Starting a company is a hectic time with what feels like a never-ending to-do list. While there is a lot going on, remember that everything in business comes back to money. So, no matter your business model or the scale of your operations, you need to follow financial best practices from day one to increase your chances of success.
Listed below are five financial best practices to follow as you embark on an exciting journey with your new business.
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1. Keep Business And Personal Separate
Keeping your personal and professional life separate is never more important than when it comes to business finances. When you’re a small operation, it might seem more straightforward to use your personal credit card to cover expenses or to deposit company revenue straight into your personal account.
But this small convenience at the start of the journey leads to significant issues down the road.
First, tax season will be a nightmare. You will have to go through all your transactions and manually separate personal and business transactions to find earnings and business expenses. The IRS requires documentation to support any deductions. If you get audited, you may even end up losing out on deductions if you can’t prove that transactions are business-related.
Beyond taxes, using a personal account can look unprofessional, and some clients may refuse to send payments to personal accounts. Plus, you can be more susceptible to fraud. Running a business necessitates a larger number of transactions than personal use. As your financial activity increases, your chances of running into scammers increase. With a business account, you are protecting your personal finances from bad actors.
When you start a new company, one of the first things you need to do is open a business account and get a business credit card. There are business credit card advantages and disadvantages, but if you want to run a serious company, the benefits far outweigh any downside. While they may come with higher interest rates and an annual fee, business credit cards allow you to:
- Establish company credit (see the next section).
- Access higher credit limits.
- Track all the spending related to your business in a single place.
- Receive perks that help your business, such as cashback rewards or points for frequent flyer programs.
- Add employees to the business credit card.
2. Build A Business Credit Score
A high business credit score brings significant benefits, from easier access to funding on better terms to lower insurance premiums and vendors willing to provide goods and services on credit.
When you first start a business, register for a free Data Universal Numbering System (DUNS) number to use when applying for credit cards or trade credit accounts. Then build up a strong payment history (by meeting your commitments on time) to start building your business credit score and show rating agencies that you are a reliable company. Also, consider that not all credit card companies or vendors report payments to rating agencies.
As a new operation, your credit score will initially be relatively low, and with little else to go on, rating agencies will take into account your personal financial history. Establishing the company as a separate entity with its own credit score is yet another reason not to mix personal and business finances.
3. Find Funding
Unless you’re bootstrapping the business with your own funds, you will have to identify a source of financing. The typical route is debt financing via business loans. You put together a proposal explaining your business idea and hope a bank approves the loan. Then you agree to a payment plan, including interest and schedule, to pay back the loan over a fixed period of time.
While loans can be scary, saddling your company with debt and burdening your cash flow with repayments, they are a critical part of getting your business off the ground. Without an influx of cash, how are you going to invest in your facilities or hire staff?
If you don’t want a loan but need capital to get started, the other option is equity financing–finding business partners who believe in your business proposal. Equity financing is when a party invests in your business in exchange for a share of the profit and, perhaps, a say in how the business is run.
4. Choose An Accounting Basis
When running a business, you have to decide between cash or accrual basis accounting. Cash basis accounting is based on when money comes in and out of your company. Accrual basis accounting is slightly more complicated, tracking funds depending on when the work or expenses incurred.
Take the end of the tax year as an example. You work for a client before the end of the tax year but don’t get paid until after the deadline. In cash accounting, the money associated with that work rolls over into the next year. Using an accrual basis, it contributes to the original tax year (the time at which the work was done, not when cash changes hands).
Each has pros and cons, but the most important factor is to choose a method and stick to it.
5. Pay Yourself a Salary
When you’re lost in running a business, it can be easy to pay your staff a formal salary and organize all of your expenses but then forget about yourself. Rather than take money out of the business account for yourself in an ad-hoc manner, you should always pay yourself a salary.
You might want to optimize the company’s cash flow, paying yourself only when you have personal expenses. But you should remember you’re also a part of the business, and you will need a salary to survive in the long term. Not only will this help your personal finances and savings, but it also makes budgeting easier.
Start On A Solid Financial Footing
These five best practices are a great starting point for getting your new business off to a strong financial start. As you grow, you will likely need to incorporate new practices and employ dedicated bookkeepers and accountants. But as long as you make future decisions with finances in mind, both improving cash flow and financial management, you’ll give yourself the best chance for success.