting services, I urge you to seek help designing and establishing the processes that will serve the particular needs of your business.
I understand that each startup I work with has unique concerns and factors that influence their success. That’s why I offer three levels of Entrepreneur Advisory services to new business owners, depending on the kind of help they need to be successful.
To learn more about Advantage Insights Entrepreneur Advisory services, and what plan best suits your needs, you can sign up here for a free consultation.
You can also reach me by calling 402-281-3785, or email firstname.lastname@example.org.