Starting a new business can be exciting and incredibly challenging at the same time. Before landing your first customer, there are dozens of requirements and problems to sort through. A few of my clients plan to launch a business in 2025 and are facing similar questions about where to begin. Focusing on key financial areas early on can greatly improve the chances of success as the business gets off the ground. Here are 5 critical aspects of your new business that need attention:
1. Get a Budget.
I firmly believe that cash flow is the heartbeat of the economy and will be for any new business. Understand what startup costs will be required, even if it’s just a rough estimate. Whether you are self-funding or borrowing, try to get a sense of what the actual cash movement will look like. How will you pay for rent, equipment, inventory, etc.? Where will the money come from? As the revenue starts to come in, focus on positive cash flow and start developing savings and reserves for the future.
It won’t be perfect, but having a plan is a great start. Chat with other business owners who have recently gone through similar experiences and learn about their unexpected (and often costly) lessons. Connect with potential customers and fine-tune your product or service. “Over-budget and behind schedule” is the constant state of life for new entrepreneurs. The more that can be tweaked ahead of time, the better the chances of success.
2. Get Insurance.
Insurance, especially for small business owners, can seem difficult. It may feel like overkill to insure both personal and business life, but it’s worth it in the long run. The goal is to reduce the risk of a disaster that could wipe out business. Having the right insurance in place can protect you from some worst-case scenarios, which will inevitably come at the worst time possible. At least covering the big “what ifs” should provide more peace of mind for everyone involved.
Start with business liability insurance, it’s the most basic and essential. You can often bundle liability and property insurance into one Business Owners Policy (BOP). For service-based businesses, looking into professional liability insurance (think errors & omissions) may be helpful as well. The list of insurance policies could get long. Start by covering the basics and then focus on risks specific to your business and industry.
3. Set Your Business Structure.
Similar to the need for insurance, make sure to set the correct business structure for the business. A popular choice in recent years has been the LLC (Limited Liability Companies), and for good reason. LLCs help reduce the risk owners are personally responsible for the business. In other words, owners may be less likely to lose their home or other personal assets if the business doesn’t end well. LLCs are not technically a standalone structure, so you will need to still choose an underlying structure as well, like a sole proprietorship or partnership. Getting this right now can save you a lot of time and money in the long run.
Work with an attorney on which structure is best for the new business. They’ll help you weigh the pros and cons of each and find the best fit for your situation. If there is only one business owner, sole proprietorship is often the simplest and most cost-effective option. However, if you plan to bring in a business partner (or partners), you may want to consider a partnership or corporation. The number of owners involved typically makes this decision more straightforward. With more owners, you’ll likely need a structure that offers more flexibility and protection.
4. Don’t Skip Compliance.
Whether you handle compliance or outsource it, don’t overlook it. Work with your government, industry, market, etc. to make sure you are doing everything you should. File the correct forms, register with the appropriate entities, and double-check your work. The last thing you want is to shut down the business for an unknown length of time because of some rule or regulation that was missed. A recent example has been around the new Beneficial Ownership Information registration requirements, and whether certain companies would be fined daily for not complying.
This also applies to contracts and agreements with clients, vendors, or suppliers. Clear and precise language within these contracts will help avoid misunderstandings and protect both parties. The goal is to reduce your risk and keep you compliant (because you have set clear terms) with all your business dealings. For partnerships, having a buy-sell agreement can be critical if someone leaves the company in the future. Having the structure in place in case a business partner dies, retires, or has another event, can make those emotional times much easier. Do your best to project the future so you can set proper expectations now.
5. Understand Your New Tax Situation.
Your business structure has a big impact on your tax situation. Depending on the structure of the company, there will be different forms to fill out and possibly even different tax returns to complete. Some very small companies start as sole proprietors, and their tax situation hardly changes at all. While that could work for some in the beginning, it is important to note why all of the different structures exist. The tax code is very friendly to small business owners, so work towards taking advantage of the tax situation you are in.
After you hit the ground running, it will quickly become apparent to have a better tax planning strategy. As your income grows, retirement accounts like Solo 401ks, traditional 401ks, or SEP IRAs can help you save for the future while reducing taxable income today. There are also other accounts like HSAs for healthcare, and Donor Advised Funds for charitable giving that can impact your taxes. Focusing on reducing your taxes could likely become a new hobby of yours. Work with your CPA and advisor to address other tax deductions and balance the tax situation you are in.
The List Could Continue.
This is just a starting list for your newfound job as a business owner. As an advisor, I believe focusing on these key areas will help get your new business off the ground with a solid foundation. Focus on cash flow and do your best to keep it clean and organized. Then, dig into your insurance needs, business structure, and compliance requirements to set up everything correctly. Once that’s in place, stay on top of tax planning to avoid surprises down the road. The more you can remove the surprises (that usually cost money), the easier it will be to build a solid business.
TC Falkner 