Many factors go into making a business a success, but one of the most challenging areas is financial management. Here are some tips from the U.S. Small Business Administration (SBA) for avoiding common financial mistakes.
• Build a cash reserve. A critical decision before embarking on any business venture is having personal cash in reserves. The costs of going into business aren’t always high, but there’s a good chance you won’t start to make a profit immediately, and you will always need to put cash aside for taxes, regardless of your margins.
• Add up all your monthly expenses so you know what a month of personal expenses really are for you.
Still in a day job? Set aside 5 percent of your net pay each paycheck and build savings.
• Be sure whenever you take a cash draw from the company, you set aside money for taxes.
• Consider your debt-income ratio. Your chances of getting a business loan are seriously diminished by debt, even if you have the projected income to repay them. If you can, focus your efforts on repaying all your personal debt before you go into business or as early in the business process as you can. Even if you don’t need financing now, you may need capital injection down the line.
• Don’t overinvest in your business. If you are relying on your cash reserves, credit cards or savings to start a business, try to avoid some of the overinvestment traps that entrepreneurs fall into — whether it’s a fancy office, computer systems or inventory overload. Focus instead on building a good product and customer experience. Starting a business from home, at a business incubator like the NIACC Papajohn Center or online are cost-effective ways to avoid some of these pitfalls.
• Separate personal finances from business finances. This provides your business with credibility and also reduces your personal liability (a must if you are incorporating your business as a distinct and separate legal entity under its own name), and helps you manage your taxes, bills and other payments.
• Don’t forget to pay yourself a salary. It can be tempting to pour all your profits back into your business without a thought for your own financial needs. However, paying yourself a salary based on what you need to keep your own personal finances in shape and separate from your business is essential.
• Talk to a financial expert. Getting expert help from a banker, accountant or tax advisor can go a long way in making the financial goals of your small business a reality.
Information provided by Tim Esbeck, community president, Manufacturer’s Bank & Trust Clear Lake Branch, 1919 Hwy. 18 East, Clear Lake. For more information, call 641-357- 6161.