By Larry Alton
Small business startups may fuel the economy, but that doesn’t mean that they always succeed. In fact, according to a study published by Bloomberg, 80 percent of businesses fail within the first year and a half, which is a pretty dismal outlook for aspiring entrepreneurs.
The reason that so many businesses fail, in large part, is due to poor financial planning. In order to beat the odds and to get your business moving on the right track, consider the following financial advice.
Financial Advice for Rookie Small Business Owners
1. Start Out Lean
The beginning of your business venture is not the time to purchase fancy equipment or take expensive business trips. You need to cut as many costs as possible during the early stages of your business.
Think of spending in terms of investment rather than plain spending. Before you make the purchase, consider the potential return on investment. If you can see a logical path between the purchase you’re making and increased profits, it’s worth spending the money. If not, look for a more affordable option or do without.
2. Protect Your Assets
At the beginning of your business, you are the sole or co-owner (if you have a partner) of the entire company and all of its equity. If you run low on capital, you have the option to give up a part of your equity for financial support from "angel investors." You don’t have to pay this money back, which makes it a very appealing option to new business owners, but it does strip you of some of your equity, and thus, some of your control over the company.
Do everything you can to avoid giving up your equity. Even though taking out a loan at the bank may seem risky at the beginning, if you’re company succeeds, you’ll be extremely grateful that you didn’t give up any of your equity during the beginning stages.
However, the ultimate goal in a startup is to keep from failing, and if that means finding an angel investor because you can't get a loan or you can’t keep up with the payments on a loan you have, then giving up some of your equity is a worthwhile option. Just a word of caution: negotiate like crazy to ensure you give up as little as possible.
3. Keep Accounting Simple
Investing in a good accounting system will help you make and keep a strict budget so that you don’t overspend. Accounting software lets you analyze spending trends and determine where you need to cut costs to stay afloat.
When choosing an accounting software option, remember to keep it simple. The accounting you’ll do in your business boils down to basic numbers, and it doesn’t need to get any more complicated than that. Don’t worry about investing in accounting software with all the bells and whistles.
Simply choose a basic system you feel comfortable using; one that can handle your current expense computing both now and later when you become more successful and have more expense accounts to track.
4. Seek Funding When the Market Is Up
Getting a loan isn’t as simple as going to the bank and asking for one. You need good credit standing and the bank must have funds its willing to lend to you. The last few years following the financial crisis have made it extremely difficult for small businesses and start-ups to secure funding, but that has recently changed. With the recession several years behind us, banks are gaining more capital and lending power, and they're willing to loan capital with lower interest rates than before.
Learn from the recent market switch: It’s best to apply for a loan or to refinance a loan during a prosperous lending market. Keeping an eye on the current financial market will help you get the best funding option possible.
5. Prepare for the Worst
Though you don’t want to think about it, you need to be prepared for hard times. Keep your steady goals in mind and work towards them no matter what, but have a plan in place just in case those goals don’t pan out as expected.
If at all possible, set aside some money from business profits for emergencies. The business world is notoriously unpredictable, and you should have savings just in case. Shoot for six-to-nine months' worth of savings in case something goes wrong and your business stops making money for a while.
Also, look into business insurance to cover you for liability and property damage. The kind of insurance you need will depend on your business type and what you wish to protect. A good insurance policy will support you financially and legally if you find yourself in a sticky situation that you can’t handle on your own.
The economy continues to improve, which is a good sign for small business startups. By taking advantage of sound financial advice, you improve your odds of success.
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