Are you a budding entrepreneur? Starting your own business is a thrilling endeavor filled with boundless opportunities––and challenges. Before launching your business, you need to assess your financial preparedness. In this guide, we’ll explore some fundamental financial principles to ensure you get off on the right track.

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Understand Startup Costs

First, you need to consider the initial costs when you start a business. These expenses can include everything from equipment and inventory to legal fees and marketing expenses. Be sure to factor in one-time expenses (like office furniture and a technology setup) and ongoing costs (like rent and utilities).

Establish a Financial Cushion 

Having a financial buffer is essential to absorbing the inevitable ups and downs of your business’s early days. Experts often recommend having at least three to six months of operating expenses saved. This cushion can ensure you remain afloat if revenues are slow at the start. 

Explore Funding Options to Start a Business

If your savings aren’t sufficient to cover startup costs, exploring funding options is a viable path. There are numerous avenues to secure funding, each with its own benefits and drawbacks.

Bank Loans

Bank loans tend to be the first funding source people consider in order to start a business. But securing that sweet, sweet moolah is easier said than done, and most banks require that you present a solid business plan and demonstrate good credit history. One of the key advantages of bank loans is that you, as the entrepreneur, retain full ownership and control of the business, as banks do not take equity.

However, they come with fixed repayment schedules, regardless of the company’s success. Needless to say, it’s in your best interest to ensure your business has a solid growth plan before accepting a bank loan.

Start a Business with Venture Capital 

Venture capital (VC) is secured through investors or firms that provide capital to startups in exchange for equity or ownership stakes. Venture capitalists often focus on high-growth potential businesses, especially in the technology and innovation sectors.

By working with venture capitalists, you gain access to major financial support and strategic guidance. On the other hand, the partial loss of ownership and control can be jarring for some businesses just starting out. Venture capitalists often expect a say in business decisions and seek a high return on their investment, which can influence the company’s trajectory––and not necessarily for the better. 

Crowdfunding to Start a Business

Crowdfunding raises small amounts of money from many individuals, typically via online platforms like Kickstarter or GoFundMe. It can take the form of donations, pre-sales of products, or equity investment. The great thing about crowdfunding is that anybody can do it. It’s a great way to validate demand for a product while building a customer base early on.

Bear in mind that with crowdfunding, success depends heavily on the strength of your marketing efforts and the way you pitch your company. Fulfilling promised rewards or managing multiple small investors can be time-consuming and detract from other business activities.

Project Cash Flow

A clear understanding of your cash flow—money coming in vs. money going out—is crucial. Cash flow projections help you anticipate financial gaps and plan accordingly. Suppose you start a small business, like a cafe. A cash flow projection shows that your monthly revenues from coffee sales and snacks are estimated at $10,000, but your monthly expenses total $9,500.

In the first three months, you anticipate a slow start with revenues at $7,000 per month due to limited customer awareness. Without cash flow projection, you might not realize you’ll face a $2,500 shortfall per month in the early stages of your business.

Evaluate Your Personal Finances

Besides business finances, your personal financial situation can impact your ability to start a business. Make sure everything is in order to avoid unnecessary stress. Here are some key considerations for assessing your financial fitness and determining whether or not you’re ready to handle a business.

Credit Score

You can’t get a loan without a good credit score. While there is no standard minimum, banks are most willing to work with those with a score of 700 or higher. This will open numerous doors for you and make just about any business loan accessible. If your credit score is lower, consider getting it up to 700 before applying. 

Personal Expenses

Effectively managing your personal expenses will give you a safety net for living costs while your business stabilizes, thereby reducing financial stress. High personal expenses may limit funding options and create unnecessary strain. Performing a financial checkup can help you determine whether or not adjustments are needed––such as paying off debt or building savings––to support a successful business launch. 

Set Your New Business Up For Success

There’s a lot that goes into starting a business. While you may be tempted to jump right in, it’s important to consider your current financial situation and make a solid game plan before taking off. By following these tips, you can lay the foundation for business success and ensure long-term stability.

 

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