financial habits for Entrepreneurs
Poor financial management in the early months and years could harm your business down the line. Here are some important habits to build for your start-up from the beginning.
Key takeaways
Securing customers and growing revenue is not enough to build your start-up, good financial management involves positive cash flow. Forecasting is important to make sure you have enough cash to pay your bills and operate the business.
Put strong credit-control processes in place to avoid running into cash-flow problems and maintain the financial health of your company. Consider arranging to take an upfront payment of invoices or deposits with new customers making high-value orders.
Separating personal and business expenses is vital. Putting personal expenses through the business can create difficulties down the line and make your company less attractive to investors or potential buyers.
After your early-stage business has made some sales, it’s tempting to look at your bank balance and think you’re in a great position. But even with healthy customer numbers and revenue, in a small and growing enterprise, things can get bumpy quickly if you don’t implement sound financial management measures.
The key is to keep a continuous cash flow through those difficult early months and years until your business becomes more stable. Without such measures, many enterprises don’t make it to their second or third year.
Having good financial management processes from day one will also make your business more attractive to potential investors and ultimately, buyers.
Cash-flow forecasting
One reason start-ups fail around years two and three is that they grow too fast and over-trade. These firms don’t have too few customers, they have too many and lack the cash to fulfill orders and buffer the gap between orders shipped and payments received.
Proper capitalization, financial planning, cash-flow forecasting and budgeting are essential to avoid running out of cash,.
credit control
One of the biggest risks to start-ups is running out of cash while they wait for invoices to be paid. So, a key goal is to minimise days sales outstanding (DSO), the time between shipping goods and receiving payment. You can do this in many ways, starting with prompt invoicing processes and a robust credit-collection function.
The right cover
Having comprehensive business insurance may feel like added expense but it’s a key part of building a financially resilient business. Consider protection such as credit insurance against potential bad debts and key person policies to cover the impact if you lose senior personnel.
Limited companies: separate your personal and business finances
Limited-company owners must have a business account and a personal account. They can sometimes still blur the boundaries between their personal and business finances but it’s a risky practice.
One temptation for a successful start-up owner is to take too much cash out of the business early on. This can weaken it; for example, if you receive a large tax or supplier bill and find you don’t have enough cash to pay it, which can then have knock-on effects that quickly spiral.
Another example of blurring the lines between business and personal finances is using your business account or credit card to pay for personal items. This may not seem like a big deal at the time, but if you don’t document and report this and handle the accounting properly through the director’s loan account, it could come back to haunt you, especially if it becomes a habit.
Any personal costs paid by the company that don’t go through the director’s loan account must be reported as taxable benefits.
How we can help
Talking to us can help you keep a close handle on your personal finances while building your start-up business. Protecting your income and savings, clear cash-flow forecasting and disciplined budgeting all help you keep a clear separation between personal and business finances during this critical period.
This enables you to maintain good financial hygiene with a comfortable cash buffer that supports growth and keeps your firm healthy, resilient and attractive to investors and buyers.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstances.