Having a stellar idea for a product or service is the first key ingredient to building a successful business. Putting sound financial strategies into place is possibly the next key piece to making sure your company thrives. Without a financial plan of how to manage business expenses and earnings, there is a good chance that soon there will be no money left to manage. Here are three of the most important rules for putting your business finances on a safe and secure path.
1. Bootstrapping Often Beats Debt
While using credit cards to fund a business is a possibility, it should not be the basis of your company’s cash flow. In too many cases, credit card debt turns into a vicious cycle of rolling debt from one card to another interest-free card without ever coming close to paying off the balance. This is very risky and is a sign that something is not right with your business model. And it can lead to serious damage to credit, hindering your chances of getting other forms of business loans in the future. Wherever possible, try to save up for your business, ask friends or family for donations, or procure business funding from angel investors rather than relying on credit cards to get your company off the ground.
2. Fill Your Emergency Reservoir
There will always be a financial crisis at some point for every business. The worst thing you could do is not prepare for that rainy day. The financial rule of thumb for businesses is to have three to six months’ worth of expenses put away in a savings account. First, you need to know how much you spend which requires keeping track of all your monthly purchases for several months. Then take the average of those figures. Say you spend $2,500 a month. A good reserve fund would have between $7,500 and $15,000 for your business emergencies.
3. Do Not Let Taxes Write-offs Determine Your Spending
Sometimes new business owners get confused about the tax term “write-off.” Just because an expenditure can be written off on your taxes, does not mean it is free or the purchase will not actually come out of your budget. You still have to pay for it – it just lowers your taxable business income in the future. Therefore, make sure you plan your business spending around things that are truly valuable to your company, rather than letting tax write-offs take over your budget.
With these three key rules under your belt, you will be in good shape to maintain a healthy financial plan for your growing business.