If you’re in the first year of life as an entrepreneur, then you probably can’t afford to hire a bookkeeper.
As an entrepreneur, you’re an idea person. You try to find solutions to problems that you can monetize, manage a team to help you transform concepts into products, and generally do the work of running a new business.
Educating yourself about financial literacy might not always make it to the top of your priority list — but it should, said Montreal-based entrepreneur Shady Elhami.
A lack of in-depth financial knowledge has been the bane of many an entrepreneur. It doesn’t matter how good an idea you have, or even how well the business is going. A financing misstep can easily undo all your hard work, and leave you back at Square One.
So here are some helpful tips to stay in the black.
Rainy Day Fund
According to the site Preferred CFO, an incredible 82 percent of all businesses fail as a result of cash-flow issues.
Unexpected problems can lead to sudden drop in profits that will ruin an unprepared business. Who could have predicted a global pandemic that would shutter retail stores and restaurants for a year or more?
To succeed in the long-term, businesses need a bulwark against those impossible-to-predict scenarios, and the best possible option is an emergency fund, or rainy day fund.
“It doesn’t have to be $100,000,” Shady Elhami said. “Most entrepreneurs can’t afford to put away that much money early on. But you’ll want some kind of cash on hand, even if it’s just to cover employees’ pay.”
A notepad and pen isn’t going to cut it. Or maybe you’re a math-lover who likes to keep all the numbers in your head. Still not a good idea.
You need a budget. There are many excellent kinds of software out there to help you keep a solid balance sheet. Start early, before things get too complicated.
Without a good budget, it’s nearly impossible to know if your business is succeeding or failing, and how to plan for the next cycle.
Careful Use of Personal Funds
In the U.S., 64.4 percent of all new businesses use personal funding as the primary source of capital.
Clearly, if you have the money, this can be an easy way to jumpstart your dreams of successful entrepreneurship — but it can also be very dangerous.
You don’t want one failed business to ruin you financially, or prevent you from pursuing your next great idea. Entrepreneurs fail as often as they succeed.
Part of the key to avoiding total catastrophe, Elhami said, is to limit the degree of that failure, and its impact on your own pocketbook.
Most business owners, even the successful ones, need to borrow money at some point. Sometimes it’s just to get started, other times it’s to grow.
Either way, loans will likely be a part of your entrepreneurial future, Elhami said.
That’s why your credit score is going to be important. Business loans, especially for new ventures, are usually risky, and lenders will be hesitant to give out money.
A great credit score means you’re more likely to get that loan — and actually start the business you’ve always wanted.
Most new businesses spent at least their first year barely breaking even. A little bit of financial literacy could make the difference between making it to your fifth year of a successful start-up — and never getting started.