In order for a business to be successful, there are a number of factors that entrepreneurs need to consider. Keeping your finances in order is maybe one of the most important of these factors. However, all entrepreneurs are not very good at managing their finances — and hence run into a lot of trouble during the initial phase of their business and which might even lead to failing. Here are our top 5 tips to assist you to manage your finances:
1. Reduce your Cost of Living
Although you may feel the need to move into a bigger nicer apartment in an expensive city, or rent out expensive office space in the hustling and bustling part of the city, but this is not the time. The lower your cost of living and expenses are, the better for your business and personal life. As Thierry Godard states, “Choose a modest home and consider using it as an office, too. While it may not be the most glamorous option, you’ll thank yourself in a few years“.
2. Separate Business and Personal Bank Accounts
Your personal account and business account should be separate from day 1. This is probably one of the easiest things for managing finances yet the most overlooked. According to Carrie Smith, having separate business account can lead to advantages such as simplifying creating monthly business reports, prove income to IRS or lender and outsource bookkeeping if required.
3. Don’t Put Off Booking Keeping
Most entrepreneurs do this and this can become a huge problem later. As Eric Siu mentions in his article, “if you put off your accounting work, it doesn’t go away. It just gets bigger, and eventually you’re going to be faced with an overwhelming mess that you’ll need to sort out.”
For small businesses book keeping tends to be fairly simple. Just categorize your expenses, and use a simple method to record all transactions. This way your accounting becomes more manageable and you will not feel the need to put it off for future.
4. Pay Attention to Cash Flow
For every business cash flow is very important to keep things rolling on day-to-day basis. Cash flow is not only about what’s coming and and what’s going out, but it is also about the timing.
Murray Newlands quotes Miranda Marquit in his article “Pay attention to timing. It’s not always fun to plan a budget, but it’s especially important to have a plan as an entrepreneur”.
5. Create a Cash Reserve
Entrepreneurs usually do not have consistent or fixed income, and especially in the beginning there are high chances that might you won’t be making an money for some period of time. It is therefore advisable to set aside some money for emergencies and other purposes like paying off debts.
According to John Rampton, “NOLO.com suggests that set aside 5 percent of your paycheck so that it will help pay for expenses for one year. You could also monitor how much money you spend each month to help determine how much to set aside in your cash reserve — and where to trim if you need to cut costs.”
These funds need to be accessible and easy to liquefy, such as savings account or money market account.