Money is vital for any business. You can have the best idea in the world but without a good financial strategy, your company will fail each and every time.
Startup failure is common, especially within the first few years, but by following these tips, you can help your business avoid financial disaster:
1. Don’t put all your eggs in one basket
You have probably heard this line before. When you risk everything on that one great idea, you could lose everything. Even so, some entrepreneurs gamble their entire savings accounts on that one fantastic idea.
90% of startups fail within the first five years. Those are not good odds.
Make sure that you set some money aside so you can recover if things don’t go according to plan. Never take out a loan using your personal assets. Most of the time, if you risk everything, you may lose everything.
2. Create a reliable financial cushion
In your business, you also shouldn’t bet everything on your next campaign. Make sure you set aside some money every month to create an effective financial cushion. Treat it in the same way as you would treat your personal finances.
Try to make your financial cushion large enough that your startup can operate for at least six months without additional income. The bigger your financial cushion, the better. During difficult periods, no amount of savings will be “too much”.
3. Never co-mingle assets
Always open a business account and keep business expenses separate from personal ones. You may think that co-mingling personal and business assets is okay if you can manage money effectively and keep accurate records. However, this is only true in the short-term.
Mixing assets increases your chances of becoming personally or professionally audited, for example. You will have to justify and specify every transaction as ‘business’ or ‘personal’. This adds an extra layer of unnecessary complexity.
A business account can be opened within a week at most banks so there’s no reason to delay it.
4. Diversify your business investments
Investing is almost never considered from the point of view of an entrepreneur. However, it should be because everything your business commits money to is an investment you hope to win back later on. Diversify your business investments by not committing all your money to a single marketing campaign or product.
Make sure you place your money into multiple ventures so if one fails you are not completely out of control.
5. Seriously consider insurance
A single accident can destroy your business. The US is well-known for its ‘sue happy’ culture. Compensation and legal costs alone can destroy everything you’ve worked for. Make sure you are insured against any and all disasters.
It may seem like a huge expense during the early years of your business, but it could very well assure its future. This is an investment well worth making.
6. Speak to a tax expert
The IRS can cause you a whole lot of problems if you forget about them. Tax is complex and business tax is even more so. Speak to a professional who can teach you about the records you need to keep and what you are legally obligated to do.
Make sure that you avoid any schemes to pay less tax. Stick to the rules and do your very best to avoid attracting the IRS auditing team.
7. Prepare for the worst case scenario
Avoiding financial disaster is mainly about preparation. Be prepared for the worst by remaining aware of what can drive your business into the ground financially. Businesses that plan for the worst case scenario are far more likely to succeed.
If you are struggling with all of this, hire a financial advisor to help you with planning and management. With all of this in mind, what steps will you take to avoid financial disaster?