Finances of Startups

An estimated 10% of startups fail within the first year, according to data from the U.S. Bureau of Labor Statistics; but that’s no reason to give up on your dream of starting a small business! If you’re looking to get your startup off the ground, here are five tips on keeping startup finances strong.

1) Build Your Startup Capital

One big reason many businesses fail is not because of a lack of customers or even a lack of profits, but because the business isn’t growing fast enough to pay for itself. In other words: the business simply runs out of money. To help avoid this particular pitfall, build your startup capital before you begin renting a space, purchasing equipment or hiring employees. The more money you can build at the start—before your operational expenses begin to pile up—the better your chances of making it in the long run. Startup costs vary widely depending on your industry and location, but there’s plenty of data online to help you understand how much your startup costs may be. Expect to raise around $5,000 for a landscaping or online retail startup, and around $100,000 for a restaurant.

2) Find a Funding Source

Of course, in order to build that startup capital, you’ll need a source of funding. Some small business owners self-fund their venture, which means taking money from a savings or retirement account and putting it toward the business. The obvious disadvantage is that if the startup flounders, those savings are gone. On the other hand, you might turn to credit cards, a personal loan, or even a crowdfunding campaign to get your business going. Another option is to approach venture capital firms or professional investors—just be prepared to convince them why your business will grow. Ultimately, it’s a good idea to talk with a financial professional, such an accountant, before making any funding decisions. This is particularly true if you’re considering removing money from an IRA or 401(K) account before reaching retirement.

3) Choose the Right Legal Structure

Many small business owners choose a sole proprietorship model, meaning the individual who owns the business directly receives all profits. A limited liability corporation (LLC), on the other hand, separates personal assets from business liabilities. Setting up an LLC usually requires more paperwork and more costs, but there are a number of benefits. If the business is in debt, a business creditor can’t go after the personal assets of an LLC business owner. In general, startups which are small and only employ the business owner start as a sole proprietorship, while startups with employees incorporate as an LLC—but be sure to check with an accountant about the best move for your burgeoning business.

4) Do Your Research

Having a business degree is not a requirement to run a successful startup, but it is important to know the deep specifics around your customers and your market. What customer demand exists, which isn’t currently being met by a market? Who are your competitors? What’s the right price point for your product? Make a list of questions and get researching. You can hire a third-party market research company, or do the work yourself through surveys, a social media study, or simply speaking to potential customers in person. The information you glean from research should help to budget your startup funding and determine prices and salaries once the business is running.

Set Concrete Goals

In your initial startup planning, you should already be developing realistic, achievable goals. A small business goal shouldn’t just be ‘to make money’. Instead, write up a list of concrete goals such as: recruit ten new clients by June, conduct one marketing campaign this year, or bring in enough money to hire a new member of staff six months from now. Setting smaller goals will make it easier to see what needs to be done and where funding should be directed, instead of throwing money at various aspects of the business without a concrete plan. Having concrete goals can also help you to evaluate the success of your business plan—if goals are consistently not met, investigate further to see what needs to change.