Big Picture, Financial Planning, Millennials

10 Financial Steps to Take When Starting Your Own Business

According to the Census Bureau, more than 4.4 million new businesses were created in the U.S. during 2020 — the highest ever on record. That’s a 24% increase from 2019 and is 51.0% higher than the 2010-19 average. COVID accelerated the shift to this digital world we live in making it easier than ever to start a business. I am not saying running a business is easy by any means (from experience, it is definitely not), but starting one is as easy as it’s ever been. 

Over this past year, I have naturally started to work with a lot of business owners as well as help people launch their businesses and leave their corporate jobs. What I have learned is that many business owners make the same mistakes in the first year and skip some important basic steps that I want to help you avoid. 

Here are 10 financial steps to take when starting your own business: 

1. Build A Personal Emergency Fund With 12-18 Months Worth of Expenses

The number 1 reason a business fails is due to cash flow problems. Setting up a large emergency fund can help combat this so you have enough runway to truly build the business and it’s revenue without having to need to pay yourself most of the revenue. Additionally, in the first few years revenue will be irregular, so there may be times you need to pull money from your emergency fund to pay yourself as you have down months. 

2. Start Tracking Income and Expenses From Day 1

For your business to run efficiently, you need to understand what money is coming in and going out from your business. Budgeting is important for your personal life, but even more important for your business. 

Start tracking the cash flow of the business month 1 and you will not regret it. I would recommend keeping your business leen at first, meaning keep those fixed costs low. The last thing you want to do is get every shiny new thing/tech and run yourself out of business. 

3. Determine The Best Business Structure

Everyone realizes they need to set up an LLC. but that is usually where the knowledge ends. Do your research or work with a professional to figure out the best way to set up your business for tax purposes. An LLC doesn’t save you on taxes, it just helps to protect you as a business owner from the debts of your LLC. You need to take this a step further to figure out if you should be an S Corp, Partnership, Corporation, etc. 

4. Set Up Business Bank Accounts, Credit Cards, Etc. 

One of the biggest mistakes business owners make in the beginning is that they commingle their personal bank accounts and their business bank accounts. This just makes everything more confusing. It is harder to track your expenses and revenue plus it makes it hard for tacking purposes for your accountant. Set up separate accounts for the business and run the business through them from day 1. 

5. Get The Proper Insurances 

Now that you are starting a business, unless your spouse works somewhere that offers you insurance, you will need to get health, life, disability, dental, eye, etc. insurances in place. You also may need Key-man or buy/sell insurances in place to help protect your business. Insurances are never fun to pay for but they are needed. 

6. Look Into The Best Retirement Accounts To Set Up

Now that you no longer are employed by someone else and have a 401(k), you still need to prepare for retirement. You need to look into what account will be best for your business setup and needs. Your main options are:

  • Solo 401(k)

These each have different benefits, contributions limits, rules, etc. to look into to figure out which would be best suited for you.

7. Build A Business Emergency Fund

As your business gets going, try to not pay out every dollar in expenses or to yourself as pay. As you can tell, cash flow is essential to your business’ survival. Build an emergency fund inside of the business savings account to ensure you can survive some slow months. Having somewhere between 3-6 months would be a great starting goal. This becomes even more important as you hire, so you can ensure you can pay payroll every month regardless of revenue. 

8. Save For Taxes

This is one of the biggest mistakes I see new business owners make — they chose to not save for taxes in the beginning and find themselves owing a lot of money to the IRS. You need to save monthly for the taxes you are going to owe. Personally, I save roughly 25% into a high yield savings account to save for taxes. Work with a CPA to help figure out the percentage you should be saving. 

9. Know Yourself and What You want From The Business and What You Want To Do

Many of us have decided to start a business for different reasons. Understanding these reasons are so important. If your goal was to create a business so you could have more flexibility and be with your family more, then you have to honor that and do that. Don’t start taking clients who can only meet with you on weekends or late at night knowing it will take you away from the main goal you had, being with your family.

It is really easy to chase money, higher paying clients, a heavier workload, etc. And it may make sense to do that in the beginning as you build, but you need to be aware of this and build the business the way you want to. If you don’t the business will be running you very shortly. 

Additionally, know the roles you want to do with the business. Business owners typically wear a lot of hats, and pretty quickly you can be the CMO, CEO, Head of Sales, ect. It can be beneficial to know the roles you are bad at or don’t want to do so you can outsource them. 

10. Know The Ultimate Long Term Goal

For some, the long term goal is to pass the business on to their kids. For others, it’s to sell and fund the rest of their life. Having an idea of your future goal is important so you can make decisions that set you up to achieve this goal. The route to selling is very different from the route for creating a lifestyle business where you only work a few days a week. 

Creating a business may be as easy as it’s ever been, but building the business is still a lot of work. Hopefully these 10 steps will help you get started in a good place! 

If you would like help building out your business, sign up here for an introductory first meeting to see if working with me would be a good fit for you. 

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.