The failure rate of startup businesses is a common story. And many of these startups were founded on great business ideas.
You might ask yourself why businesses built on brilliant ideas still fail. The answer is usually fairly simple. Having an idea for a business and having an idea about how to run a business are two entirely different things. The reason most startups fail centers around two things — management skill and financial skill.
For this article, let’s focus on financial skill. Let’s say your capital base is robust enough to deal with all your business expenses. If you do not know how to be disciplined and frugal with spending, the amount of money you have invested in your business will not do you any good.
If you are a startup entrepreneur, here are a few tips to help ensure that you maintain your capital base, and enhance your profit margins as soon as possible.
1. Postpone personnel rewards.
Starting and running a business is already a herculean task on its own. Think of how much worse things will be if you start dolling out exorbitant amounts of money on unnecessary employment benefits and expensive salaries. You can avoid depleting your capital by avoiding these practices. Set your employee salaries reasonably and augment it with performance bonuses.
If you must have employee benefits, limit them to only those that are critical to motivating employees to achieving the set goals and objectives. Beyond helping you save money by breaking even and turning profit sooner, this practice will help you develop a culture of frugal and disciplined spending in your business.
2. Keep personal and business finances separate.
Let’s say you are the founder of your business. The problem arises when you mistake this to mean that you are the business. No successful business can be run with such a mindset.
Always keep your personal and your business finances separate. Money made from the business is for the purpose of maintaining and growing the business. If you do not separate these two, you may soon find yourself dipping your hands into the business’ coffers for reasons of personal benefit.
3. Skip the real estate.
You do not need a corner office to run a successful business. Many businesses that are successful today started in awkward, not-too-comfortable locations. Just ask the founders of Google or Microsoft.
Do not spend money on real estate that will not directly benefit the business. You can turn part of your house or any other free space you have into an office. From there, you can run your business with a small band of employees.
Let the business grow and expand organically so that when the time to spend on real estate comes, you will know about it and better yet you will be able to afford it without putting a financial strain on your business.
4. Purchase key person insurance.
In every business, you will find that there are certain people who are invaluable to its success. One way to protect your business is to purchase key person insurance on such a person. As a business owner, you certainly belong in that category.
Key person insurance is a fancy way to describe life insurance on you, co-founder or key employee on whom the continued successful operation of your business depends. The business is the beneficiary under this policy. This insurance coverage is important because it ensures that if anything should happen to the key person, rendering him/her incapable of working, the business will have other available options besides filing for bankruptcy.
The business will be able to use the insurance payoff to cover operating costs and pay off debts until they can find a replacement for the key person.
The success of many startups depends on strict planning and budget discipline. An experienced CPA like Williams & Kunkel CPAs can help you achieve both. Call us today in Flower Mound at 972-446-1040 to have a chat.
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