From startup to $1 million: How to use finance and accounting to grow your business.
November 5, 2021 •ROARK
Welcome to our series “From startup to $250 million. How to use finance and accounting to grow your business”. In today’s blog post, we’re going to talk specifically about the startup phase to $1 million in revenue.
The time from the startup phase to $1 million is an excellent opportunity for any entrepreneur. It’s an exciting and challenging journey, but if you’re willing to put in the work, it will be worth it!
Here are 13 things that should make your entrepreneurial experience better when starting up.
Create a company vision and purpose.
The first thing that you need to do is you need to understand your vision or purpose.
Why do people start businesses? People typically start a business to solve problems that they see in the market. If you want to communicate your vision and purpose to different audiences, get clear on your goals.
A company purpose is an inspiring statement that ties your vision to the realities of today. The most important thing about the company’s purpose is that it should resonate with you and inspire those you work around.
Name your company.
In the world of startups, naming your company is one of the most critical steps. It’s how people will recognize you and know what they’re getting.
Keep in mind that a lot goes into finding just the right name for your business – it should be unique, catchy, or memorable without being too short!
A relevant name can also help customers remember whom to come back to when they need something again.
Hire a CPA and attorney to create your company legally.
Businesses in the Startup to $1 million range may want advice on where they should incorporate. A CPA and attorney can help evaluate your company’s options since there will be different laws depending on which state you choose. We work with many of them as partners and are happy to make introductions.
For example, the two most popular legal structures, S-corps and LLCs, each have their unique financial considerations, so consulting a professional is essential in this stage of growth.
And this is something that many people don’t realize. They start as sole proprietors and soon after to figure out what type of entity they want. When you’re working on your own or in partnership with others, there’s liability involved.
It’s also a good idea to have an attorney help you develop your standard customer contract. By doing so, you’ll be able to protect yourself and the company from any issues that may arise in the future. This contract is essential even as soon as when you start generating revenue.
Set up separate business bank accounts.
Entrepreneurs can set up separate business bank accounts to help protect themselves from liability and maintain more structured financial systems. Business accounts will also allow them to keep their personal finances separated, as the company account is where they’ll spend in addition to making deposits for revenue.
Entrepreneurs must have a clear separation between what belongs personally versus professionally- it helps balance out your budget while using all of these funds wisely without getting mixed up or lost with money transfers back and forth.
Apply for business lines of credit/credit cards.
While you’re setting up your business account, it’s also an excellent time to apply for a credit card or line of business credit. I highly recommend that you apply early for a loan or line of credit to have it in place when the business begins. Establishing business credit early will make it easier to obtain loans and lines of credit down the road as well.
While it may seem convenient at the time, using your personal credit card for business expenses can hurt your personal finances.
A reduced credit score will reduce your ability to get those lines of credit in the future. You are usually in a better financial position at the start of a business.
Get necessary business licenses.
One of the most crucial steps in opening a business is understanding what licenses are needed and ensuring that you have them. States and local jurisdictions may have different licenses, so it is essential to do your research.
If you fail to get the necessary business license in time, you may have to pay fees, fines or face other penalties.
For example, construction companies may need to have a license for general contractors and each trade they provide. In manufacturing, you may need a manufacturer’s license for each type of product you are making or an air quality permit based on the type of business or industry. Retailers may need a sales tax number, and restaurants may need to have food safety certification.
Set up an easy and inexpensive accounting system.
Get started on the right track with an easy and inexpensive accounting system. QuickBooks is an excellent example of software that makes managing your finances for business simple!
Accounting software will allow you to see if the company’s making money or not. You can also figure out why it might be losing its cash early in starting up- which happens more often than you think.
It’ll also help manage what little funds are available because this becomes even harder when there isn’t enough revenue coming in from sales yet.
Raising cash from investors.
Raising debt can be a great way to get extra cash from lenders, like banks or family and friends, for example. Still, they don’t typically get ownership in the business. When you raise money from investors, they naturally will want to own part of your company. Before offering equity, ensure that expectations are clear between all parties involved and communicate very well with everyone about what different levels mean.
Seek advice on this process from an attorney beforehand as it is crucial not only for securing agreements but also making sure those arrangements work optimally post-investment.
Keeping track of different investors’ interests in a business can be difficult even when few investors or the company are small. You need to ensure you put a process in place. You don’t want to have a situation where different investors know their position, and other investors aren’t even on the same page.
It is also vital to consider these repercussions when looking for capital expansion or selling the business. An accessible and up-to-date cap table will help investors make decisions about their equity stake in the company.
Cash management is critical.
The best analogy I can give is cash flow like blood in your body. It’s essential, and it circulates in your body.
That’s important to get oxygen and feed your body. Losing a bit of blood or money will be okay, too. The problem with losing too much blood is that your business will be hurt or could even die just like your body. Managing your company’s cash flow is one of the most critical aspects of managing your business.
You should constantly be on the lookout for ways to manage cash flow better. One way is by using your accounting system to see if your business has been profitable or not and where the trends a pointing. You want to have an idea of what’s going on with sales so you know if you need to take some action to build revenue, which is nothing without cash collections!
Collecting money from customers who owe payments due is crucial at this stage. I’m sure we’re all guilty of forgetting about unpaid bills sometimes but don’t get too lax with managing these things; they’ll come back around later and bite us hard.
In the startup stage, it becomes challenging because you don’t have access to resources but create a preliminary budget. Even if you use a simple accounting system with only inflows and outflows, now that’s very simple.
We use a 13-week cash flow forecast for struggling businesses. First, we will outline the cash these companies have coming in and going out each week. In addition, we’ll review the beginning and ending balances. And once that point completed, we monitor it.
That’s an excellent practice for early-stage companies. Still, it is also an essential strategy for venture capital-backed startups that will focus on the numbers.
A second key piece of advice was to keep accurate and up-to-date financial records which will help when it comes to fundraising. As projects or administrative functions pile up, there will frequently come a day when managing your finances begins to feel like an afterthought. But in the early stages, keeping good records, sticking to a budget, and staying on top of cash flow management is just as important.
Pay yourself as the owner.
One common misconception about starting a business is that you should hire yourself before hiring anyone else. Right?
And that’s where many entrepreneurs make mistakes. They get so focused on their product and vision that they forget to pay themselves a salary.
I highly encourage business owners to pay themselves even a minimum wage from the start. Pay yourself.
No matter what stage your company is in, it would help if you got used to that idea because it will continue to be necessary.
Get a payroll service starting with your first employee.
When you hire your first external employee (especially if the laws are very employee-friendly in your geographical region), you’re going to want to get a payroll service.
It is so important to stay on top of the taxes. It can be very complex, especially when you look at federal, state, and local taxes. Hiring employees and paying taxes is an area that can be a significant liability for you, not only in the company but also for you personally if it’s not managed correctly.
When you take on your first employee, make sure to get a payroll service. The cost of these services is not that high, and they make it easier.
Establish your marketing and brand.
One of the most essential tasks in starting a business is establishing your brand. When I talk to people thinking about starting a business, my advice is to start with marketing.
Business owners have a message that they want to get out there. The faster and more precise you communicate this message, the sooner it will take off in success.
Starting a business from scratch can be difficult for anyone while managing the tasks associated with sales, marketing, and operations.
Outsource back-office functions like accounting, HR, and IT.
Outsource as much of your back office work as possible. Right now, that includes HR, IT, and accounting. These are not the things that will drive your business’s revenue or generate cash flow at this stage. Yes, they are essential, and they’re critical to do and help you make decisions. They can also help keep you out of problems and issues, ensuring your business runs more smoothly.
You can hire fractional workers for a fixed cost and still be able to receive their expertise. Often the spouse will take on this role for business owners in this stage. Among all of the possible business decisions, if your budget permits, you should consider outsourcing specialist operations such as accounting, HR, and IT functions.
We hope that this blog post has helped provide some insights into the process of becoming an entrepreneur. Whether you are just starting or have already begun to establish your business, we want all entrepreneurs to know they aren’t alone on their journey. If you’re looking for a little extra help with any aspect of running your company, don’t hesitate to reach out and schedule a consultation today!