I'd like to introduce you all to Rachel LaMantia, owner of Masterpiece Bookkeeping, LLC. When Rachel and her team stepped in to help me keep up with the financial side of my business, it was a game changer.
I'm excited to have Rachel as a guest on the IK Blog this month. - Lynn
Congratulations! You’re a new business owner. It’s exciting and maybe slightly terrifying. I’m sure you’re learning that there are a ton of things you never thought about before you started.
What about your business’s finances? Shouldn’t you worry about that when you actually start making money? Well, yes, but you also should think about it now! Here are a few things to consider to help you get off to a good start in your business money wise.
1. What’s your vision for your business?
Maybe it seems funny to start an article on business finances talking about your vision, but it is the critical piece to setting yourself up for financial success. If you don’t even know where you’re going, how are you going to get there?
Think about what you want. Why did you start your business and what are your goals? This, more than anything else, keeps us grounded and focused on the wild ride that is entrepreneurship.
2. Where are you going to bank?
Choosing a bank may seem easy, but consider whether you want to go with a big national bank or a smaller community bank or credit union.
I’m torn on this one; big banks play very well with cloud technology and can make your life easier doing cool things like automatically pulling bank statements. On the other hand, smaller banks often have better service and it’s easier to build a relationship with your banker. Avoid the really small ones as they sometimes don’t even connect in accounting software such as QuickBooks Online.
How many and what type of accounts are you going to have besides a business checking account?
Are you going to get a credit card and do you have a strategy for how you’re going to use it? Are you considering getting a PayPal account, which functions as another bank account? Generally, I don’t recommend using PayPal for business as it is a consumer focused platform.
This is a big one: keep your business and personal finances separate. If you need to put in or take money out of your business, do a transfer to or from your business account. Please don’t pay personal bills from your business account or vice versa. There are so many reasons; just trust me on this!
3. How are your customers/clients going to pay you?
What’s the timing? Are they paying at the time of service or purchase? Before? After? What will make it easiest on you?
Will you be invoicing and what will be your system for ensuring they get out on a timely basis?
How will you accept payments? Check? ACH? Credit card? If you’re accepting credit cards, do you know what processor you’re using and what system will fit your business model?
If you’re not collecting up front or at the time of service/purchase, what’s your collections strategy? This is crucial. Sending out an invoice and relying on the client to pay you works a lot of the time, but not always. You need a follow-up strategy to make sure you get your money.
4. How are you pricing your products and services?
This is a big hangup for a lot of startup businesses. You need to start by doing market research. How are other businesses in your space pricing? Who’s your target market and how do they value your offering?
What pricing model do you want to use? There’s often more than one option, and sometimes taking a non-traditional approach can work very well. For example, in my industry, it’s common to price on an hourly basis. That can be a pain for tracking and consistency. My firm uses a fixed monthly rate model instead, which is a win-win because the clients can expect and plan for a fixed amount and if we become more efficient we don’t get paid less.
If you’re service based, a very rough rule of thumb is that you should charge triple what you pay. So if a master plumber makes $40 an hour, your rate to the customer is $120. I see a lot of new entrepreneurs undercharging when they’re starting out and it proves to be unsustainable in the long run.
Of course, make sure you’re delivering an awesome product or service for what you’re charging!
5. Will you have inventory?
If you have inventory, you need an inventory tracking system. And it is way easier to put into place from the beginning than trying to do it later.
What kind of investment do you want to make in inventory? That’s your money that’s tied up on those shelves. It’s easy to get carried away and buy more than you actually will need or sell. Consider this carefully.
6. Will you have employees?
Work with an HR consultant to make sure you have all your bases covered.
How will you do payroll? Find a provider that you can build a good relationship with. I recommend startups stay away from the big payroll providers as they are focused on their bigger business clients. Be careful if you’re considering 1099 contractors. There are a lot of specific rules about whether or not they qualify and how closely you can direct their work.
7. Do you need to collect sales tax?
This is complicated because every state, county, and sometimes municipality is different. There are different rates and different rules about what is taxable, and sometimes it’s rather confusing. Make sure you understand if you have any sales tax obligations.
If you’re dealing with ecommerce, this is changing a lot right now due to new laws regarding interstate commerce and what is taxable. No longer can you only pay attention to your own state’s laws; you may need to be filing sales tax in multiple states.
8. How are you funding your business startup?
Do you have loans or are you investing some of your own money? How much are you willing to borrow or put into the business? Having a cap on this will help you limit your spend and make wiser decisions.
What’s your plan for paying this back in a timely manner?
What are your expenses going to be?
Have you put together a list of all of your expenses right away? How much can you edit that list to bootstrap in the beginning? You can start a business these days with surprisingly small amount of money. Balance the need to keep expenses low with getting a good support team and professionals in your corner.
What’s your initial break even number? How much do you need to make to cover all of those initial expenses on a monthly basis? That’s your first income goal.
Make a wishlist of things that you want to add when you start making more money.
9. How are you paying yourself?
Initially, maybe you’re not. But have a plan to compensate yourself for the work you do in your business. Your goal is to pay yourself a market based wage. It’s important that your business can “afford” you because that means it’s sustainable for the long haul.
In addition to paying yourself for the work you do, you should also have a plan for paying yourself profits from the business. And you can plan to have a profitable business! Hint: don’t spend all the money that you bring in.
10. How are you tracking everything?
You need to keep accurate business records at a minimum to file your taxes. Your business’s numbers can be so much more, though, and give you valuable insight into how your business is performing.
Who’s going to do your books? You can do it yourself, but it’s a big learning curve; your books are a giant math equation. Please do not have an administrative employee do this for security and accuracy reasons. If you want to chat about this part, please let me know!
Was any of this a surprise to you? Will it help you be a little wiser about your business’s money? I’d love to hear your thoughts!