8 Legal Strategies for Effective Finance Management for Early Startups

By
Amanda E. Clark avatar
on June 06#business-tips
8 Legal Strategies for Effective Finance Management for Early Startups

When you launch a new business, it’s easy to be completely consumed with creating a product, building a customer base, and managing a team. Administrative tasks, including the nitty-gritty elements of financial management, often take a back seat. And yet, sound financial management is seldom more important than during the early stages of a startup.

Simply put, the financial routines you develop early on can prove make-or-break for your startup. The ability to facilitate cash flow, to create a cash reserve, and to properly allocate your investment capital will have a direct impact on your company’s longevity and growth.

As such, it’s wise to deploy a few simple strategies to ensure you’re stewarding your finances well.

How Startups Can Effectively Manage Their Finances

1) Choose the right legal structure.

The legal structure you choose for your business will have a major impact on financial management. For example, if you run your company as a Sole Proprietorship, your business and personal assets will effectively be one and the same. That can make finance management easier, but it also means there’s greater risk: If your company is taken to court, your personal assets will be on the line.

By contrast, setting up an LLC and selecting a registered agent (like Northwest Registered Agent) allows you to keep personal and business assets separate, while also protecting your personal property from potential legal peril. For many entrepreneurs, this will be the most sensible option.

2) Open a small business bank account.

No matter which type of legal structure you choose, it’s important to create separate bank accounts for your personal assets and for your business assets. There are several specific reasons why you’ll want to open a business bank account:

It helps your business look more professional, as customers will be able to pay the business as opposed to paying the business owner.

It can provide legal protections (again, keeping your business funds separate from your personal funds is important should you become involved in a lawsuit).

Having a business bank account can also make it much easier to prepare your business tax returns.

Shop around for business bank accounts that offer the lowest fees and the best online accessibility. 

3) Create good habits to manage cash flow.

Cash flow simply refers to the money coming into your business versus the money flowing out. Healthy cash flow is the lifeblood of any business, but it’s especially vital for startups.

There’s no magic formula to ensure a balanced and healthy cash flow. Instead, it’s simply a matter of putting the right habits into place. Some recommendations:

Make sure to send invoices as promptly as possible.

Borrow money before you need it, considering options like business lines of credit, business credit cards, or loans for bad credit if traditional lending options aren't feasible.

Keep an eye on operating expenses, always seeking opportunities to cut costs.

Adjust your inventory to ensure cost efficiency.

4) Conduct market forecasts.

Cash flow is all about the money coming into your business right now… but what about future profitability? It’s widely accepted that small businesses take a little time to become profitable, but it’s important to achieve profitability within the first year in order for the business to be truly sustainable.

A market forecast draws from past and present data to estimate how much profit you’ll make in upcoming seasons. For startups, it may be wise to over-forecast for revenue and under-forecast for expenses. In other words, double your projected expenses while cutting your projected revenues in half. This can be an effective way to keep you from spreading yourself too thin, financially speaking.

5) Carefully consider options for extra funding.

It’s pretty normal for new business startups to require a little bit of outside funding in order to grow. While seeking outside funding isn’t a bad thing, it can be dangerous to choose a funding source without first doing some due diligence. Compare different options for interest rates, repayment terms, funding availability, and eligibility requirements.

Some of the most common forms of funding for a business startup include:

Traditional bank loans

Small Business Administration (SBA) loans

Grants

Business lines of credit

Peer-to-peer loans

Beyond exploring different funding types, also compare the terms offered by different lenders, including banks and credit unions.

6) Use the right tech tools

An initial investment in technology can make your financial management that much more expedient.

First and foremost, every small business needs a good accounting system in place. Quickbooks is the best-known example, but it’s worthwhile to compare options. Startups seldom need fancy packages with all the bells and whistles; basic accounting options should more than suffice.

A system to automate accounts payable is also a good idea. And if you find yourself sending a lot of invoices early on, automated invoicing can be an effective way to regulate cash flow.

7) Use a basic budget.

A budget provides you with a blueprint for ongoing financial management. And again, it doesn’t have to be anything fancy or complex. Simply knowing your monthly expenses, and subtracting them from your monthly revenues, can provide a good sense of the wiggle-room you have for investing or growing your business.

Remember that a budget isn’t meant to be static. Review and revise as needed, curbing costs or accommodating variations in your revenue stream.

8) Know your tax obligation.

Before your startup begins generating revenues, taxes are probably going to be low on your priority list. However, it’s crucial to start tax planning early on, and build tax obligations into your financial forecasts.

Consider working with a tax prep expert who specializes in working with early-stage startups. The sooner you develop your tax plan, the more effective it will be.

Make Financial Management an Early Priority

Really, this could be said of all aspects of financial management: Starting early will yield the best results, and position your startup for the greatest longevity. Make sure that, in the rush of launching a new business, you don’t forget to develop the right habits for managing your finances.

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