What are the financial questions you need to ask when starting a business?
Starting a business can be an exciting prospect.
It is your chance to take that idea you’ve had and make it come true.
It can also be an opportunity for you to finally achieve financial freedom and independence.
But, investing in business also brings with it serious risks.
In fact, studies have shown that a large number of small businesses will fail within a few years.
One of the main reasons why businesses fail is that they failed to deal with the financial aspects of starting a business.
To ensure that your business does not come to a premature end, here are the essential financial questions to ask when starting a business.
How Much Money Do You Need To Start a Business?
This is one of the most important finance-in-business questions that you need to answer.
Think about what the actual costs of starting your business will be, including:
- Office space
- Legal expenses
- Inventory/Raw materials
- Accounting Expenses
- Software etc
You have to compute the startup costs and figure out what the monthly costs of running the business will be.
These recurring costs include employee salaries, utility costs, rent, and other monthly expenses.
Your startup costs and your monthly costs will help to determine how much startup capital you need, and how much your cash flows have to be to cover recurring expenses.
How Much Will My Monthly Cash Flow Be?
Cash flow refers to the actual amount of money going into and out of your business, so it is an important financial question to answer before starting.
When you are estimating cash flow, it is important that you are not too optimistic.
Of course, you want to believe that your business will do well, but it is more realistic to presume that it will grow slowly.
How To Finance A Business?
Now that you know how much startup capital you need, ask yourself, “how will I get financing for it?”
There are a variety of options you can draw from, including traditional sources such as banks to informal lenders such as family and friends.
You can also put your expenses on your credit card, although this will increase your costs since you will also have to bear finance charges.
What Are My Financial Goals In The Future?
This is another vital financial question that you need to answer when you are starting a business. You have to ask:
- What do you want the business to look like in five years? In ten years?
- How much do you project that it will earn at the end of these periods?
Having a long-range idea of where you want your business to go in the future will help keep you focused during the grind of having to run it day-to-day.
What About My Personal Finances?
Of course, you would want to devote yourself to your business.
However, you should not neglect your own financial situation.
Make sure that you continue saving for retirement, paying your bills, and building a retirement fund.
In addition to answering these questions, here are some business finance tips to keep in mind.
These tips will help you when you are actually starting to run your business.
Keep your personal and business finances separate.
This is one of the essential aspects of finance in business.
Make sure that you do the following:
- Open a separate bank account
- Get a separate credit card
- Separate receipts for business and personal expenses
But the most important thing that you have to do is to establish your business as a separate legal account.
This means forming a private liability company in which your liabilities are limited only to your capital in the business.
Doing this will protect your personal assets since these cannot be pursued by creditors to cover your business debt.
- Create a business plan
Basically, a business plan lays out what your goals for your business are and how you plan to achieve them.
For instance, it will answer financial questions like how to fund a business and how much money is needed to start a business.
This plan is something that you can show to others to communicate what your vision is for your business.
For instance, before investing in a business, potential financiers [investors] would want to see your business plan.
You can also show it to prospective employees that you want to recruit for your company.
- Pay yourself a salary.
This is one business finance tip that business coaches can’t seem to agree about.
Some believe that you should sacrifice paying yourself during the first few months when you are starting out, others don’t.
However, there are many reasons why you should pay yourself from the onset of your business, apart from the fact that you will need an income to meet your personal expenses.
For one, it will ensure that your personal finances remain stable so that you can focus on running your business.
So make sure that your personal salary is part of your business budget.
It should be enough to meet your expenses plus 20% for personal savings.
Track your spending. At the start, your available capital will be limited.
Keeping track of what money is going out of your business will help you to manage your cash flow so you won’t run out of money.
It will also make it easier when you file your business tax returns.
Learn the basics of business accounting.
Even if you choose to hire a bookkeeper or accountant to do your books, it is still important for you to know at least the fundamentals of accounting.
This will allow you to be able to read financial statements and use them to make decisions for your company.
Set business goals that are measurable.
For instance, you can set amounts for your monthly, yearly, and even weekly revenue goals.
By tracking these goals, you can measure your progress and make adjustments as required.
To help build your morale and confidence, you can even set small milestones to hit.
Achieving these can give you the encouragement to carry on in the face of difficulties.
You need to have answers to all these financial questions when starting a business, especially at the planning stage.
These answers will help you avoid the common pitfalls many entrepreneurs face.
They may even spell the difference between failure and success for your business.
Good luck with your new venture.
Do you now understand the role of finance and its importance in a startup business?
Please leave us your comments!
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