Almost all of us at some point or another will dream about owning our own business. The thought of being your own boss is appealing for many reasons. But how do you start a business, anyway? Where do you even begin? How do you go from having a concept to actually having a business that is up and running? That’s where we come in. In this six part series, we’ll go over all aspects of starting and running your own business:
- Putting the plans in place
- Financing your idea
- Getting the word out
- Taking care of employees and customers
- Keeping an eye on cash flow
- Covering your bases
Financing Your Idea
Funding can prove challenging for new businesses, especially if they don’t know how much money they need or where to get it, but that doesn’t mean all is doom and gloom. Rather, it means you need a solid financial strategy to win over lenders and investors. With limited funding available, entrepreneurs who present with strong business plans stand the best chance of getting the startup funding they need.
The first step is to calculate your start up costs. Start by adding up your monthly expenses, such as payroll, utilities, mortgage/rent, inventory, insurance, supplies and marketing. Next, total your one-time startup costs, such as equipment, vehicles, website design and down payments. Finally, consider the total of your one-time startup costs plus a full year of monthly expenses to arrive at your startup costs. This is the amount you will need to stay in business for one year.
The SBA recommends estimating costs for five years. Since it can take two to five years to become profitable, funding the first five years of business can increase your chances of success.
Securing Your Finances
Now that you know how much you need, where do you get it? There are essentially eight different ways to fund your business.
- Small business loans -- Bank and credit union loans are straightforward and popular ways to fund new businesses. As we mentioned last time, it’s important to approach traditional lenders with a strong business plan to secure the funding you need.
- SBA loans -- Though new startups do not qualify for disaster relief programs such as PPP and EIDL, they can still obtain funding via SBA (Small Business Administration) guaranteed loans.
- State and local government loans -- Some state and local governments offer small business startup loan programs, and many launched new initiatives to fund businesses during the coronavirus crisis.
- Non-bank lenders -- If you’re unable to obtain funding via traditional banks, you can seek out nonbank lenders. They tend to offer quicker approvals, though interest rates are typically higher. The COVID-19 bailout programs also prompted lending startups to seek new business, which suggests these companies are eager to lend at a time when others might be reticent.
- Venture capital -- Venture capitalists extend funding in exchange for shares of business ownership. These investors assume risk and hope to cash in if your business goes public.
- Crowdfunding -- Crowdfunding surged during the coronavirus crisis, as many people have donated to help keep their favorite businesses alive. That, in turn, has increased general awareness for – and willingness to participate in – crowdfunding, which makes it a viable option for new startup funding.
- Grants -- Government agencies and private institutions offer small business grants, typically designed to spur innovation or make the world a better place. Those initiatives are more pertinent than ever, so startups might qualify for business grants that bolster jobs in underserved communities, offer access to financing to minority founders or seek to develop emerging technology.
- Bootstrapping -- Finally, you can use your own money to fund your startup. It’s how most small businesses get started; and even though self-funding carries risk, it also lends an immense sense of accomplishment if and when your business succeeds. Your personal savings might not be enough to get your business off the ground, but the good news is you still have options in the form of a home equity line of credit, a second mortgage or even selling off assets.
Managing Business Finances
With funding secured, you need to now consider how you’ll handle your business finances. The saying “It takes money to make money” can feel especially true when looking at the costs associated with starting a business, but like any worthwhile endeavor, putting in the legwork necessary to arrive at an accurate forecast will be time well-spent.
Managing your business finances properly will his help you keep track of your money, pay your bills and identify a path to profit. It will also help you maintain compliance with regulations and plan to weather potential future crises. Here are some things to consider:
Manual Bookkeeping or Bookkeeping software?
Manual spreadsheets are fine for microbusinesses with minimal transactions, but erroneous entries can prove disastrous. As businesses grow and hire employees, bookkeeping software can simplify accounting and offer additional services such as time tracking, invoicing, point-of-sale integration and remote access.
Accural Accounting or Cash Accounting?
You need to decide which accounting method your business will use. With the accrual method, transactions are recorded when they occur, regardless of whether cash has exchanged hands. It’s often used for companies that buy or sell a lot of products or services on credit.
With the cash method, sales are only reported when cash has been received, and expenses when cash is paid. This is typically used by very small businesses.
Double-entry bookkeeping recognizes that every transaction affects both your debit and credit balances. The sum of your debits and credits should be equal, since you will use one asset to acquire another. For example, you will increase revenue when you make a sale (debit), but also decrease inventory (credit).
Single-entry transactions are only recorded once, and not as debits and credits. This method is only for small, cash-based businesses.
Cash Flow Management
It’s critical to master cash flow to achieve business success; in fact, more than 80 percent of failed small businesses experience cash flow problems. Cash flow is the money that moves in and out of your business over a given period, typically a month. The goal is to deposit more than you spend to yield positive cash flow.
Outsourcing is a great way to improve your cash flow. Though it requires upfront investment, it’s typically cheaper than paying in-house employees and saves time you can use to generate additional revenue for your business. Here are five tasks you can outsource to improve cash flow:
- Social Media Marketing
- Email Marketing
- Phone calls
Leveraging Your Bank
Banks and businesses are intertwined from the start – every startup needs a checking account, and many seek financing through bank and credit union loans. However, businesses often underutilize banks by failing to tap into a wealth of resources designed to help startups succeed. Banks can offer advisement and financial products that help entrepreneurs make smart decisions, maintain legal compliance and save time so they can focus on business growth.
Here are five ways that banks can help your business:
- Business Filing Services
- Payroll and HR Management
- Trademark, Copyright and Name Search Services
- Treasury Management
- Branding and Marketing Services
You probably know your bank can print your logo and other branding on your business checks, which lends authenticity and credibility. But, did you know many banks offer high security business checks with anti-fraud features such as safety holograms and anti-copy technology?
Print checks aren’t the only payment options, either. ACH, wire transfer and eChecks round out the most popular payment solutions for small businesses. Here’s how they compare:
Automated Clearing House (ACH) is offered by most major banks. It allows the transfer of funds between two accounts. Payments can be sent at the last possible moment and there are no limits to the amount of transactions. Deluxe eChecks integrate with QuickBooks and other accounting sotware. Another benefit is that remittance data can be simultaneously sent with each eCheck. One drawback is that Deluxe eChecks do require a recipient to share their email address.
Wire transfers allow you to transfer money from one bank account to another. Since they’re best for transmitting massive sums of money, they are typically used by large corporate entities. However, there is high cost, they require an increased time investment and the sender must have the recipients’ full bank account information.
Paper checks by definition are a document that orders a bank to pay a specific amount of money to a person from the sender’s account. There is no need to store the payees' bank information and they work with most accounting software but there is the possibility that they can be lost, stolen or delayed in the mail and you must deduct the funds from your account days before the payment is due.
With Deluxe eChecks, you can send checks instantly via email. The sender writes an eCheck through a secure online system and sends notification to the recipient, who prints and deposits the eCheck, or deposits it instantly. They allow payments to be sent at the last possible moment and there are no limits to the amount of transactions. Deluxe eChecks also integrate with QuickBooks and other accounting sotware and remittance data can be simultaneously sent with each eCheck.
Some banks also offer remote deposit capture, which can help you deposit paper checks and pay employees and vendors fast – without the need to visit your bank. Here are two ways it works:
- A customer check arrives in the mail. You either scan it with a bank-provided check scanner or your mobile device, and the funds are instantly deposited into your account
- You issue a paper check to an employee, who scans it with their mobile device to deposit funds into their account
Remote deposit capture saves time by eliminating in-person bank visits, and it’s a great way to keep tech-savvy employees happy, too.
Banks vs. Fintechs
Fintechs such as online lenders woo small businesses with provocative pitches, but they’re not necessarily the best options for small business owners who seek the simplicity, security and comprehensive capabilities offered by traditional banks. Make sure you compare options before deciding whether to choose a bank or a fintech.
Necessary Business Filings
How you structure your business – and what you file – has a direct impact on how much you will pay in taxes and how well you can protect personal assets. Common business structures include Sole Proprietorships, General Partnerships and Limited Partnerships.
Then you will need to consider how to legally organize your firm. Options available are:
- Limited liability company (LLC)
- Nonprofit corporations
Choosing the right one for you can really depend on your business. We highly recommend fully reading chapter 6 of our How to Start a Business eBook to determine which will be right for you. Many banks offer business advisement and legal filing services. You can also consult your CPA, business attorney, local Small Business Development Center and companies that specialize in small business filings.
Exact filing requirements depend on your business structure and city, county and state regulations. Here are some of the documents startups need to file but be sure to speak with a qualified expert to determine which apply to your business.
- EIN (Employee Identification Number)
- Business name and/or DBA
- Articles of Incorporation
- Operating agreement or bylaws
- Additional state, county and local documents
- Ongoing business filings such as meeting minutes, annual reports, stock/membership certificates and employee, payroll and tax filings
All employers must have an EIN. If you’ll have employees, you’ll also need to file:
- Form I-9: Each new hire must fill out this form so the IRS can verify their identity and eligibility to work in the U.S.
- W-2: This form reports taxes and wages for each individual employee
- W-4: This is a withholding allowance certificate that allows employers to withhold federal income taxes for each employee
COVID-19 changed the way business is conducted. Now more than ever, employers have embraced remote work – and many are discovering that independent contractors can help them save on overhead and payroll management. Still, traditional employment models offer greater control over employee activities. That’s why many companies rely on a mix of employees and independent contractors. Determining which is right for you is another important step to take when starting your business.
Now that you’ve gotten your finances figured out and completed the necessary filings to get your business officially off the ground, how will you acquire the customers that you need? Next time we’ll dive into getting the word out and properly marketing your business.