Dollars and Sense
Starting a business can be a fun, exhilarating, and overwhelming journey. From attempting to determine a business structure to crafting a detailed small business marketing strategy, it’s no wonder that after penning a cool name and creating a logo that pops, many entrepreneurs begin to spin their wheels trying to turn that lightbulb above their head into a tangible reality. There are legal fees for entity formation and contracts, state entity fees, business license fees, equipment purchases (such as computer hardware, manufacturing equipment, tools, etc.), inventory (if you’re running a product-based business), vehicles (if a mobile service, repair, or contracting business), professional website design, development and hosting, professional logo design, business insurance, and more.
This is where our proven consultative process helps you understand the next steps you need to take to get your business off the ground and set it on a trajectory for profitability, sustainability, and growth.
The best part? Our initial, two-hour, 360º Overview, is free.
One of the first things you’ve probably considered, (and the thing everyone around you always asks), is where will you get the money to get started?
Organizing Your Business Finances
There are a range of possible options for funding your business: personal savings; personal credit; loans or investment from family, friends, business partners, or investors; business credit cards; bank term loans or lines of credit and of course, SBA loans. A good rule of thumb is that it will take twice as much money to actually launch your business versus what you think it will take before you start. Running out of cash before the business is generating enough revenue to be self-sustaining is a common problem. It can be devastating to both the business and the owner(s), and is one of the top reasons for small business or start-up failure.
A good first step to any of these funding options is to take a hard look at your current finances so that you can build accurate financial statements. A messy, cluttered, and chaotic home can be stressful and even overwhelming. Not surprisingly, the same goes for finances. By organizing your finances from the beginning you’ll have a significantly higher chance of not only obtaining the small business loan you need, but negotiating the terms you want.
Rather than swinging in the dark, follow these four steps for getting your business finances organized and ready to present to a potential investor, lender, or for applying for an SBA loan.
Step 1: Get a Business Bank Account
The implicit part of opening a business bank account is that you’ll have a separate bank account for personal expenses, but since it’s so important, let’s make it explicit. If you commingle funds, not only will you have to unravel a disaster every tax time, but your ability to apply for a loan as a business entity would be dead on arrival.
By setting up your accounts ahead of time you shouldn’t have any business transactions flowing through your personal accounts and you shouldn’t have any personal transactions flowing through your business accounts. (This is actually a requirement if your business is organized as an LLC or corporation, but you should really do it even as a sole proprietor). That said, virtually all business owners do it: we forget and swipe the wrong credit card at some point or another. No worries. Maintain a good practice of reimbursement whenever it happens, or ensure that your books clearly identify personal expenses as Owner Draw or Shareholder Distributions rather than business expenses.
Bonus level: when you set up your business checking account, set up another account for short-term savings (a savings account or money market account are good options). Use this account as a place to set aside funds on a monthly basis for your state and local income taxes, as well as self-employment taxes. By setting money aside on a monthly basis, you ensure that you have cash on hand to make quarterly tax payments.
Step 2: Get a Business Credit Card
My banker always encouraged small business customers to establish a credit line before they needed it – and she was right. It’s much easier to establish credit now. Remember, you don’t have to use that credit card or credit line until you need it.
Be sure to check the APR and verify if there is an annual fee.
We don’t recommend you set up a debit card for your business bank accounts. The risk of someone draining your business cash is too great, and banks are not obligated to return your missing funds from debit card fraud. It’s much better to use a business credit card for all card-based transactions, and then carefully review the transactions and pay the statement off each month. The credit card creates a secure firewall for your cash, so that even if fraud occurs on the credit card, it’s the credit card company’s cash that got stolen, not yours, and they are fully equipped to get their own money back. The turnaround time for getting fraudulent charges taken off of your account is pretty fast with a credit card, whereas it can take significantly longer with debit card fraud.
Step 3: Choose the Right Accounting Software
Choosing the right accounting software is more important than you might think. This is one of the fork-in-the-road financial management decisions that could make a significant difference in how you view, operate, and present your business. It’s also an opportunity to review whether you need to outsource your bookkeeping.
As you consider how to organize your business finances you’ll need to decide whether you want a paper or digital filing system. Either way, here are some of the items you should keep:
- Accounting and bookkeeping records
- Bank statements
- Permits & licenses
- Employee / Outsourcing records
- Vendor records
- Tax records
If you choose to go with paper records, consider buying a filing cabinet or a file box that can accommodate your organizational system. If you decide to go with a digital filing system, Evernote can organize your files, with tags pertaining to various types of records. QuickBooks Online allows you to attach documentation directly to your transactions, your customer and vendor records, etc.
Finally, be sure to keep your records separate by year, (Evernote makes this as simple as adding a year tag to your record). We recommend Egnyte for secure document storage.
You could keep everything in Excel – but that could get clumsy, and it’s not easy to run a wide variety of professional-looking financial reports out of an Excel document. There are a number of free and low-cost accounting programs available that will save you (and your accountant) headaches down the road. QuickBooks, Wave, Zoho Books, Xero, and FreshBooks are a few examples of the best apps for small business owners. Most accounting professionals prefer QuickBooks for small business accounting. Us too. Our firm is a QuickBooks Online Certified ProAdvisor firm, and we provide our clients who are just starting out with wholesale pricing on their QuickBooks Online software subscriptions.
Before deciding on an accounting program, think about the needs of your business. Some things to consider include:
- Do you need to send invoices?
- What level of income & expense tracking do you need? How granular or segmented do you want to get?
- What kind of financial reports are available?
- Do you have clients that you need to track? What about vendors?
- Do you have employees? Is payroll processing supported?
- Do you need mobile access? What about multiple users?
- Can your credit card processing be integrated?
- What about integrating 3rd-party e-commerce platforms?
- Do you have inventory to manage?
- Does it interface with your bank?
- Does it provide enough bells and whistles or too many? What is the learning curve?
Step 4: Schedule a Time for Finances
Set aside time each week or month to keep your finances organized. Some people will do an hour on a Money Monday or a Finances Friday. Depending on your situation, this may include adding data to your financial software, scanning receipts, filing, reviewing financial reports, paying bills, invoicing, collections, etc. The point is to put it on your calendar and treat it like any other meeting that you prioritize.
Typical recommendations are 15 to 60 minutes per week, depending on your business needs. However, some people prefer to batch process finances, setting aside half a day once a month to update business and personal records, review accounts, etc.
The Next Step: Obtaining Startup Financing
Financial organization strategies are essential if you want to keep your business in order. Without a system in place, you don’t know if your business is profitable, or if you’re actually taking a loss (and nobody wants that). Plus, it will help you avoid headaches at tax time. The tips outlined here will help you stay on top of your small business finances and establish a system that works for you.
With your finances in order, you’re able to present your financial statements–meaning you’re finally ready for that crucial next step: getting financing. You’ll be ready to sift through the variety of financing options, lines of credit, or SBA loans and project growth and profit, as well as make an informed decision about how much debt to take on as a new business owner.
If you need financing before you have any financial activity in the business, you may need to provide pro forma financials to your lender instead, which will contain your best estimates of what your business’s income and expenses will be in the future. An accountant or business consultant can help you with preparing these.
Talk with a business consultant at Ingenium to help you hone your business goals and establish a clear, strategic plan for getting there.