Starting a small business can be an exciting and rewarding experience. While there are many aspects that go into forming a business from choosing a name, to selecting vendors, to filing all the proper paperwork, one of the most important areas to focus on is the financial steps you need to take when beginning your business. Your financial foundation can sometimes be the difference between a new business succeeding or failing, so it is vital to start with a strong framework. Here are seven of our financial steps we recommend new business owners take when preparing for the opening of their business.

Step 1. Calculate All of the Startup Costs

Startup costs are one of the biggest expenses you will incur in the development of your business and these expenses occur typically before you have even sold your product or service. Business owners will run an average cost of $30,000 to start a new business according to the Small Business Association, though this can vary drastically depending on the type of business and its geographic location.1 For example, brick and mortar locations have a significantly higher startup cost than e-commerce stores. Businesses that require a number of licenses and certifications can be costly to get off the ground as well. There are several expenses that can go into startup costs such as rent or mortgage down payments, salaries, website development, advertising, permits, accounting and legal fees, and business filing fees, to name a few. Remember, you will need some ‘runway’ before you get off the ground.

Step 2. Determine Required Living Expenses

Since your time and resources will go into building and growing the business with the possibility of not seeing a profit for a while, it is important for those looking to start a small business have enough set aside for their basic living expenses until the business becomes profitable. If you are leaving a job to start your new business, you will also need to take into consideration the cost for health care and other necessary benefits which will no longer be covered by your employer. A good rule of thumb is to have at least six months of living expenses saved before starting.

Step 3. Get Your Credit in Order

While you may be able to borrow money under the business name, initial funding with loans and credit cards will be based on your personal credit. Even after being established, many banks will still consider the owner’s credit as a deciding factor on the ability to lend – as well as the interest rate. You will want to take stock of your assets, including the equity in your home as well as find ways to increase your credit score. We have resources available for tracking these.

Step 4. Determine Your Tax Burden

An important and unavoidable expense in business is taxes. Unfortunately, many entrepreneurs starting small businesses may forget to take taxes into calculation when determining if their business has the potential to be profitable. You will need to consider such issues as self-employment tax, federal state, and local tax, payroll taxes and more. All these need to be taken into consideration when determining how to classify your business as well as your ability to hire employees and the amount they can be paid. We often do this through a trail tax return.

Step 5. Assess Your Profit Potential

It is easy to get wrapped up in the excitement of a good idea, but it is important to make sure to fully assess the potential of your business before embarking on it. Not all ideas can produce a profitable business. It is essential to assess your income and sales projections to make sure that once your business does start making money, it is possible to cover expenses and make a profit. You can determine this potential by performing your own market research identifying possible customers as well as current industry competition and how much it will cost for you to be able to compete with them.

Step 6. Determine Funding Methods

You will need to determine what methods of funding you will use, not only to start your business, but also to keep it going and help it grow. Some of the most common sources of funding include personal savings, loans from family and friends, small business loans, and outside investors. You should carefully consider which method will help your company continue to grow, and how much it will cost in terms of interest or equity.

Step 7. Implement the Plan

Once you have at least considered the steps listed above, it is time to start implementing your plan for your small business. Use our helpful Small Business Checklist to get started, highlights listed below.

  • Asses Your Risk:
    • Be sure to research your services to review others also operating in the same or similar capacity.
    • Conduct a SWOT Analysis to identify what you can improve and what is working.
  • Legal:
    • Check your business name to make sure it is not already in use
    • If your business is in retail, be sure to register for State and maybe local Sales Tax collection.
    • Obtain business licenses and permits.
    • Determine your entity structure and work with a professional to draft your Articles of Incorporation, Operating Agreement, Buy/Sell Agreement, etc.
  • Financial & Accounting:
    • Open a bank account for your business. It is critical to build your business foundation from day one by separating business and personal income and expenses.
    • Engage with a CPA/Accountant to stay on top of reporting and taxes.
    • Establish an accounting software / system. As a business, proper accounting and reporting is imperative.

If you would like to talk through starting your own small business with our Advisors, contact us today for an informal conversation.

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.