Starting a new business is an exciting journey but one that requires careful financial planning. As a new business owner, you need to budget, fundraise, account, save, and spend strategically. Without proper money management, many promising ventures fail in the first year.
This article outlines financial planning best practices tailored to entrepreneurs. You will learn budgeting basics and financial management tools that can help you gain valuable insights into what’s working well and what needs improvement. Follow these money tips to set up the financial foundations of your company.
Create a Budget and Cash Flow Projection
Creating a monthly budget is one of the most important financial planning tasks as a new business owner. A budget allows you to forecast and track your business’s income and expenses to determine your monthly and annual cash flow. Follow these key steps:
Estimate One-Time Startup Costs
Make a list of expected upfront expenses to start your business, such as equipment purchases, licenses and permits, legal fees, renovations, and initial inventory or supplies. These are one-time fees required to get your business off the ground.
Project Monthly Revenue
Conservatively estimate your monthly income from the sales of products and services. Consider seasonality trends and economic conditions. Be realistic in your projections, as it’s better to underestimate than overestimate.
List Ongoing Operational Expenses
Identify regular monthly costs like rent, payroll, loan payments, utilities, accounting services, insurance, advertising, etc. Also, account for variable expenses like credit card or other fees that fluctuate each month.
Calculate Net Cash Flow
Subtract your estimated monthly expenses from your estimated monthly revenue to calculate net cash flow. Positive cash flow means your business earns more than it spends. If cash flow gets tight, overdraft protection can help by covering essential payments and avoiding unnecessary disruptions.
Refine and Monitor the Budget
You will need to review and adjust your budget every three months based on your cash flow to ensure that it remains up-to-date. As your business grows, your income and expenses are likely to change and become more difficult to track.
However, there are consolidated business software tools available that can help you track everything in one place. Many such software platforms offer a full suite of tools for tracking income, expenses, inventory, and more on a single dashboard
Moreover, you can gain insights from to optimize your business spending patterns over time. Monitoring your revenue and costs will help you make informed decisions to keep your budget realistic. Click here to explore options that could work for your business needs and scale with you as you grow.
Monitor Key Financial Metrics
Once your budget is in place, it’s important to track specific financial metrics over time. This provides visibility into what’s working well and areas that need improvement. Some key financial metrics to track include:
Revenue Growth Rate
Setting realistic revenue growth rate goals, such as 15-20% quarter-over-quarter, can help scale your business sustainably. Track if you’re meeting targets through consistent monitoring of sales. Benchmark against the average growth rate for your industry.
Profit Margins
Review both gross and net profit margins to ensure you’re pricing properly and managing costs. Set goals by quarter. Your margins will show you how efficiently you run your business and operations.
Operating Expenses and Burn Rate
Keep an eye on overhead costs like payroll, rent, and utilities. Calculate your average monthly operating expenses to see how long your capital would last without new income. Try to reduce unnecessary costs.
Accounts receivable/payable days
Monitor to get insight into customer payment patterns and set payment terms with vendors. Review reports frequently and tweak your strategic and financial decisions based on what the trends indicate.
Careful tracking acts as an early warning system for spotting problems so you can take prompt corrective action. It also helps you identify successes to be replicated. Make monitoring metrics a consistent practice.
Plan for Profit First
Many new business owners focus so heavily on operations that they neglect setting up proper profit strategies. Adopting a “Profit First” system ensures your business remains profitable continuously.
With Profit First, you prioritize your profit by allocating a percentage of each deposit into a separate profit account before paying any expenses. For example, allocate 25% of each payment received to the profit account.
This profit account is essentially “off limits” and not used for running the business or your personal compensation. Only access these funds for true business investment or after ample profits have accumulated.
Putting profit aside upfront removes the temptation to spend it on owner compensation, bonuses, or unnecessary expenses when bills need paying. This also creates transparency on true profitability.
Over time, as your profit account builds, you can use a portion of these reserves to self-fund growth initiatives like new equipment, expanded marketing campaigns, hiring extra staff, etc. Just be sure to continue funding it at the predetermined percentage going forward.
Conclusion
As a new business owner, you can’t afford to neglect financial planning. Though it takes some effort up front, implementing these financial best practices gives you the data-driven insights and discipline to manage your money wisely. Embrace sound financial practices now so you can achieve your entrepreneurial dreams down the road.
