Most people don't step into a new venture with a wealth of experience in financial management. Knowing how many new start-ups have failed to succeed financially — and why — is essential for any business owner.
A smart business owner comprehends the central role of accounting and bookkeeping to make effective business decisions.
Whether you are a brand new start-up or want to expand an existing business, using the right tools or software will help you meet your business goals.
Several digital consultants also offer a wide range of accounting solutions and the supervision of experienced professional bookkeepers.
They will give you advice on various bookkeeping tools, applications, and bookkeeping services that will help you make your future financial decisions and be alert to new opportunities for growth.
However, accountancy is an ever-changing industry with so many subcategories that you can't thrive on accommodating accounting.
Most entrepreneurs want to grow their businesses and introduce innovations. Many start-up owners will experience financial teething problems in the early months and years of a new venture.
Whether your business structure is a sole proprietor, limited company or a partnership, responding to common financial challenges is key to building a solid foundation. Here are some of the more common hurdles — and what you can do to overcome them.
1. Business Structure
If you have a flexible business model, it would be better to start a company. A consultant may be able to help you choose the structure for your new business, be it a corporation, a private partnership, or a public company.
Common Business Structures
Determining the most suitable structure for your enterprise will significantly impact your legal and financial liabilities, taxation, management risks, personal liabilities and responsibilities, and operational costs. Some of the more common structures include:
- Company or Corporation
- Partnership agreement
- Sole trader
- Proprietary Limited Company
In many instances, you can change your company’s business structure to adapt to changes in your operation, growth, and market focus.
A corporation allows you to have a separate legal entity from yourself. It is a more complicated structure, often costlier to set up, and comes with the imposition of more arduous tax obligations.
In the United States, a corporation will need to pay both federal and state taxes. Corporate shareholders will also be required to submit their dividend payments as part of their personal income.
You have two main options when setting up a corporation: C-corporation and S-corporation. A C-corporation creates an entity that is distinct from its owner. An S-corporation can include up to 100 shareholders and has many similarities to a partnership.
While the structure is more complex, an advantage of a corporate entity is raising capital. As a corporation, you are in an excellent position to raise large amounts of money.
One of the ways you can do this is by offering shares to the general public. The limited personal liability clause in a corporate structure is also attractive to many new business start-ups.
Forming a partnership of two or more interested parties is one of the more basic structures for a start-up.
Unlike a corporation, a partnership does not create a distinct legal entity. This means that partners are all personally liable.
In terms of taxation, the business’ profit and loss belong to individuals within the partnership, being split according to the number of people in the partnership and requiring each partner to submit a 1065 Form with their tax returns.
Other obligations you should consider include:
- Self-employment tax
- Schedule K-1, which is submitted with Form 1065 and is a record of your profit or loss for a given period
Partnership registration is simple and requires less paperwork than a corporation, and the legal obligations are generally lighter.
They also come with the benefit of including your slice of the partnerships' financial records in your personal tax return.
Like all things, there are downsides. One is your personal liability for business debts and the need to negotiate with your partners to manage the operation.
Sole Trader (Or Sole Proprietor)
A sole trader (or proprietorship) is the most straightforward structure for most start-ups. It means that the responsibility for all of the financial and operational management of the business rests with one person: You.
A sole proprietor arrangement also means you can bundle your financial records into one tax return.
AS a sole proprietor, you will need to complete a Form 1040, which will need to be accompanied by a Schedule C and Schedule SE (Self Employment) for taxation purposes.
A Sole Proprietorship is a cost-effective way to get started. For most, the only costs are the operating license fees and business tax requirements for most. Sole traders may also find that they are eligible for a number of deductions or tax concessions.
On the flip-side, like a partnership, you do not enjoy the limited liability of a corporation. You will be responsible for all debts incurred in doing business as a sole trader.
Limited Liability Company (LLC)
Finally, though there are still more options we could cover, you have what is called a limited liability company or LLC. An LLC is essentially a conglomeration of a partnership and a corporation.
An LLC will give you the personal liability protection found in a corporation while also providing tax benefits similar to a sole proprietor.
Another advantage of structuring your start-up as an LLC is that you will have fewer financial reporting obligations than a corporation. You get limited liability, fewer forms, and no limit to the number of appointed shareholders.
However, like a corporation, an LLC costs more than a partnership to set up and must register with each state in which it plans to do business.
Whichever model you choose, it's essential to keep in mind that investors want to fund scalable or ready to expand businesses.
As time goes by, your business model must not only be structured for growth but able to demonstrate the potential to raise revenues with minimum expenditure.
Scalable business models usually have increased profit margins and reduced investment in sound infrastructure and proven marketing. Your business model must remain adaptable to your company’s core offerings as it grows.
Finally, the legal structure of your start-up should reflect your business goals. You need to ask what you are trying to achieve and find a structure to get you there.
2. Personal Capital
One of the most significant business challenges most people face when starting a company is a lack of capital.
In addition to a monthly budget, you will need to budget for a list of current and future capital expenses, future goals, and associated growth costs, as well as capital costs for replacement.
Raising personal capital comes with several challenges. There are two primary ways to tackle the challenge, and they are through debt financing and through equity financing.
Debt financing (or debt raising) involves borrowing money, often through a loan (though not always), and then paying it back later.
Selling corporate "bonds" to investors, which will reach maturity in time, is also another way of raising capital through debt financing.
Once the bond matures, the corporation will need to make interest payments to its investors.
Equity financing is accomplished by selling common or preferred shares of the company's stock to the general public.
Of course, this option will depend on your business structure (LLC or corporation). You also need to consider the long-term cost of selling off your business through the purchase of shares.
3. Tackling Unexpected Expenses
Often businesses that create realistic income statements fail to cover unexpected costs. Even a relatively small expenditure not included in the organization's budget will make payments or payroll more complicated in the early chapters of a business.
While the use of digital accounting and invoicing software solutions is essential as a record of your fiscal position, you will also need accounting tools that can record and track unexpected expenses so that you can monitor and review unusual or unexpected expense patterns.
Common Types of Unexpected Expenses
Property and Power Expenses
As your business begins to grow, so may your need for space and utilities such as power. A flourishing small business is a great thing to have, but start-up costs can add up fast once you factor in the cost of land, office space, or electricity.
Take time to review your most critical needs and be careful of expanding beyond your ability to meet your property and utility expenses.
Do you need all of that premium retail space or office space for your start-up? Do you need climate-controlled warehousing for your products?
Maybe you need to be near major transport. Then again, perhaps you don't have any transport needs and choose a less costly location for your business to get underway.
One way you can think this through is by asking, "What do I need to pay today to grow my business — and — what plans should I be making tomorrow if I want my business to grow?
The balance between these will reduce the likelihood of being caught out with location and utility costs that are not bringing in a good return on your investment.
An increasing number of start-ups rely on digital and electronic technology to deliver their goods and services, communicate business-to-business and business-to-customer, and maintain their business records. Each of these factors may increase your overall equipment (and software) needs.
These costs are not incidental and can represent a difficulty for start-ups with limited physical and digital resources. Yet, these costs are central and essential for doing business and should not be overlooked.
As you build your business, you may also need to adapt, expand, or improve your equipment to meet growing demand.
Those unexpected expenses might include new computers, digital devices, software, workspaces, and more.
Also, as the trend of remote work roles continues to climb, the kinds of equipment and the types of technology your business needs will change.
This can pose considerable and sudden financial difficulties for a young start-up growing quickly. Don't wing it. Do your research beforehand and plan for it.
Professional Service Fees
Outsourcing certain aspects of your business is becoming an increasingly good option for time-starved entrepreneurs. But there are traps.
Common business services like legal advisors and accountants are not the only thing being outsourced in the 21st century.
Unlike a start-up of only a decade or two ago, start-ups may also find themselves needing to outsource technical expertise, web designers, digital marketing agencies, software developers, and more.
These all come at a cost, and new business owners should not consider these costs outside of their start-up budget. For many, these costs are not one-off but are ongoing. And they can be significant.
If your start-up is successful, it won't be long before you need help. And while employee costs are not really unexpected, they are often overlooked as part of any RIO strategy.
Each new employee, consultant, and contractor will result in increased salary and wage costs. Added to this are the often unexpected costs of training, equipment, and tech costs. You may also have to consider insurance and workplace costs in some instances.
One of the ways you can mitigate the fright of a sudden rise in staffing costs is to develop a staffing budget. Be realistic and calculate the cost — and potential return on investment - for each worker you engage.
How many keen entrepreneurs ever sit down and ask the question of insurance costs? Mundane costs are often the cause of a good deal of heartache in business.
Yet, maintaining these mundane, though necessary costs in your budget is a good way to avoid unexpected and sudden expenses.
Unless you're itching for a lawsuit, your premise, public, or other liability insurance should be acknowledged and accounted for from day one. Incidents and accidents happen. Parcels go missing, customers get irate, and staff get hurt.
When contemplating your financial insurance obligations, keep in mind the following entities and their interaction with your business.
- Your Customers
- Your Neighbors
- Your Suppliers and
- Your third-party experts and support network
The kinds of insurance you should be considering may include:
- Insurance associated with working from home
- Product liability insurance
- Commercial property and lease-related insurance
- Professional service liability insurance
Operational Equipment Costs
The final area to consider when it comes to unexpected expenses is the area of maintenance and operation.
Regardless of what type of business you run, at some point, you are going to have to replace the tools of your trade, whether it's a tractor, a computer, or a warehouse.
Maintenance and upgrading costs can cripple a business and fore them out of the marketplace if not carefully budgeted.
Keep records of all maintenance, equipment replacement, and expense. Know the life-cycle of anything you use to generate a profit in your business and budget for the inevitable future costs.
4. Developing Your Business Plan
A good business strategy is necessary for a successful business. The first step is to provide a summary of your business. This activity improves you to refine your vision, and you will focus on many other parts of your start-up plan.
Such a successful business plan assists all start-up companies. In addition to realistic economic prospects for your business plan, you will need a financial plan that considers the start-up costs, operating expenses, taxes and fees, emergency costs, and estimated revenues.
If you're not sure how to start creating a business plan you can always use a business plan template and make tweaks and changes as necessary for your specific business.
You will want to track sales, perhaps using a sales tracking app, and set up a means of monitoring expenses, capital costs, and more.
5. Prioritizing Your Tax
It will help if you plan for pay and benefits, capital gains on business expenditure, claims, and other tax-exempt expenditures at an initial stage.
To help you expand, tax accountants will ensure that you take advantage of all the tax breaks available.
Many start-ups make a mistake because the organization is not addressing its economic issues.
At first, you have to spend your time, resources, and energy without making money for a while. It might take months or perhaps years, depending on your business, for the company to start making a profit and to help you financially.
The Value of Networking
Business networking is interaction directed at establishing mutually beneficial relations between owners, investors, and clients.
For start-ups, business networking activities are the opportunity to promote their products/services, attract an audience, or create a professional team.
You should track specific time-consuming business considerations and keep things simple to help your business achieve its goals, irrespective of whether you are taking the first step in the business world or looking to grow a reputable organization.