What Financial Management Tip Would You Offer Someone Starting Their Business Journey?
To help new entrepreneurs navigate financial management, we asked small business owners for their top advice. From instilling financial discipline from day one to creating and updating cash-flow forecasts, here are seven essential tips these leaders shared for those just starting their business journey.
- Instill Financial Discipline from Day One
- Separate Personal and Business Finances
- Build a Substantial Cash Reserve
- Master Every Detail of Your Business
- Be Selective with Early Spending
- Invest in Scalable Financial Tools
- Create and Update Cash-Flow Forecast
Instill Financial Discipline from Day One
As an experienced strategist and entrepreneur, my advice for anyone starting a new business would be: Make financial discipline a core part of your company culture from day one.
Too often, founders get caught up chasing growth and market share at the expense of profitability and cash-flow management. This commonly leads to overspending, taking on unnecessary debt, and eventually running into cash crunches that can cripple the business.
Instead, instill a mindset of financial prudence in every aspect of your operations. Be meticulous in tracking income and expenses, no matter how small. Develop disciplined spending habits—question every expense and avoid lifestyle inflation. Pursue profitability and positive cash flow as eagerly as you pursue revenue growth.
Maintain a cash reserve that can sustain your business for at least 6-12 months with no income. This buffer will help you weather inevitable fluctuations and give you runway to adapt when challenges arise.
Lastly, manage your finances with the same strategic rigor you apply to your products and services. Analyze your cash conversion cycle, optimize working capital efficiency, and make data-driven decisions about financing, investments, and capital allocation.
Financial discipline won't guarantee success, but lack of it has ruined countless promising startups. By making it a core operating principle, you'll increase your odds of building a fundamentally sound, sustainable venture that can thrive for the long haul.
Separate Personal and Business Finances
Keeping personal and business finances separate from the start is crucial. When I began my entrepreneurial journey, establishing distinct bank accounts and credit cards for my business made a world of difference. This practice simplified bookkeeping, tax preparation, and provided a clear view of my business’s financial health. For example, it became much easier to track expenses and revenues, leading to more informed decisions. It’s like having a clear lens to view and manage your finances, ensuring you stay organized and avoid financial confusion down the road.
Build a Substantial Cash Reserve
As the owner and CEO of a top law firm, one crucial financial management tip I'd offer to someone just starting their business journey is to prioritize building a substantial cash reserve. When I began, I quickly learned that having a financial cushion is vital for navigating the unpredictable nature of business.
By setting aside at least 3-6 months of operating expenses in a savings or money-market account, I was able to create a buffer that could sustain my business during slow periods or unexpected challenges. Meticulous budgeting and regular financial reviews are essential. Develop a detailed budget that outlines your expected income and expenses, and make a habit of reviewing and updating it regularly. Staying on top of your finances in this way helps you maintain control over your business's financial health and supports sustainable growth.
Understanding every aspect of your finances also means getting involved in the small details, especially in the early stages. When I started my law firm, I was deeply involved in all financial aspects, from managing invoices to tracking expenses. This hands-on experience gave me a comprehensive understanding of our financial operations, which was invaluable as we scaled up. Today, while I have a team to manage these tasks, my foundational knowledge helps me oversee financial strategies effectively.
Master Every Detail of Your Business
One financial management tip I'd offer to someone just starting their business journey is to take the same approach that a member of a Navy SEAL team does: learn everyone else’s job. When I began as a solo practitioner, I was the secretary, the legal assistant, the paralegal, and everything else. By sweating the small, minute details of every task and taking pride in getting the little things right, I built a strong foundation for my business.
Today, I have several associates and a large staff, and I know how to do each and every one of their jobs. This comprehensive understanding ensures that I can manage and oversee my team effectively. A business does not fail because of some large catastrophe; they typically wither and die based on a long string of tiny mistakes. The greats truly sweat the small stuff and find meaning and purpose in the tiny to-dos that contribute to all their great accomplishments.
By mastering the details and understanding every aspect of your business, you set yourself up for long-term success and avoid the pitfalls that can come from overlooked minutiae.
Be Selective with Early Spending
Start slow and be selective with your spending. In the beginning, it’s very easy to feel like everything is essential. There’s always the temptation to invest in the best from the start: the best software solutions, the best office space, the best hardware. In an ideal scenario, this would be the right approach, but the reality is that resources are most of the time not unlimited, and running out of funds early on is how most startups end. Prioritize your expenses, make sure you can cover them for at least six months, maintain a cash reserve, draw out an investment plan, and execute it slowly.
Invest in Scalable Financial Tools
A key lesson from my journey is the importance of investing in scalable tools early on. While it might be tempting to save money by opting for the cheapest solutions available, I found that investing in robust, scalable financial-management software saved us time and prevented costly errors as we grew. These tools offered better insights and more accurate forecasting, which were crucial in navigating the unpredictable early stages of our business. Allocating resources wisely and prioritizing scalable solutions can make a substantial difference in achieving long-term financial stability.
Create and Update Cash-Flow Forecast
I would recommend creating a detailed cash-flow forecast and updating it regularly. This will help you anticipate when you might face cash shortages and plan accordingly. Building strong relationships with suppliers and negotiating favorable payment terms can significantly impact your cash flow. Additionally, consider offering early payment discounts to encourage customers to pay invoices promptly. By closely monitoring your cash flow, you can make informed decisions about spending, investments, and overall business strategy. Remember, a business can be profitable but cash-poor, so prioritize cash-flow management above all else.
