Business Finance Basics For New Startups
By Business Desk
Monday, August 1, 2016.
As a new startup owner, thinking about your business idea will take up a considerable chunk of your time. However, you should also be trying to get to grips with the fundamentals of business finance - which will make or break your startup. There is a lot to consider, so for today’s article, we’re going to take a look at everything you need to know. Let’s get started with some of the basics of financial management for new startups.
You can have the brightest idea in the world lodged into your brain, but without money, you won’t turn it into a viable business. You can fund it yourself, of course, but you should also be looking around for loans, grants, and investment opportunities. Your local bank is often a good starting point, but you might get cheaper terms by asking close family members for investment. If you need a large sum of money, an angel investor might be your only option. Bear in mind that you will need a compelling business case to put forward when asking someone to lend or invest money into your company.
Balance sheets are critical to show how well - or poorly - your business is doing. It is vital to start off on the right foot and learn how to enter figures into your balance sheet with complete accuracy. You will need to show where your money comes from, and where it is at any given time in your business. In simple terms, wherever there is an action on your balance sheet, there also needs to be a reaction. For example, you might spend money on a piece of machinery, so your balance sheet would show a reduction in your cash and an increase in your capital.
You will also need to learn how to create an income statement. It will show you all your sales and receipts for an accounting period, as well as your overheads. You should end up with two types of profit - gross and net. Gross profit is the difference between your entire revenue and the cost of making all products. Net profit is the same figure, but removing all your overheads such as payroll, taxes and interest payments on loans.
Don’t forget about taxes when you are starting up a new business. Make sure that your returns are 100% accurate - you can hire a tax professional to do this for you. Failure to do so can result in a visit from the IRS - which may not be pretty. If this does happen, make sure you use find a tax attorney who knows what's best for your situation. Tax problems and fines will put your business in grave danger - particularly when you are at such an early stage.
Return on investment - or ROI - is another key financial term to understand. It is vital that you begin focusing on ROI right from the beginning. In simple terms, your ROI is the profit you make from selling a product minus the amount you spent creating it. It can encompass many different things, from the cost of raw materials to how much you pay people to create a product. Paying attention to your ROI from an early stage can give your new business a great platform and foundation to grow.