Owning and operating your own small business can be incredibly rewarding. After all, who doesn’t want to make their own hours, avoid having to report to a boss, and have the other freedoms that come along with working for yourself? However, owning a business isn’t all glitz and glamor. The truth of the matter is that it can be very hard work. One of the biggest challenges facing small business owners is the financial challenge.
At the end of the day, a small business owner doesn’t simply have to make enough money for themselves, they also have to cover overhead expenses like office rent, employees, service providers and more. With that said, one of the keys to being successful in business is setting a strong financial foundation on which your business can grow.
Breaking Down Your Business’ Needs
Before you start working to build a financial foundation that will meet your business’ needs, it’s important that you understand just what those needs are. No matter what kind of business you run, there is a specific dollar amount that you must earn every month to keep your business afloat. This dollar amount will vary from business to business, and it’s important to get a good understanding of what your number is. To do so, consider the following:
- Your Earnings – First and foremost, you need to live, and to do so, you need to make money. The key here is figuring out the minimum amount of money that you would need in order to cover your living expenses.
- Space – If you work from home, this isn’t something you need to worry about. However, many small businesses need space outside of home. Whether this is an office building, a steel building to store materials, tools or merchandise, or any other structure or space, it’s going to come with a cost. Keep this cost in mind when figuring out just what your company needs to survive.
- Goods – If you’re in the business of buying and selling goods, it’s important to understand the costs of those goods before they are sold. After all, before you can sell it, you need to have it on hand. So, break down the average monthly cost of buying your wholesale goods.
- Employees & Service Providers – Finally, employees and service providers can prove to be a relatively large expense. However, without them, your business may not be able to survive. So, when considering the total monthly cost of running your business, think about these expenses as well.
- Debt – Many businesses, small, medium and large, have debt. Of course, debt comes with a cost as well. So, this should be added in your calculation.
- Taxes – Finally, taxes aren’t just a consumer thing. Businesses must pay them too. There are various taxes that your business will be required to cover. In some cases, you will need to pay them quarterly, in some annually, but this is definitely an expense to consider when setting your foundation.
Be Willing to Pay Yourself Less Until the Foundation Is Set
When it comes to setting a strong financial foundation for your company, in many cases, you may have to put your company’s needs ahead of your own. When getting involved in running your own business, it’s easy to want to pay yourself everything you make. However, it’s also important to remember that your business is an entity of its own, and should have money of its own. Therefore, it’s a good idea to set aside any funds that go above and beyond what it takes for you to live until a foundation is built. A good financial foundation includes liquid assets that add up to 6 months of business expenses. This may be done relatively quickly or it may take a while. Nonetheless, it is incredibly important!
Put Your Business’ Savings to Work
Once you’ve got thousands of dollars or more in your business savings, it’s time to put that money to work, building the foundation by your side. This is done by investing. Essentially, by building an investing portfolio for your business, you can cut back on the time it takes to build its financial foundation. After all, when money is in the market, it’s generally working to make more money. While we often think about investing for our retirements, few newcomers to the world of small business consider investing for their business’ future. If you’re new to investing, you may want to do some research on building a quality investment portfolio before getting started.
Be Careful with Business Debt
Debt is never any fun, whether it be personal debt or business debt. However, business debt is known to be a bit more expensive than personal debt, especially when the business is a small one. The truth of the matter is that the lenders take on more risk. After all, if a business dissolves, there’s no way for the lender to recoup its losses. While debt can be an important tool that will help your business grow, it’s also important to keep the debt at a minimum. Here’s a great article by Harvard Business Review that gives tips with regard to how much debt is right for your business.
Final Thoughts
Being in business can be overwhelmingly rewarding. However, before rewarding yourself too much, make sure to set a strong foundation for when times get rough. By keeping a minimum of 6 months of operating expenses in your business at all times, being careful with debt, and being willing to make some sacrifices here and there, your business will likely stand the test of time!
