Business lifecycle stages: Seed/startup
During the seed and startup phases, it's important to write a business plan, determine your legal structure, secure funding, and track your small business's cash flow.
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Welcome to this segment of the business lifecycle video series. Hi, I'm Jeff Sloan of StartupNation.com. In the next few minutes, you'll get financial strategies, tips from fellow business owners, and resources that can help during the seed and startup stages of the business lifecycle. The decisions you make during this critical time will shape your company's future and help determine if it prospers.
Key considerations during the seed stage include creating a business plan, determining your legal structure, and setting up your business finances. A business plan is a blueprint for turning your idea into a functioning, profitable venture. Here's what one business owner has to say about this important first step.
At Sweet Trapp Toffee, it is so important to have a business plan in place. It helps with goal setting, structure. It helps line up qualified suppliers. And it helps you with your financial records and bookkeeping, as well.
Need help creating your business plan? We'll show you how to access a step-by-step guide at the end of this video segment. Your company's legal structure affects everything from the taxes you pay to the people who make decisions and assume liability for your business. Listen to this entrepreneur's experiences with making this fundamental decision.
The structure of your business when you're starting it is very important. My first business, I started as a C corporation. And when I sold it, then I found out that there was more taxes that I had to pay. And so for this business, I decided to be an S corporation. And everything flows through. For a startup, it's a good practice. It's also sometimes a good thing to have an LLC. But you want to explore what your business is and what your product is to make that decision.
Finally, separating your business finances from your personal ones right from the start can help with good record keeping and tax preparation. Talk to a banker about the financial needs of your business, both in your current situation and for future growth. Consider this business owner's perspective on how important it is to set up separate business accounts.
It's very important to keep your business expenses separate from your personal expenses for so many reasons. For me, I set up as a corporation. And I invested $30,000 of my own money into Private Eyes to start it. And so that was a loan to the company, and I did discuss with my banker at the time my plan of how I was going to move forward. But it's important to have things be separate so that your books can be very clean and then it's very clear to your bank as you go through growth stages and you tell them what your needs are, they can see clearly that everything in the business is for the business.
Once your doors are open, you'll probably find many issues vying for your attention all at once. A couple of the most important considerations during the startup stage are securing business funding and tracking and controlling cash flow. If you have the resources, tapping your personal assets is by far the easiest way to fund a new business; however, many entrepreneurs must seek outside investors, borrow, or do both.
If you have financing in mind, you’ll want to make sure your credit profile is as strong as possible. A good way to start building credit in the name of your business is by regularly using and repaying a business credit card. Once you secure funding, you'll want to manage this precious resource as efficiently as you can.
Now let's look at some common questions about the seed and startup stages. How do I keep my business and personal finances separate? Establish a business checking account, business debit card, and business credit card that you use only for business purposes. How much cash is enough? 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%.
Thank you for joining us for this segment of the business lifecycle video series. To find out more about other stages in the business lifecycle, click on the relevant video chapters. We'll conclude with a recap of the key considerations to the seed and startup stages, and provide you with some additional resources.