In 1975, a young Bill Gates dropped out of Harvard to start developing software out of a garage and focus on building his Microsoft company. The following year, college dropouts Steve Jobs and Steve Wozniak began building the Apple I, the first personal computer. The stories of these tech moguls are what every entrepreneur dreams of emulating. However, the reality is that more than half of small businesses fail within the first five years.
If you’re considering branching out on your own and starting a business, how can you become one of the success stories? Here are three financial tips to keep in mind:
Most people who decide to become entrepreneurs do so because they become dissatisfied with their current job situation. They can become frustrated with the lack of work-life balance, they may work in a mentally or emotionally toxic environment, their salary may be too low, or they may have lost interest in their work in general.
Whatever your reason may be, don’t walk away without a financial plan. While you build up your business to be financially sustainable, you’ll need a source of income. If you can, remain at your current job until your business becomes profitable. If that’s not possible, try finding part-time or temporary work that will allow you to meet your living expenses but also provide time to dedicate to your burgeoning company. You might find yourself working longer hours in the beginning, but maintaining a steady, positive cash flow in the early phase of your venture sets the stage for a successful future.
As soon as you start your business, open a business checking account to keep funds separate from your personal finances. If you’re eligible, apply for a business credit card as well. Once your company is in the black and after you’ve paid yourself a salary, you might also open a business savings account as an emergency fund.
If you need to “borrow” money from your personal account, pay yourself back. If you need to use a personal credit card for business expenses, save the receipts and note it. Separating your business and personal accounts will make bookkeeping easier for tax purposes.
Becoming a small business owner also involves becoming an amateur bookkeeper. To gauge the success of your business, you’ll want to keep track of all your income and expenses. Although you can do this in an Excel or Google Sheets spreadsheet, inexpensive accounting software is available. Not only is this software easy to use, but several have features to track time, invoice customers, create estimates, and even manage payroll if you have employees. Some accounting software also allow you to calculate and pay quarterly estimated tax payments and are compatible with income tax software.
Whether you do your own accounting or hire a professional, consider consulting with a certified public accountant your first year in business to doublecheck your recordkeeping and for advice.
After you have a business plan and are ready to become a business owner, the best place to start is at your local bank. Your local business banker will be able to help you with funding, if necessary, and assist you with determining the best bank accounts to ensure your business succeeds.