Running a business could be the ticket to the success that you are looking for all these years. But to get to that status, you need to go through arguably the most challenging part, which is starting the business.
Business ventures can go two ways: it can either work out as planned or turn into a nightmare. Obviously, we don’t want the latter to be the result of our hard work. That’s why in this article, we’re going to go over seven useful tips to help you avoid financial disaster when starting your business.
Before you embark on your business adventures, it’s essential to be on a solid financial footing and have an effective plan in place. That way, you can make sure that your wealth will be safeguarded, regardless of where your business will lead you to in the future.
Tip #1: Don’t Go All-in on a Single Investment
Ever heard about the idiom, “don’t put all your eggs in one basket?” If you have, then you ought to know that it plays an important role in your business.
A failing business is already a bad thing. But what’s worse is that your business fails after you’ve invested all of your money in it. Optimism always plays a key role in any businessperson’s success story. But don’t count on it too much. If you’re planning on investing in a business, make sure you don’t go all-in on it.
Have a reserve fund to make sure you still have the money to reinvest on other ventures once one doesn’t work out. Don’t take every dollar out of your pocket to fund your business. You should always have reserves so that you will have some money to spend on your fallback options in case things go wrong.
In addition, not putting all of your money on a single business means you can invest in other ventures and potentially have multiple sources of income.
Tip #2: Have an Emergency Cash Cushion
Even if you’ve reached the pinnacle of success, it’s not a guarantee that things will be smooth sailing moving forward. There will be a time when your business will take a dive, and you need to be ready for it. That’s why you need to have an emergency cash cushion to aid you during rough times.
It’s a standard rule of thumb in business to have three to six months of emergency cash ready. However, if you have no other income stream other than the business you currently have, then that emergency cushion needs to be even more.
To make sure you don’t hit rock bottom when things don’t go well for your business, experts suggest that you have at least two years’ worth of expenses held back that you can live on. That way, you can guarantee that your business is ensured even at the beginning. It will also avoid any unwanted stress on your end, as you won’t have to worry about finances even when things don’t work out.
Have a strong financial foundation in place – even if you’re just starting. Always keep in mind that you, the entrepreneur is your business’s strongest asset. If you fail financially, your business won’t stand a chance at surviving.
Tip #3: Avoid Co-Mingling Your Assets
As someone who is just starting a business, you must learn to separate your personal expenses. Whether you’re shelling out small sums or making a significant investment, you should always do that on a separate bank account.
The money that you spend on any business-related transaction will be deductible from your business income. That’s why we recommend that you open a separate business credit card and business bank account. At the same time, you should also consider having an accounting system to record and track all of your expenses.
Tip #4: Take Advantage of Online Accounting & Invoicing Applications
Speaking of an accounting system, you should consider using online accounting and invoicing software. Not only do they make your life easier, but they will also make sure that your business runs smoothly and efficiently.
By having an accounting and invoicing system in place, you can automate these crucial areas for your business. So not only are you getting more efficient, but you’re also paying less. That’s why you should consider using the best systems available.
When establishing an accounting system, you can either hire a personal accountant or bookkeeper or rely on online accounting and invoicing software like ReliaBills. As someone who’s just starting, we highly recommend that latter as it doesn’t cost as much, and you’ll still get the accounting jobs done.
ReliaBills, in particular, is an excellent invoicing platform that’s available for FREE. For more information, visit ReliaBills today. Other accounting applications include QuickBooks, Wave, Zoho, and more.
Tip #5: Make Sure You and Your Business Are Insured
Starting a new business can go really well or go really bad. No matter how well-planned you are, success will always be 50/50, as you need to consider unexpected roadblocks. That’s why it’s a great idea to speak with a financial expert to determine where insurance policies can help mitigate certain risks in doing business.
One particular type of insurance that you can go for is disability insurance. It protects your greatest assets, which is your ability to earn money. This insurance is essential, especially if you only have a single source of income.
There are also other options, depending on the type of business that you’re running. There are different kinds of policies for working-from-home businesses, purchasing expensive heavy equipment, or using your car for your business.
There are even policies that protect people within the business. Examples include errors-and-omissions policies, covering damages related to professional advice, and directors-and-officers insurance. You can search through the internet to learn more about business policies. Remember, knowledge is necessary when you’re running a business.
Tip #6: Diversify Your Investments
Many people are aware of the importance of having a well-diversified investment portfolio. However, business investments are often not included from the bunch. If you want to achieve success in your investments, then you need to make sure that you diversify between a range of asset classes. These classes include stocks, bonds, real estate, commodities, and cash to reduce the risk of starting a business.
In addition, entrepreneurs such as yourself need to be extra mindful about stacking up on investments in your area of expertise. For instance, if you own a lot of construction supply stocks and start a construction supply company, you’re overloaded in that sector. Instead of stacking everything, you need to allocate some of these assets to other areas, like those we just mentioned. Doing so will reduce the overall risks “going down with the ship” when things go south for your business.
Tip #7: Don’t Forget About Your Taxes
You can’t start your business without getting familiar with the Internal Revenue Service (IRS), otherwise known as the “tax agency.” Speak with a tax expert to make sure you’re setting up your business structure the right way, all while maximizing your deductions.
Also, IRS rules can be quite complicated. That’s why talking with a tax expert is crucial as it will ensure that you won’t make costly mistakes. For example, a common tax mistake is failing to pay a salary for yourself.
Business gurus claim that many people run so thin that they don’t pay themselves a salary for a long time. It’s either they are trying to get the business cash flow or avoid going further into debt. This could also be an issue with the IRS when they see that your business is not paying you as it will indicate that the government is losing out on those valuable tax dollars.
Tip #8: Always Prepare for the Worst to Come
Finally, most people who find success in starting their business are also the ones that prepare for the worst-case scenario. To avoid financial disaster, you simply need to plan for it. Make sure you have your emergency funds in place, as we mentioned in tip number two.
Remain aware of what can drive your business to bankruptcy. Finally, always remember that by having a “plan for the worst” mentality, you’re setting yourself up for success in the future.
If you’ve gone through all the tips, and are still struggling with managing your business, consider hiring a financial advisor to help you with business planning and management. With all of this in mind, what steps will you take first to avoid financial disaster when starting your business?