6 Financial Steps to Starting a Small Business
Starting a small business can be an exciting and rewarding experience. While there are many aspects that go into forming a business from choosing a name, to selecting vendors, to filing all of the proper paperwork, one of the most important areas to focus on is the financial steps you need to take when beginning your business. Your financial foundation can sometimes be the difference between a new business succeeding or failing, so it is vital to make this foundation strong. Check out the six financial steps that all new small business owners should take when preparing for the opening of their business.
1. Calculate All of the Startup Costs
Creating a budget for your business is key. Startup costs are one of the biggest expenses you will incur in the development of your business and these expenses occur typically before you have even sold your product or service. Business owners will run an average cost of $30,000 to start a new business according to the Small Business Association1 though this can vary drastically depending on the type of business and its geographic location. For example, brick and mortar locations have a significantly higher startup cost than e-commerce stores and businesses that require a lot of licenses and certifications can be costly to get off the ground as well. There are a number of expenses that can go into startup costs such as rent or mortgage down payments, salaries, website development, advertising, permits, accounting and legal fees, and business filing fees just to name a few.
2. Determine Required Living Expenses
Since a lot of your time and resources will go into building and growing the business with the possibility of not seeing a profit for a while, it is important for those looking to start a small business to be able to have enough to set aside for their basic living expenses to get them through the time period before they will become profitable. If you are leaving a job to start your new business, you will also need to take into consideration the cost for health care and other benefits that you will need which will no longer be covered by your employment. A good rule of thumb is to have at least six months of living expenses saved before starting.
3. Get Your Credit in Order
While you will be able to borrow money under the business name when you are just starting out, that initial funding with loans and credit cards will be based on your personal credit. Even after being established for a time many banks will still consider the owner's credit as a deciding factor on the ability to lend as well as the interest rate. You will want to take stock of your assets, such as the equity in your home as well as find ways to increase your credit score as high as you can. If possible, pay down as much debt as you safely can as the amount of debt you carry can significantly affect your score.
4. Determine Your Tax Burden
An important and unavoidable expense in business is taxes. Unfortunately, many entrepreneurs starting a small business may forget to take tax burden into calculation when determining if their business has the potential to be profitable. You will need to consider such issues as self-employment tax, federal state, and local tax, and payroll taxes. These issues all need to be taken into consideration when determining how to classify your business as well as your ability to hire employees and the amount they can be paid.
5. Assess Your Profit Potential
It is easy to get wrapped up in the excitement of a good idea, but it is important to make sure to fully assess the potential of your business before embarking on it. Not all ideas can form a business, and it is essential to assess your income and sales projections to make sure that once your business does start making money, it is designed to be able to have the income cover the basic expenses. You can determine this potential by performing your own market research identifying possible customers as well as current industry competition and how much it will cost for you to be able to compete with them.
6. Determine Funding Methods
You will need to determine what methods of funding you will use, not only to start your business, but also to keep it going and help it grow. Some of the most common sources of funding include personal savings, loans from family and friends, small business loans, and outside investors. You should carefully consider which method can help your company continue to grow and how much it will cost in terms of interest or equity.
Help yourself get a solid financial start when starting a small business by considering the steps above. Making a plan in every aspect of your business is one of the best ways to set you on a path towards success.
About Angela
Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.
1 https://www.sba.gov/blogs/how-estimate-cost-starting-business-scratch
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