Starting a business from the ground up is no easy task as it requires not just a great idea but a certain level of financial understanding and funding. The good news is, you don’t need a finance degree or a massive amount of cash to get started or be successful.
Whether you’re a first-time small business owner or a seasoned entrepreneur, you can get your business on sound financial footing from before you even launch. The key is to start with these seven money basics for entrepreneurs.
Money Basics for Entrepreneurs
So you’ve got a great business idea, but don’t know where to start. From a financial perspective, you want to lay the groundwork now for long-term financial health and, of course, make sure your business can be profitable. The following steps will help to guide your path to financial success:
1. Create a business model and business plan
Your first step is to create a business model and write a business plan. In other words, you’ll want to define your business idea, describe your execution plan, articulate how you stand apart from the competition, and bring in revenue.
Your business model and business plan work hand in hand. The former focuses on how your business will make money while the latter defines your company’s objectives, finances, customer demographics, leadership, and more. Both documents are often requested if you are seeking partnerships, financing, or other business opportunities. They will help solidify the overall uniqueness and value of your company.
To help you get started, check out this business plan guide from the Small Business Administration (SBA) and/or these seven business model must-haves from Entrepreneur.
2. Understand your market opportunity
A big question that should be addressed in your business plan is the market opportunity. In other words, is there a potential customer base that will want to buy from you and not your competition?
By definition, “market opportunity” refers to the projected potential size of your market (i.e. number of potential customers) and sales (i.e. how much money you could potentially make). Here’s how to figure out both aspects of your market opportunity:
- Market Size: To determine market size, first define who your market is. Then look at sites like Census.gov, research any existing stats on your industry, or even check out Facebook Audience Insights to give you a sense of audience size.
- Potential Sales: To calculate your potential gross sales, you’ll need to know how to price your product or service. Run a competitive analysis to see what other businesses like yours are charging and use that as a basis for your own pricing. Of course, you’ll also have to factor in your own costs so you can actually make a profit, which leads us to tip #3.
3. Calculate startup and operating costs
There are two costs to consider before you start your business: how much it will cost to get your business off the ground and how much it will cost to keep your business running.
Startup costs generally include the following:
- Market research
- Fees to incorporate
- Technology (including actual equipment as well as things like website design, development, and hosting)
- Inventory and/or manufacturing costs
- Marketing and advertising
- Office space
- Financing (if you end up borrowing capital)
- Employees, as needed for launch
Many of these expenses become operating costs that you’ll have to cover on a regular basis. To help you calculate costs for your business type, head to SBA.gov.
4. Get funding
Cash flow is the lifeblood of any business. When you have a steady stream of cash coming into your business, you can more confidently cover costs and keep your business operating long-term. The reality is, cash flow is tight for many businesses — especially startups. But that doesn’t mean you won’t be able to cover your launch costs. For help, consider these common sources of funding:
- Keep your day job: If you have a steady paycheck right now, consider staying put and building up your new business on the side (and after hours, of course). Then, when your new business becomes financially viable, you can quit your full-time job with more confidence, and money in your pocket.
- Savings: While you’re still earning that steady paycheck, try setting aside a certain amount of money each month to use only for business-related expenses.
- Consider financing options: It can be difficult for small business owners to get loans from banks and traditional lenders. Fortunately, there are other options, like crowdfunding through sites like Kickstarter or Indiegogo, equity financing from angel investors, or even asking friends and family for support.
5. Set up a separate business checking account
It might seem silly to open a business checking account before your business makes any money, but keeping your business and personal finances separate from the start has a number of benefits.
First, business checking accounts offer liability protection. This means that your personal assets will be protected should your business ever get sued.
Second, you’re more likely to have simple and accurate tax filings since you won’t have to comb through your personal bank statements to find business expenses.
Third, it will help legitimize your business and give you the flexibility you need to grow — especially when it comes to opening a business bank account.
For example, online business banks like Bluevine Business Checking offer no monthly fee business checking accounts for sole proprietors and incorporated businesses. With high APY and no monthly fees, balance requirements, or transaction limits, your startup money will work harder for you than it would in a personal or other business checking account.
6. Incorporate your business
Another way to legitimize your business is to incorporate it as an LLC, S-Corp, or C-Corp, for example. Doing so establishes your business as separate from you, the owner, thus providing liability protection and keeping your personal assets safe.
When you incorporate, you’ll get an Employer Identification Number (EIN) that many traditional banks require to open a business checking account or to apply for a business loan. Further, incorporating gives your business more credibility with suppliers, vendors, potential partners and investors, even future employees.
If you’re not sure how to incorporate or which legal entity is right for your business, we recommend discussing your options with an accountant.
7. Learn financial basics
As you likely already know, starting a business requires you to learn a lot of new skills and information, including business finance.
Rather than overwhelming yourself with business finance articles and books, here are three resources to follow for a solid foundation in all things financial literacy:
- Cash flow vs. profit: Money is money, right? Well, when you’re talking about cash flow and profit, not exactly. For example, you can have a profitable business but lack cash flow. Learn more about the difference — plus how to keep a steady stream of cash flow regardless of profit.
- 5 must-have business finance skills: You don’t have to be a former CFO to have sound business finances. Just follow these five basic skills that every small business owner should master.
- Business finance glossary: Get up to speed on 65 common terms related to business finances, like accrual basis, days payable, liquidity, and more.
More New Business Resources
Now that you have a solid understanding of how to set up your small business’s financials, it’s time to think about your actual launch strategy. To help you get your business off the ground, follow these three steps:
- Find a business mentor or advisor: We recommend aligning with people who have been in your shoes and who can offer guidance in key areas. To find a mentor, we recommend SCORE.org, which provides free business advice and even pairs former business executives with small business owners looking for guidance.
- Forge launch partnerships: Identify individuals, influencers, or like-minded businesses who might be willing to partner with you on your launch to help spread the word or, at the very least, to gauge the viability of your business or idea. If you don’t have the budget to pay for such a collaboration, consider other benefits you could offer them, like free referrals, products, etc.
- Open your business checking account now: Even if you haven’t incorporated and received your EIN, you can still open your business checking account and start transferring your funding from step #4 above. Bluevine Business Checking is available for all types of small businesses, including sole proprietors. Sign up for your account today.
To learn more about how Bluevine can help your small business optimize its cash flow, payments, and other finances, visit www.Bluevine.com.
