In theory, a sustainable business is one that makes more money than it spends. The problem with this oversimplified view lies in the fact that it assumes that you start from zero. This is not the case with most startups that have to get in debt to even launch. Aside from this, the ways in which you spend your money, reinvest and make financial projections affects the efficiency of your business in more ways than you can imagine. With that in mind, here are five things that first-time entrepreneurs need to know about startup finances in order to survive.
Cash Flow vs. Account Receivables
The fact that your company is earning money is great. However, it might not be enough. Why? Well, because your account receivables may not be arriving at a fast enough pace to cover the cost of all your day-to-day expenses. So, in order to balance this out, you need to have an alternative way of funding your business up your sleeve. A source of side revenue is always a good thing; however, applying for another loan or selling your invoice might also be options worth considering.
Fundraising Methods Determine the Future of Your Company
The source of your initial capital might determine the future of your company. Teaming up with a partner will set you up for a lifetime of cooperation, but also an inability to make independent decisions on some of the most pressing matters. The same goes with selling equity. This is why it’s probably for the best to look for reliable start-up business loans instead, which is a course of action that most entrepreneurs take.
Structure Determines Your Taxes
The structure of your business determines your taxes, which is why this is a decision that you shouldn’t make hastily. A sole proprietor can pay their personal taxes together with their business taxes; however, this also means that there’s no legal mechanism to protect their personal assets by separating them from business assets. In other words, if your business ends up in a failure, you lose more than just your business. This is why it’s smarter to register as an LLC (limited liability company), even though it might make your tax scheme a tad more complex.
Austerity Can Backfire
In theory, saving money each step of the way is supposed to be a good thing; however, in practice this can go sour fairly quickly. First of all, in order to expand your business, you need to invest in it by buying new equipment, hiring new people and even moving to a bigger office. Failure to do so will hold your business back. Moreover, ignoring your own needs and forgetting to pay, and even treat, yourself, can make you lose motivation, which is a horrible thing for the potential of your business.
Pessimism Can be a Good Thing
Hoping for the best, but expecting the worst is the only way in which you can be ready for every outcome. Sure, optimism is great as long as it keeps you going forward; however, if it makes you go too fast forward, you might make some decisions that you’ll come to regret. This is why you need to be pessimistic (not all the way, of course), when calculating your break-even point, even prepare for the worst case scenario. This is one of these situations that you hope will never actually occur, but just can’t afford to be underprepared for.
No matter how logical they may seem, the sad truth is that an average first-time entrepreneur tends to be completely oblivious of at least a couple of the above-listed issues. Fortunately, now you know better.