6 Tips for Ensuring Financial Health in Your Startup
Are you a proud business owner? Many people have launched their startups to build something of their own. It is an exhilarating journey filled with ambitions and endless goals. However, passion alone is not enough to keep your boat sailing. Hence, every entrepreneur must dig into the practicalities of running a successful business; financial health is crucial. It serves as the backbone of startups, enabling entrepreneurs to propel growth.
So, are your business financials up to date? Entrepreneurs often overlook money-related matters after raising the initial capital, considering the business has enough money to remain afloat. Even though you have invested sufficient cash into the venture, only effective financial management will ensure smooth operations. Therefore, look into resource allocation, check cash flows, and stay on top of all inflows and outflows.
Further, assess your company’s financial needs and develop strategies accordingly. If your startup needs additional funding, start looking for investors or lenders beforehand. A clear idea of business financials will help streamline business operations. If you want to learn more about this, keep reading. Here we have outlined six tips for ensuring financial health in your startup.
Improve Financial Literacy
Is your numbers game strong? Most entrepreneurs think they will hire a talented finance team to manage all money-related matters. While accountants and analysts might assist with keeping finances in order, you must be equally aware. For this, consider improving your financial knowledge. You can search for online resources like articles, magazines, or short courses. You can also attend webinars on financial management, investment strategies, etc.
Similarly, you can pursue higher education to enhance your knowledge further. Entrepreneurs with a business degree can opt for an MBA in finance online to manage studies with their startups. It will help build a comprehensive understanding of financial concepts and strategies. In addition, the online curriculum will ensure you can study at your pace.
Manage Cash Flow Smartly
One of the common reasons why most businesses fail is because of cash flow problems. Some startups don’t have enough cash to incur routine operations, whereas others have money tied in inventory. Therefore, you must pay close attention to your cash flow to save your business from money-related problems.
First, understand how cash flow works. It includes that money that goes out and comes into your business. Thus, your cash flow will be positive if you make more money than you spend. Second, implement strategies to keep the cash flow positive. Here are a few tips.
- Cut back on credit sales and encourage customers to pay in cash.
- Send invoices as soon as possible and charge a penalty for late payments.
- Monitor your working capital to ensure sufficient current assets, including cash.
- Leverage an inventory management system to avoid inventory surplus, ensuring you don’t have money tied in stock.
Draft Financial Forecasts
Where do you see your business in the next five years? Expand into different regions or with a versatile product line. You must back your vision up with a solid financial standing to make it a reality. After all, your future profitability and prospects depend on different factors. You can begin by creating 5-year forecasts based on your past and present financial situation. You must cut your revenue and double the expenses for the first six months to get a realistic view.
Next, if you plan to make any fixed asset purchases or obtain financing, incorporate that in the forecasts. You can add a depreciation or interest expense to show how buying a new asset or taking a loan impacts the financial statement. It will help determine business profitability, enabling you to make more informed decisions today.
Stay on Top of Taxes
Any business earning profits is subject to taxes by the law. If your startup has reached its break-even point, it is time to prepare for tax filing. Begin by understanding the tax obligations of your business niche. It will help determine your tax obligations, including income, payroll, sales, and corporate taxes.
Likewise, maintain accurate financial records to take advantage of tax deductions. All business expenses you incur, including salaries, utility bills, etc., are tax exempted. Hence, you can deduct them from your gross profit and reduce taxable income. Consult a tax accountant to maximize tax savings and improve business profitability. Lastly, mark all tax deadlines on your calendar. Failure to file taxes timely can result in hefty penalties and interest charges.
Work on Your Credit Score
Every new entrepreneur’s ability to secure financing depends on their credit score. If your credit score isn’t up to par, start working on it. Here are a few tips to improve your credit score.
- Establish a viable credit history. If you are new to credit, open a secured credit card and make small purchases. After that, pay off the monthly balance to demonstrate yourself as a responsible entrepreneur.
- Keep your credit card balance low since high credit utilization affects the credit score. For example, you can keep the utilization rate at 30% if your credit limit is $1 million. However, you can always spread out balances across multiple credit cards if you have a higher credit utilization. That way, your score will also improve.
- Make it a priority to pay all bills timely, including your utility expenses and interest on loans. You can also set up automatic payments to avoid missing out on payments.
All credit bureaus closely monitor these activities; based on this, they adjust your credit score.
Determine Financing Needs
Startups have different ways of raising funds. Some reach out to venture capitalists for investments, whereas others bootstrap their ventures. Either way, they need more money as the business grows, and the question is how to raise additional capital. Every entrepreneur must determine their financing needs beforehand. You can create a business plan and analyze how much money you need to keep the business going. Likewise, define a budget and funding requirement if you purchase assets to hire a bigger team.
Once you know how much money is needed, start exploring financing options for small business owners. You can contact banks for traditional loans, open a credit line, or opt for invoice factoring. If you don’t want to take debt, look for government grants or peer-to-peer lending forums. A proactive approach will ensure your company has enough time to secure funds and maintain its financial health.
Managing finances in an emerging startup is challenging but crucial for financial stability. Hence, begin by updating your financial knowledge and understanding money-related matters. Likewise, manage cash flow, assess financing needs, and build a solid credit score. These few tips will go a long way in making your startup a massive success.