Managing through the business lifecycle: Startup
Build a solid foundation for success.
The first few years in business are an exciting time. You need to balance competing priorities, and respond nimbly to changes and challenges, all while making sure you cover the basics and stick to your plan. If you're like most businesses, the biggest concern may be supplying the "fuel" that makes it all go: financing. Securing adequate funding may be difficult, but it is perhaps the single most important thing you can do to prepare for success.
Control cash flow
Once you secure funding and launch regular operations, you'll want to manage this precious resource as efficiently as possible. At the most basic level, projecting cash flow simply means, "Will I have enough cash in the bank to cover my expenses – today and in the future?" The key to success is to track every penny and question every expense.
Here are some tips:
Be brutally realistic. Make a habit of overestimating your expenses and underestimating your income. Your cash flow should always be a worst-case scenario. If you know you can handle that, you'll be in great shape if things turn out better. This also applies to receivables: acknowledge that people won't always pay on time, and account for that in your planning.
Spend as little as possible. Take a hard look at all your expenses. Is there anything you can find a cheaper deal on? Before you purchase anything over $50, ask yourself, "Can I live without this?" This is especially true of items like computer hardware: owning the newest and greatest is tempting, but an unnecessary luxury.
Chase invoices the minute they're late. It may sound harsh, but if an invoice is late, call the company right away. If they think they can get away with a late payment, they may regularly prioritize other invoices before yours.
Update your cash flow regularly. As time goes on, you'll realize you were wrong about some things. Update your projections weekly at first, then monthly after a year or so.
Ways to secure funding
If you have the resources, tapping your personal assets is by far the easiest way to fund your business. However, many new businesses must seek outside investors, borrow, or do both to meet their initial funding needs. Weigh the potential risks and rewards of each approach carefully before you put up your own capital, issue equity, or take on debt.
Typical sources of startup financing include:
Personal savings and other assets
Family members and friends
Individual "angel" investors
Investor groups and venture capital firms
Commercial lenders such as banks
Both lenders and investors prefer entrepreneurs who've invested some of their own money. Having your "skin in the game" sends the message that you are committed to making your venture succeed.
Sales surge, cash crisis?
When sales suddenly take off, building up inventory, waiting for receivables, and handling operational challenges could actually strain cash flow. It's a good problem to have, but make sure you have a source of cash ready before you need it.
A small business owner needs to wear a lot of hats. Whether you do it all yourself, share the workload with partners or employees, or hire specialists, make sure you cover all five of the following key areas:
Management/staffing. Finalize your business plan, join your chamber of commerce, seek guidance from experienced peers, and line up all your vendors and employees.
Marketing. Create a strong business identity, and determine what kind of marketing efforts will help you reach potential customers.
Administration/operation. Set up all the commercial equipment, technology, services, and other tools you'll need to do business — as well as a dedicated space, if appropriate.
Legal/regulatory. Fill in any legal details left over from the seed stage, such as name registration, licenses and permits, tax filings, and obtaining legal counsel.
Lifestyle. Prepare your family, your schedule, and yourself for the long hours and stresses that will come with the new venture.
Q: How much cash is enough?
A: A good rule of thumb is to have at least enough for one month's expenses in the bank, preferably two or three. Another approach is to look at your working capital ratio: the total of your cash, receivables, and inventory compared to your total liabilities. Ideally what you have should exceed what you owe by a cushion of about 25% or 30%.
Q: How do I keep my business and personal finances separate?
A: Establish a business checking account, business debit card, and business credit card.
Set up financial tools. Make sure your accounting software, bank accounts, and bookkeeping routines are established well in advance.
Maximize cash flow. Increase cash on hand by giving your customers payment options. Merchant services can help you accept credit and debit cards for payment.
Control your bills. There are many options to make paying bills convenient and consistent, including scheduling payments using business debit and credit cards, and online payment options.
Manage payroll. Review state and federal employment tax laws that might affect your payroll process. Decide who will process your payroll — an internal employee or a vendor. Prevent payroll fraud by implementing a secure payroll process and offering employees direct deposit.
Watch your overhead. Look for any other areas where you can manage expenditures and reduce your burn rate, and try to live below your means.
Discover more Wells Fargo resources
Learn more about cash flow projections.
Get your business up and running with these initial key steps. View this video about starting a business.