Starting your own business is exciting. You get to announce to your friends and family that you’re a business owner. You can network with inspiring entrepreneurs and attend exclusive small business meet-ups. You can even get your own flashy, embellished business cards printed and claim your coffee meetings at Starbucks as a business expense. It really is #bosslife.
This is all well and good until you realise that your business isn’t actually making any money, you’ve exploited all your savings and the bank of Mum and Dad / your actual real-life bank won’t lend you any more money. This is an all too common occurrence in the enticing world of entrepreneurship and is usually a result of a lack of proper planning.
While writing a business plan and creating accurate financial forecasts are crucial to the success of your business, starting your entrepreneurial journey with a basic understanding of money management will give you a solid foundation to build from.
If you’re an aspiring entrepreneur, take note of these three essential money management tips. You (and your bank balance) can thank us later!
Back in the day, saving was all the rage. We set ourselves savings goals for just about anything we were hoping to buy; from a first car, to a new television, or even a holiday abroad. We saved and saved and saved our pennies until we had reached our goal and had the required cash to make the purchase. These days, thanks to credit cards and interest free plans, we get what we want when we want it, all while avoiding thinking too much about the debt thanks to easy direct debit repayments.
Running a business will usually involve managing debt (let’s face it, the majority of businesses start out with help from some form of external finance), so it’s important that you know how to set financial goals. The more money you have in savings, the less you will need to apply for as a loan. The more confident you get in setting and reaching your financial goals, the more responsible you will be when you actually start running your business.
So start small. Set yourself short term and long term savings goals. Maybe you need £100 by next month to buy a new pair of shoes, or £1,000 by next year to buy a new bicycle. Whatever you’re aiming for, write it down and continually remind yourself of what you’re working towards. While it might be difficult at first, getting into the habit of saving forces you to become more aware of your actual financial position, rather than relying on credit, and will help you to live within your means.
Live within your means
Alongside inaccurate financial forecasts, spending more than you earn is a surefire way to get your business into trouble. It’s important to make sure that you aren’t stretching your budget too far and that you have a steady cash flow in your business. Just don’t bleed it dry the moment you start to see the money coming in!
Yes, you need to invest in your business and yes, there will be start-up costs, but once the ball starts rolling you need to keep a tight reign on money coming in and money going out. It may seem like a fantastic idea to blow all of last month’s profit on a shiny new piece of equipment, but if next month isn’t as fruitful as you anticipated you may find yourself in hot water struggling to pay your bills.
A great way to develop the habit of living within your means is to put aside money for all of your essentials first (bills, rent / mortgage, groceries etc. including allocating some to savings!), then use the remainder as your disposable income. By only spending what you can afford you will guarantee that you have all of your essentials covered and can relax knowing that the remaining money is guilt free to do with as you please. Saving and living within your means are great habits to adopt when thinking of starting a business, but to make them work together effectively you need to monitor your finances.
Monitor your finances
First of all, how are you meant to run a successful business if you currently get to the end of the month, anxiously anticipating pay day, thinking ‘I just don’t know where the money’s gone!’. Secondly, you might be planning to work as a sole trader, but if you’re aiming to build a team of people then they will be depending on you financially. You will need to guarantee you have money available to pay your employees in addition to also having some left over to cover your own costs.
If you don’t closely keep track of your finances you’re heading into dangerous territory. Naivety won’t help you here, neither will your bank. You could hire a bookkeeper or use an online tool, but in the early stages of setting up a business the most cost effective option is to do it yourself. Once you get into a routine it’s not difficult, you just need to set aside some time every week to review your financial position.
To build this into your normal life and create a new habit, start by reviewing a previous bank statement. Group all of your expenses on the statement into relevant categories, such as; rent, dining out, clothes etc. and add them to a spread sheet. Do this once a week and keep a tally of how much you’re spending in each category. Make sure you include any income you make to track that you’re living within your means and also include a category for savings, as this money won’t be available in your disposable income. Keeping an eye on how you’re tracking financially will not only help you to plan for the future, but by seeing where your money is mysteriously disappearing to you might decide to re-assess some of your spending. Your £5 daily caramel latte might not seem like much, but if you add it up over a month, that’s £150!
Setting good financial habits before you start a business will make your life a whole lot easier when you do. While you might have a revolutionary business idea or the most cutting edge marketing campaign, if you can’t get a handle on the basics of managing money, your business won’t be around for long.
If you’ve mastered managing your money and you’re ready to start your business, you will be starting to put together your financial forecasts. It can be a daunting task, but our business finance experts are here to help. They will walk you through what’s required, show you how to tailor the forecasts to your business and provide you with working spread sheets. Find out more.