Each year, over 627,000 new businesses are opened by eager entrepreneurs with big hopes and dreams for the future. While their reasons for taking this leap may vary, they all share at least one thing in common: a desire for freedom. Who doesn’t like the idea of leaving their current job for the last time, giving their resignation and becoming their own boss?
In reality, there is a huge amount of planning that needs to be done long before a business venture ever gets off the ground. These foundational steps will help ensure your business does not end up like the many that fail within the first few years. Where should you start? The very first step is to make sure you understand your finances.
According to a U.S. Bank study, 82 percent of business failures are due to either poor cash flow management, or a lack of understanding of how cash flow contributes to a business. These tips will help you avoid some of the most common financial mistakes entrepreneurs make when starting a new business, so you can start off on the right track.
Stay on top of cash flow – always
Regardless of business type and industry, cash flow is the lifeblood of every business. As mentioned, maintaining cash flow is many small business owner’s top challenges. What is cash flow? The term cash flow refers to the money that flows in and out of your business at any given time. To be successful, you will need to know where every single dollar is coming from and where every single dollar is going to. Without this knowledge, your business can easily slip into a tight financial situation.
Closely monitor all spending
Armed with this understanding of cash flow, you will be able to better manage and monitor your spending. You will have expenses coming from every direction, especially in the early days. It’s important to stick to necessary expenses, like utilities, rent, and payroll. Try to minimize or eliminate unnecessary spending wherever and whenever possible.
Create a cushion for the unexpected
One of the most important things you can do for your business from day one is to prepare for the worst possible scenario. You can do this by creating and keeping a cash reserve. Some businesses worry that if they set too much capital aside it will take away from investment and growth opportunities. While this can be true, it’s important to strike a healthy balance; maintain a reasonable cushion of cash, and still have cash on hand to seize chances to expand. Many experts recommend setting aside enough cash to easily cover several months of expenses.
Establish an outside source of funding
Even if you don’t necessarily need a lending partner right now, it’s always wise to know who you will turn to when you do. Not all financing options are created equal. Not every cash solution has your business’ long-term health in mind. Not every lender is willing to work with a new business with limited financial history. If you need additional capital starting your new business, make sure you consider alternative lending options too, like merchant cash advances and high risk business loans.
If you’re having trouble finding the extra cash you need to get your business started, our team of experts at First American Merchant can help you quickly and easily secure flexible funding. Thanks to our experience and vast network, you can have an account and funding approved in as little as 24 hours.