Many of us don’t expect to go through a financial disaster, but given the chaotic nature of the world, they come about with alarming frequency. Small businesses can get snuffed out by the tiniest perturbations in the economic ether, never to be seen again.
What’s worse, it seems as if every other business you come across winds up failing, thanks to the constant churn of the market and the high expectations of customers. So the question for startups is, how can they avoid disaster?
Don’t Put All Of Your Eggs In One Basket
According to Nate Wenner, a director at a financial advice firm, entrepreneurs tend to be optimists. As such, they have a habit of focusing only on upside scenarios and avoiding any consideration of the downside.
Wenner says that he has had entrepreneurial clients who have literally given everything – their house, their car, their pensions and their kidneys – to prop up failing businesses. He reminds entrepreneurs that sometimes companies just aren’t destined to succeed, and when the market gives you a signal like that, you should listen to it.
Keep Emergency Cash Cushion
If there’s one thing that experienced accountants know, it’s that having a cash cushion for your business is vital. According to Eric Roberge, an adviser to entrepreneurs, the standard rule of thumb is to have three to six months of cash in reserve, just in case, something doesn’t work out. But he reminds entrepreneurs who don’t have a secondary income that they may need more.
Roberge says that he keeps at least two years of expenses held back so that he can live on them. He says that entrepreneurs don’t want to be stressed out about their finances while they’re trying to found a business.
Manpreet Singh who founded TalkLocal, a home service platform that connects consumers to traders, says having a strong financial foundation is essential. He points out that in the early stages of a business, the entrepreneur is actually the company’s only assets. If the entrepreneur doesn’t make it financially, the whole enterprise doesn’t stand a chance.
Don’t Mingle Your Assets
When starting a business, it is essential to keep personal and business assets separate. Remember, anything that you spend on business-related activities, including things like accounting fees, is deductible from your business expenses. The more deductions you have on your business account, the fewer profits you make, and the less tax you will owe HMRC.
It is for this reason that most professionals recommend that businesses use a separate business account and credit card for all their business financial transactions. It is also for this reason that most experts recommend that businesses hire a bookkeeper to keep track of all of their accounts.
Finally, just as it is a good idea to have a well diversified personal investment portfolio, it is also a good idea to have a well-diversified business investment portfolio. Don’t just put all of your extra cash back into the firm. Look for other ways in which you can help make your money grow faster.