When doing financial planning for the first few months of my new business, what sort of things should I bear in mind?
Below are some financial considerations for the first few months of your new business.
1. Your Personal Salary
In this startup phase, the owner’s personal salary and the business viability will be strongly related. If you are solely reliant on your business to meet your needs, then you may need to reduce your lifestyle to ensure that your business will still break-even, while paying you enough to meet your essential needs.
Don’t start your business hoping to draw a large salary. This may come later, but seldom in the startup phase. Initially, you may have to personally contribute money to the business just to keep it afloat. If possible, work and save up as much as you can before starting your business. The startup phase will often require personal sacrifice.
Consider working a second job in the early months of your business. Your goal in the startup phase should be to take as little as possible from the profits, so that your business can grow as quickly as possible.
Reduce your personal lifestyle and expenses as much as you can. Carefully develop a personal monthly budget. Monitor this budget regularly and ensure that you adhere to it.
2. Separate business finances from personal finances
It is important to have a very clear separation between business transactions and personal expenses. Some owners use business funds for personal costs, often using cash from business sales to buy personal items, then declaring these as business expenses.
Any money taken from business profits for personal use cannot be expended to the business, nor should personal transactions be done through your business accounts. Also avoid business trading using your personal bank account. The only personal cost through your business accounts should be the salary that is paid to you.
3. Startup capital
In most businesses, you will need to invest money, (for stock, machinery, equipment, etc.) before you can trade. When determining your required startup capital, it is wise to start small and gradually scale up.
Avoid debt as much as possible. Focus on sales and begin selling as soon as you can. You don’t need a fancy office with billboards and business cards to start trading. Avoid large rental costs – initially try to work from home. Should you need a loan, try to get low-interest loans from friends and family before approaching institutions.
4. Cash flow forecast for your business
Plan a cash flow forecast for at least 12 months. Take time to realistically list the anticipated monthly cash flowing into your business (Sales, Loans, Investments), and out from your business (Salaries, Suppliers, Loan repayments, Rent, etc.). Regularly review this forecast.
5. Accurately record all income and expenditure – personal and business
In order to draw up a realistic Personal Budget and Business Cash Flow Forecast you will need accurate historical information of all your business and personal transactions for the previous months. Start today: record all income and expenditure, especially cash transactions that do not leave a document trail.
Remember to keep personal records separate from your business records. Develop an effective filing system for all source documents.
6. Don’t give up
Starting a new business is tough, and the financial rewards are seldom seen in the startup phase. You may be tempted many times to just give up. Remember, every large tree started as a small seed and took a long time to grow.
If you give your small “business seed” the care and attention it needs, it will eventually grow and develop into a great tree and bear much fruit.