If you're an aspiring entrepreneur looking for financial planning advice, you're in the right place. We've compiled thirteen pieces of advice from co-founders, CEOs, financial advisors, and other experts in the field. This article covers a range of topics, from understanding the important concept of opportunity cost and value to embracing the runway concept. These tips will provide valuable insights if you're in the early stages of planning your business or about to launch.
Financial Planning Tips for Entrepreneurs
Understand Opportunity Cost and Value
Know your numbers by heart and be able to simulate scenarios as quickly as possible!
If you are starting your own business, it is very critical to understand the opportunity cost associated with everything you choose to do. This means you should consider whether you should choose Option X or Y at that point and under your specific circumstances. When you are choosing from your options, deeply understand what you are paying for, what the incremental effort that needs to go in is, what happens if you don't make a decision at all, and, of course, what is the best and worst that can happen to you and your business.
Also, when investing in various tools to help your business grow, understand the value you are getting for the price you pay. Start with tools with no contracts, an affordable pricing range, and, of course, specially designed for small businesses like ours.
Avoid Debt, Grow Organically
Do whatever you can to avoid debt. Starting a small business is stressful in and of itself. Starting a small business in the red adds an incredible amount of stress—cash flow as much as you can, whether that's from personal savings or secondary income.
If you have to borrow money, borrow the least amount you need to keep the business going. Your company does not need to start with the vision you have for it ten years from now.
Start with the basics and grow organically by saving for upgrades and additional costly services. This also allows for marketing opportunities as you launch the new services. You'll be thankful you followed these tips when the going gets tough (and, boy, can the going get tough).
Manage Your Cash Flow
From my experience as a CEO, my advice to future business owners is, "Keep a close eye on your cash flow." Cash is the lifeblood of any enterprise. There will be a delay between the money you spend on inventory or services and the revenue you receive. This can lead to a cash crunch if not appropriately managed. Therefore, it's critical to track and analyze your cash flow regularly. It's like the fuel gauge in a car; you've got to keep an eye on it if you want the journey to be free of sudden stops.
Start Early, Track Finances
Don't wait, get started! Make time to work on your business, whether early mornings, lunch hours, evenings, or by taking PTO. Nothing good comes easy. Track expenses and hours spent on key activities, and don't quit your job until you're consistently producing enough revenue to replace your current salary.
If taking a pay cut isn't a concern, consider tracking your progress by how well you're keeping up with demand for your product or service. Are you turning down business or orders because you're at capacity, or do you experience lulls where your time can be spent on marketing activities? Having at least six months of living and business expenses in a high-yield savings account would be wise.
If you own a home, it could also be wise to open a home equity line of credit (HELOC) to access lower-interest debt and avoid higher-interest debt solutions like credit cards in emergencies. Only borrow for expansion, not to pay yourself.
Establish an Emergency Fund
My number one suggestion with financial planning is to ensure you have an emergency fund before venturing down the path of small-business ownership. We should use an emergency fund to cushion against potential lean times, like cash flow shortfalls or the need to pay unexpected and unbudgeted expenses. Having this cushion can help keep your finances afloat during those tough times without putting your new venture at risk.
Set Clear Financial Objectives
One mistake I made early on was not setting clear, time-bound financial objectives. In our initial years, we faced unexpected challenges, primarily when investing in specialized equipment like desiccant bags and thermal insulation blankets. Had I set specific financial milestones with timelines, it would've provided clearer direction and better resource allocation.
So, based on my journey, I'd advise anyone looking to start their own venture to always set financial goals with explicit deadlines. It helps prioritize your spending and gives you a roadmap for growth and expansion.
Invest Intelligently in Your Business
One piece of financial planning advice that I would give an up-and-coming entrepreneur is to invest in their business. Everyone tells you to do it, but they don't tell you how to do it properly. You can't just throw money at a random aspect of your business and hope it will make you long-term profits. You have to do it intelligently.
Research and planning are key steps in this process. You need to determine what aspects of your company would most benefit from investment. Some companies, like those dealing with soft drinks, benefit from extensive marketing and brand recognition.
Others, like the cannabis businesses we work with, benefit from better bookkeeping, efficient cultivation, and logistical support. Knowing when and where to invest in your business can mean the difference between a flop and a success.
Make Wise Strategic Choices
My top financial tip for new entrepreneurs is to invest wisely in your venture. This doesn't just mean putting money into the business; it's about making strategic choices that propel growth and align with your long-term vision.
Before splurging on the latest equipment or hiring a team, do thorough research to ensure a potential positive return on investment. And don't go it alone—getting advice from a financial advisor can be invaluable.
Create a Comprehensive Business Budget
One critical piece of financial planning advice for someone planning to start their own business is establishing a well-structured business budget.
A comprehensive budget should encompass both startup costs and ongoing operating expenses. Identify all the necessary expenditures, from office space and equipment to marketing and employee salaries, and allocate funds for unforeseen expenses or contingencies. A clear budget helps you understand your business's financial requirements and ensures you don't overspend or underestimate the resources needed to keep your venture afloat.
Another essential aspect of financial planning for a new business is to secure adequate capital. This could come from personal savings, loans, investors, or a combination of sources. Ensure you have a solid financial runway to cover initial expenses and sustain your business until it becomes self-sustaining.
Hire a Financial Professional, Manage Taxes
If you want to start a business, tax planning becomes much more difficult. If you hire a skilled, certified public accountant (CPA) or other financial professional to help you with your business and do your tax planning and preparation, you will not only have more time, but their knowledge may also help you pay less in taxes.
When thinking about the costs of starting a business, remember that you may get certain tax breaks as a business owner. You can reduce ordinary business costs (normal and accepted in your trade or business) and necessary (valuable and suitable for your trade or business).
There are specific rules, exemptions, and limits for tax deductions on many of these expenses. These benefits can be figured out with the help of a tax expert. If you're unsure how to maximize your qualifying business costs or how much to pay in estimated taxes so you don't get stuck with a hefty bill or overpay the federal government, a CPA can help you.
Prepare for Higher Costs and Delays
Success will cost five times the money you expect and will take much longer than expected. Be prepared to bankroll this project for years beyond your estimated break-even date. If you are not prepared to see this through until the business succeeds and can sustain itself from revenues, you'll likely lose a lot of time and money.
However, if you can find a way to persevere through the early stages of this business, it's an incredibly rewarding process both from a personal satisfaction and monetary point of view.
Choose a Scalable Financial Platform
My advice is to factor in scalability when deciding which financial platform to use.
As your operations expand, you'll need your tools to cope with increased transactions, potentially in different currencies. Keep up with data-tracking and compliance issues, which may get increasingly complex.
So, you don't want to outgrow your initial decision and have to migrate to another platform as your business evolves. In my opinion, it's important to get these early decisions right.
Embrace the Runway Concept
Embrace the runway concept. Before taking off, an airplane needs a sufficient runway, and similarly, before your business gains altitude, you'll need financial reserves. Calculate your estimated operating costs for at least 6-12 months, including personal expenses, and ensure you have that amount as a safety net.
This runway gives you the breathing room to navigate initial challenges, make iterative improvements, and avoid desperate decisions driven by short-term cash crunches. Remember, it's not just about launching but sustaining and soaring.