Starting a Business

The Definitive Guide to Starting a Business

Caleb Newquist Editor-at-Large, Gusto 
starting a business definitive guide
Artern Design

This is it. You’ve started the journey of starting a business. You have an idea, and you’re about to put it into action. Either you’ve decided to fix something (literally or figuratively), provide a rare service or product, or embark on a revolutionary idea that will become the stuff of legends.

Simple time tracking that syncs with payroll.

But in all the excitement, you may have forgotten the difficulty of the task ahead of you, not to mention all the work. Oh, yeah, and the high risk of failure.

Yes, the cold reality is that, despite all the ingenuity, optimism, and promise, over time most small businesses fail. Specifically, ~20% fail in their first year; ~30% by the end of their second; ~50% by the time five years have passed, and ~70% won’t make it past 10 years.

Those are dire stats when you consider that people rarely start businesses with the intent of failing. And many times this failure has nothing to do with the skill or quality of the idea; often it comes down to little details or a stroke of bad luck.

Despite the odds, the threat of failure shouldn’t conquer your entrepreneurial spirit. Hundreds of thousands of small businesses are started every year in the United States, employing hundreds of thousands of employees. Altogether, there are more than 30 million small businesses, making up 99.9% of all businesses in the U.S. Those businesses employ nearly 60 million people, almost half of all the employees nationwide.

Ultimately, it’s hard to deny that the story of small businesses in America is a resounding success.

Which is probably why you’re reading this. You’ve recognized an opportunity—or, at the very least, an idea—worth pursuing and you’re willing to take the risk in pursuing it. And while that enthusiasm is a huge key to success, there are scores of mundane choices and everyday work that don’t have much to do with your original idea. Things like regulations, registrations, entity structure, banking, business plans, payroll, and accounting, to name a few.

That’s why we developed this guide. It will steer you through the foundational work that every business owner should do to set themselves up for success. The sooner you knock these out, the sooner you’ll be back to the business of your business.

Paperwork: All the stuff to get done to officially start your business

There are some critical tasks to handle while launching your business. Among them:

  1. Coming up with a name
  2. Choosing an entity type
  3. Registering your business with the secretary of state
  4. Applying for an employer identification number (EIN)

It’s virtually impossible to get your business off the ground without doing all these things. So we’re going to explain how to do them. Let’s dig in.

What’s in a name?

Once you’ve decided to start a business, it may feel like a momentous occasion. Until you realize that you need to call it something. Yes, just like a newborn baby, a cat, or that jalopy that gets you around, your business needs something to go by. You can’t throw up a sign or a website that says “BUSINESS” and hope that people will be so intrigued that they’ll inquire further.

And if you thought that the decision to start a business was difficult, choosing the right business name is bound to drive you batty. You’ll want the name to be memorable, something that people will quickly recall, and that can be achieved by either being informative (e.g., In ‘N’ Out Burger), unique (e.g., Lego), or basic (e.g., Moe’s Tavern).   

Where to start? First, jot down a bunch of ideas, and remember, there are no stupid ideas. Think of all the household names in business that are a little…odd. Etsy. GoDaddy. Twitter. Yeti. Zillow. Those are business names? Those are business names.

After you have the ideas, there are some steps you can take during your brainstorm:

  • Do some word association; what do you think of when that potential name comes to mind?
  • Share your list with some people who will give you honest feedback. The kind of people who will point out any awkward or strange connotations, and tell you that something is just plain stupid (usually the sign of a good name).
  • Narrow down the list, check if the domain name and trademark are available, and if they’re not, it’s time to get creative with spelling or it’s back to the drawing board.
  • Work this process until you’re happy with the business name you pick.

Once you have the name, then it’s time to take the next set of steps in making your business official.

Choose an entity type

When choosing an entity type, you’ll want to consider your options carefully. You have a handful to choose from:

  1. Sole proprietorship
  2. Partnership (with various forms: general, limited, limited liability)
  3. Limited liability company (LLC)
  4. S corporation
  5. C corporation

The entity type you choose will depend on a number of factors, and each form has its pros and cons. Talk to your business advisor (a CPA or an attorney, most likely) if you’re unsure. Changing entity types after your business is up and running is a bit of a pain, so it’s important to get this right.

Get an EIN and register your business

Once you’ve chosen your business entity, it’ll be time to bring it into the world by filing for a federal employer identification number (EIN). EINs are like Social Security Numbers (SSN) for businesses. This number will go on every tax return you file and many other forms too.

Virtually all business types need an EIN except those operating as sole proprietorships with no employees. However, it’s still a good idea to get an EIN because it will allow you to keep your SSN private, which can help protect you from identity theft. Having an EIN will also let you open bank accounts and credit cards, along with applying for licenses and permits, among other things, on behalf of your business.

If after all this, you still aren’t sure if you need an EIN, check the IRS’s “Do You Need an EIN?” page.

If you’ve said YES to the…EIN, there are many ways to apply for it. The easiest way is to pop over to the EIN Assistant and get the process started. But if you’re not hip to that, you can also apply by filling out Form SS-4 and sending it by snail mail—international applicants can apply over the phone by calling 267-941-1099—or you can even send a fax. Yes, a fax.

After you’ve applied, the IRS will notify you of your assigned EIN with Form CP-575. The CP-575 serves as proof of your business’s EIN, official name and address, as well as a list of the federal tax forms you’ll be required to file. After you receive it, you’ll want to file it away with other important business documents that you’ll need on an indefinite basis.    

You may also want to consider using a “doing business as” (DBA) name if you aren’t going to use your legal name. For example, if you’re opening a donut shop and your name is John Smith, you may have a legal entity name of John Smith, LLC. But since that’s a lousy name for a donut shop, your dba could be “Donut Worry, Be Happy” or “Glazed and Confused.”

DBAs are common among sole proprietors who want to do business under something other than their own name. Using a DBA may also come up if your entity decides to operate another business separate from the current one.

If you’ve decided to use a DBA, be sure to look into your state’s process around obtaining and registering it. In California, for example, you must first search and reserve a name with the Secretary of State (SoS) to make sure your preferred business name isn’t already being used. Then you need to file a Fictitious Name Statement form with the appropriate county and pay the associated fee.

With the EIN checked off your list, now it’s time to register your business with the SoS. You’ll need your:

BOOM, YOU’RE OFFICIAL

It might seem tedious, but these decisions and tasks are the first steps in a long journey to creating your successful business. Don’t take the details lightly!

Get a plan: The work before the actual work gets started

Before you open the physical or figurative doors of your business, you’ll want to spend some time putting your idea down on physical or figurative paper. This is best achieved by writing a business plan.

Why a business plan is a good idea

At first glance, you might think, “Business plan? That sounds like a bunch of fancy talkin’ nonsense.” Skepticism from new entrepreneurs about business plans runs beyond gobbledygook, including the idea that they:

  • Overcomplicate things
  • Slow down any entrepreneurial momentum
  • Are unnecessary because “It’s all up here [points at head].”

And sure, a business plan might seem like extra work, but it will help you accomplish several things:

  • It presents the basics of your business: A business plan forces you to think about your business at the simplest level, and, in the process, will prepare you to explain its operations so anyone can understand it. A business plan will explain:
    • Who the owners are and what roles they fill;
    • What the business will do and why it’s different or better than the competition;
    • Who its customers are, how it will be run, and more.
  • It’s the roadmap for your business: If someone asked where you wanted your business to go, do you have a clear answer? A business plan will help you articulate the direction you want your business to take. In essence, your vision.
  • It serves as your business’s resume: If you’ve looked for a job, you know that every prospective employer will ask for your resume. It tells the story of your career, but also what you’re looking to achieve. A business plan functions in a very similar way, but instead of employers, it informs potential investors, partners, employees, creditors, or anyone else who may be a stakeholder in your business. It states what your objectives are and how you plan to achieve them.

How to write a one-page business plan

If you’re still unsure if you need a big formal business plan, don’t fret, a one-pager will be an excellent place to start. To get started, we recommend pasting the following sentences into Word or Google Docs and filling in the blanks:

  • The business problem we solve: My business will provide a solution to _______.
  • Our value proposition: The reason customers will buy from me and not someone else is ____.
  • Target market and competition: Our target market is ______ and our competition is ________.
  • Marketing: Our customers will hear about us by ______.
  • Financial projections: We expect to earn $______ (Yes, be specific!) in Year 1, $____ in Year 2, and $_____ in Year 3. Expenses in Years 1, 2, and 3 will be $____, $____, and $_____, respectively.  
  • Key milestones: In Year 1 will be ____, _____, and ____. In Year 2 we expect to build on those by  ____, _____, and ____. Finally in Year 3, we hope to ____, _____, and ____.
  • The team: Our team will be made up of myself as [title], and [anyone else].
  • Financing: To finance the early stages of the business, we will rely on ________.

Remember, this is supposed to be a one-page business plan, so get to the point. It should be clear and straightforward so that anyone can understand it.

How to write a full business plan

If you plan to look for business partners, investors, or other kinds of financing, a one-page business plan probably won’t be sufficient. You’ll need the whole enchilada.

The U.S. Small Business Administration (SBA) says the following sections should be included in a complete business plan:

  • Executive summary
  • Company description
  • Market analysis
  • Organization and management
  • Service or product line
  • Marketing and sales
  • Funding request
  • Financial projections

Unlike the one-page business plan, the full business plan will provide lots of details on each of these sections. One sentence won’t get the job done.

Fortunately, the SBA has tons of free resources, including templates, and a step-by-step tool to help write your full business plan. There are also apps like PlanGuru, LivePlan, and GoSmallBiz.com that will walk you through each section, and have additional tools to help track your progress, video instruction, analysis, and benchmarking for similar businesses.

Where’s your business located?

Your business will happen somewhere. It may be a storefront, an office, a workshop, a garage; whatever your trade or business, a place where the work occurs will be needed.

Oddly enough, the garage has become something of a cliché—even a myth—in the entrepreneurial world. But a garage is a handy space for tinkering, storing stuff, or, merely working, making it the perfect location for many fledgling businesses.

In a lot of situations, starting a business in your home is a great solution. It won’t cost you any extra money, and there’s no commute. But if you’re going to start a business like, say, a restaurant—something that has a lot of inventory, deliveries, or employees coming and going—having all those people and things in your home won’t work for you.

If your business will operate from somewhere other than your home, then finding another location will be necessary. Here are just a few things to consider:

  • Convenience: Will this space be easy for you, your customers, employees, suppliers, or other stakeholders to access? Or will it be a major inconvenience? You’ll want to avoid the latter.
  • Cost: This is a big one, obviously. Paying for prime real estate could blow up your budget, and potentially turn out your lights.
  • Facilities: Does your business have any specific needs, like refrigeration, green space, or plenty of storage? Be sure to think ahead about what it will require.   

And you shouldn’t stop there. You’ll have to consider things like safety and zoning, too, depending on the neighborhoods you’re looking at. Finding the perfect location will be a critical task, so choose wisely.

Your logo

A picture is worth a thousand words, the saying goes, and that goes for your business, too. The world’s best-known brands have logos that are instantly recognized by millions, maybe billions, of people. That kind of value is hard to measure, but there’s virtually no debate that it is valuable.

If you’re just starting a business, creating a world-famous brand is probably not high on your priority list, but giving it some memorable visual appeal is an excellent first step. That means developing a logo that will tell your business’s story when people look at it.

When considering the type of logo you want for your company, there are two main approaches:

  • Use your company name: Think IBM, Sony, Disney, Coca-Cola. Each logo is distinct and memorable and it’s merely the name of the company.
  • Hidden messages within a logo: Often this is done within the design of a company’s name. Once people see the hidden message in your logo, they can’t unsee it. FedEx is a perfect example, as are Baskin Robbins and Tostitos.
  • Abstract images: This isn’t as easy as just making something up and throwing it on your website. It will take years for people to associate your business with an image of something that may not really look like anything. The Nike Swoosh is a perfect example.

Many elements encompass a well-designed logo. Things like color, typeface, and illustrations are important, all while thinking about the message you want your logo to convey. That’s why it might be worth hiring a freelance designer or using a service like 99designs to help you. Yes, that will require an investment, but can you really afford to work on such a crucial part of your business by yourself? Especially if you’re not, shall we say, aesthetically gifted?

Once your logo is complete, you’ll want to trademark it with the U.S. Patent and Trademark Office to protect your creation from being used by someone else. Next, start slapping it on all your business collateral: signs, stationery, advertisements, website, social media accounts, etc., and ta-da! Your business looks like a business.

Money: Getting it, spending it, tracking it, reporting it, and keeping it safe

Assuming you’re not going to stuff revenue under your mattress, pay employees and vendors in cash, and hire 24/7 security guards to protect you throughout all these transactions, you’ll want to invest some time and money into financial resources. Don’t worry, it sounds worse than it is, and it will make your business a more secure and smooth operation.

Open your business bank accounts

First things first; you’ll want to open checking and savings bank accounts for your business. It will be very, very important for you to keep your personal and business bank accounts separate. Too many times, business owners either:

  • Pay for personal expenses using business funds
  • Take money out of their business without considering the tax implications

There are different schools of thought on how to set up your bank accounts (here’s one approach), but a good rule of thumb is to start with three:

  1. Checking/Operating: Use this one to deposit your revenue and pay your bills.
  2. General savings: This is where you park money that you’re setting aside for big purchases like a dump truck or a new website.
  3. Tax savings: After your expenses are paid, put a chunk into your tax savings account. These funds should be off limits for anything other than taxes. No exceptions.

Wait, why a tax savings account?   

Remember that revenue earned by your business will not have taxes withheld from it, and if you’re operating a pass-through entity, you—the individual you—will be responsible for paying the tax due on the income earned from that business. That means setting aside a piece of your profits, and a tax savings account is the perfect place to put them until it’s time to pay the piper.

Keepin’ the books

There are lots of reasons why people start businesses. Accounting is very rarely one of them. However, tidy accounting makes a world of difference when it comes to knowing how your business is performing, and whether or not it’s in a strong financial position.

For business owners, accounting (aka bookkeeping) usually goes one of two ways:

  1. It’s a nightmare.
  2. It’s a delight.

You definitely want to be in group number two. How do you accomplish that?

  • To start, keep your personal and business accounts separate.
  • Next, decide whether you’ll do the accounting yourself or pay someone to do it.
  • If you’re going to do it yourself, then you’ll need to decide how exactly you’ll do that.
    • You can try to scratch everything out on a paper ledger. (Not advised.)
    • Get real fancy and plug everything into a spreadsheet. (Still dicey.)
    • Use a cloud-based accounting system like QuickBooks Online, Xero, or Freshbooks. (Preferred.)

If you’d rather have an accountant do your bookkeeping for you, then you’ll want to choose that accountant carefully. Ask questions such as:

  • Will they just do your bookkeeping?
  • Can they provide any other services that will be useful to your business like tax return preparation or planning?
  • What about forecasts or cash flow analysis?

A good accountant will do more than keep your books. They will give you all kinds of insight into your business that will be immensely valuable. If you’re just starting out, that might all seem premature, but if you choose the right person now, they’ll be a critical advisor to you at all stages of your business’s journey.  

Taxes

Speaking of things that didn’t inspire you to start a business: hello, taxes. They are a certainty, but that doesn’t mean they have to be a drag.

Just like bookkeeping, when your business is new, it may be tempting to give your tax preparation a go yourself with one of those tax prep tools that bombards you with emails. We’re not saying that you’d be a fool if you did…but you’d be a fool if you did. Working with a trusted tax professional will give you the peace of mind that all your tax obligations are being met.  

How you choose that tax professional will depend on many factors, including the ones we mentioned in the bookkeeping section above; however, you’ll definitely want someone who specializes specifically in tax matters for businesses, not just individuals.

Depending on your business and where it is located, there could be many types of taxes you could be obligated to pay, namely:

  • Income: This is the tax that gets levied on your business’s profits. The profit of a C corporation is taxed separately from its shareholders, while if you’re an owner of a sole proprietorship, a partner in a partnership, or the shareholder of an S corporation, your share of profit flows through to your individual return and will be taxed there.

    That’s why these business forms are commonly known as “flow-through” or “pass-through” entities. Limited liability companies, a popular entity choice we mentioned above, can elect to be taxed as a sole proprietorship, partnership, S corporation or C corporation. That election will determine how companies file their tax returns.

    And while federal income taxes are unavoidable, there’s good news for business owners in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—these states don’t have an income tax. You won’t pay income tax on the income that flows through to you, if your business’s home state is one of those seven.
  • Sales: If your business resides in a state, county, city, or one of the thousands of jurisdictions with a sales tax, the products, and in some cases the services, you sell will be subject to sales tax. That means you will need to collect, report, and pay the tax due to the appropriate taxing authority. This includes goods that you sell online to buyers in other states. In 2018, the Supreme Court ruled in the landmark case South Dakota v. Wayfair that physical presence was not the only way for a business to create nexus (i.e., a connection) with a particular state, and therefore be responsible for collecting tax on its sales in said state.

    If your business sells stuff nationwide, you’ll want to be sure to work with a tax advisor who knows sales taxes inside and out. This is especially important because sales tax errors are one of the top things that trigger a small business audit.
  • Property: If your business owns real property (e.g., land or a building), it will likely owe tax, based on its assessed value, to the city or county where it is located.   
  • Excise: Businesses that use or consume certain products (e.g., fuel) or engage in certain activities (e.g., wagering) pay excise tax. Excise taxes are sometimes known as “sin taxes” because they are often levied on goods or services that are widely understood to be harmful. Taxes on tobacco and alcohol, for example, are common.
  • Self-employment: Since business owners are often not employees, they avoid having to pay Social Security and Medicare taxes. Enter: Self-employment taxes. This ensures that sole proprietors, partners in partnerships, and member/owners of LLCs pay their share.
  • Payroll: If you have employees, you’re responsible for a portion of their payroll tax (i.e., Social Security, Medicare); federal and state unemployment insurance, and workers’ compensation tax.
  • Gross receipts: States such as Nevada and Texas that do not tax income instead tax a business’s gross receipts (i.e., revenue). LLCs and corporations are most likely to pay gross receipts tax.
  • Franchise: Some states charge a corporation franchise tax based on the value of the company. These are similar to state income or gross receipts tax.

Taxes are a part of life, and an experienced tax advisor will be able to walk you through the details. You will not regret getting their help.

Financing

These days, business news is always popping with startups raising gobs of money at massive valuations. But if venture capital isn’t in your future, you can try financing your business in other ways:

  • Find a partner: Maybe you didn’t set out to start a company with someone else, but it can be a good option if you’re hard up for cash, need someone with skills you don’t have, and are willing to give up a piece of your business. Of course, that’s often the main reason people don’t want a business partner—it could mean letting go of some control.
  • Get a loan: Getting a bank to loan you money for your business is not an easy task, so you’ll want to do your homework before applying for one.
  • Ask loved ones: In some ways, asking friends and family for investment or a loan may be riskier than hitting up strangers. Be sure you think about this option long and hard before you go down that road.

Beyond more traditional financing options, there are several alternative ways of raising money. Let’s take a look at a few:

  • Awards
    • Pros: There is no shortage of contests, hackathons, and other competitions to win money to help finance your business.
    • Cons: Finding the right one can be a challenge, as the most popular awards and contests will be very competitive.
  • Grants
    • Pros: There’s lots of money being given away!
    • Cons: The money isn’t available for every type of business. USA.gov states that only non-commercial organizations (i.e., nonprofits and educational institutions) in medicine, technology development, and related fields are eligible for federal funds.
  • SBA loans
  • Crowdfunding
    • Pros: Sure, why not?! Crowdfunding on sites like Kickstarter and Indiegogo is a relatively new way to raise funds for your idea, and a lot of small donations could help you reach your goal rather than one big funding source.
    • Cons: The odds are against you reach your goal. Only about one-third of Kickstarter campaigns successfully funded their projects.

Insurance

If you’re starting a business, there’s no shortage of unfortunate events that could shut you down. To keep one of these unfortunate events from closing your business, it’s a pretty good idea to carry business insurance. But what kind of insurance? That’s a good question. Here’s a handful to consider:

  • General liability insurance: This will protect you if your products or services hurt someone or damage property.  
  • Property insurance: If you have equipment, real estate, or other long-term assets, you may want to consider buying insurance to cover them in case they get damaged. It’ll save your business from replacing them at their full cost.
  • Business owner’s policy: A business owner’s policy (BOP) is a bundle of insurance policies—general liability and property are a common pair—that a particular business might need. It can be customized based on your business’s needs and will be cheaper than buying each of the policies individually. Be careful, however, as certain insurance types, such as automobile or workers’ compensation, may not be included.
  • Workers’ compensation insurance: Workers’ comp provides funds to your employees who get hurt on the job for missed pay and medical expenses. The catch is, your employees agree not to sue you for additional damages in exchange for workers’ comp benefits.
  • Professional liability insurance (Aka errors and omission insurance): This insurance is specifically for lawyers, accountants, consultants, and similar professionals. It protects them if they ever get sued for their failure to perform a particular service for a client or if they performed it really, really poorly.

Running the business: Tools, resources, and things to help you get through the day-to-day

By now, you’ve probably realized that starting a business involves a lot of stuff that you didn’t expect. All of it may seem overwhelming, but chances are, the challenges you’re currently facing have been taken on by others. That’s why it’s good to get some recommendations from people who’ve been in your shoes.

Experienced entrepreneurs will have suggestions for tools and resources that will help you pick up the slack for things that you either don’t have time for or don’t know how to do at all.

Tools

These days, there’s a solution for everything, so if something you’re doing feels hard, try looking for a tool that will make it easier. Here are a few common areas to get you started.

  • Accounting/Bookkeeping: It was mentioned earlier, but it bears repeating—accounting is usually not the first thing business owners think about. However, it is still an essential part of running a successful business. There is no shortage of accounting tools for small businesses out there that will help make your bookkeeping a breeze.
  • Customer Resource Management (CRM): CRM tools are today’s Rolodex. Everything you may want or need to remember about a customer can be stored in CRM software. If you expect to be managing many important customer relationships, CRM software will be of massive help to you.
  • Credit cards: It may sound a little silly, but a great tool to have is a business credit card. It will be critical to have the right attitude about credit cards to avoid putting your business into debt, but they can be indispensable when you need some flexibility.  
  • Productivity: Administrative tasks like email and scheduling eat up a lot of your time, which is why it’s worth finding some productivity apps to help you manage them. And regardless of whether you use an iPhone or Android device, you’ll be able to do lots of that work on the go.

Who’s on your team (Or why you need to think about payroll)

Even if you’re the only person working in your new business, you’ll want to think about payroll. This might sound obvious but deciding whether to pay yourself or not is a big deal. There will be several factors to consider including your personal financial situation, so don’t take it lightly.

Ultimately, there are two main ways a business owner can pay themselves:

  1. Salary: If you’re an owner of an S or C corporation and you are involved in the day-to-day operations, the IRS will expect you to take a salary. This means you’ll need to run payroll regularly, and payroll, federal and state income taxes will be withheld.
  2. Owner’s Draw: An owner’s draw is for sole proprietorships, partnerships, and LLCs. The IRS considers the owners of these types of entities to be self-employed and not employees, which means paying yourself a salary isn’t an option. That means taking an owner’s draw, and that means you will be responsible for setting aside a chunk of the

Since business owner pay is largely determined by the business entity, the first step might seem easy. The second step—figuring out how much to pay yourself is anything but.

Here’s a handful of things to take into account when figuring how much to pay yourself:

  • Calculate your monthly net income: This is where it starts. If your business spends more than it makes, then you’ll have a hard time paying yourself anything.   
  • Calculate your tax savings: It will be vital for you to set aside a portion of your net income for taxes. A good rule of thumb is for any new business to sock away 30% of its profits for taxes, just to be on the safe side. For example:
Your net income$10,000
Savings %30%
Tax savings to set aside$3,000

You may have to adjust this percentage depending on your personal situation, so consult your tax advisor to land on the best tax savings amount for you.  

  • Factor in any business debt: If you borrow money to start your business, you’ll want to make that payment before paying yourself anything. Be sure to also include any business credit card payments you’ll need to make to come up with your total monthly debt payment.

  • Create a business savings plan: Do you need to make a big purchase for your business? Are you thinking of hiring two or three people in the next six months? Or perhaps you just want a cushy bank account? Make a savings plan!

    For example, if a designer is sprucing up your website in six months, and they’ll charge you $3,000 when the work is done, you’ll need to stash away $500 a month to avoid paying the whole sum out of your profits or slapping it on a credit card.

  • Consider your personal needs: Okay! So what’s left? You’ll want to take a look at your personal situation to determine if the funds that remain are adequate for you to, well, live. If you have an additional income source (e.g., wages from a day job or a spouse’s salary), then maybe it won’t be a lot. On the other hand, if your business will be a crucial part of your income, review your fixed, variable, and impromptu expenses to see if adjustments are necessary.   

Managing cash flow

On any given day in your new business, money will be coming in, and money will be going out. These are commonly known as cash inflows and outflows.

  • If your cash inflows are greater than your cash outflows, then you have positive cash flow.
  • If your cash outflows are greater than your cash inflows, then you have negative cash flow.

It’s crucial for you to understand that cash flow is different than profits, aka net income. Remember, net income is just an accounting number: revenue minus expenses. Or in other words, what’s left from the money you make after deducting your business expenses. Net income is at the bottom of your income statement and does not account for things like owner’s draws and credit card payments. Those things are cash outflows that have no impact on your net income, but have a BIG impact on your cash flow, so you need to be careful with those kinds of payments.

Here’s a simple example of net income:

Revenue$10,000
Expenses$(7,000)
Net income$3,000

Looks good, right? A nice chunk of profit. Now let’s look at what happens to net income when you take into account the cash outflows we mentioned above:

Net income$3,000
Owner’s draw$(1,500)
Credit card payments$(1,000)
Positive cash flow$500

Wahoo! Positive cash flow. But as you can see, there are plenty of opportunities for cash flows to go negative very quickly.

Whether it’s a month with higher expenses or a slightly larger draw or credit card payment, managing cash flow can be tenuous. Too much negative cash flow could put you in a position where you feel pressure to borrow money to make ends meet, and next thing you know, the business is awash in DEBT.

To avoid plunging your business into debt before it even takes off, obsess over how cash flows in and out of your business. That means making cash flow management a day-to-day and week-to-week exercise. Here are some do’s and don’ts to keep in mind:

Cash flow dos

  • Check your upcoming bills before you make purchases: Big purchases can wait; bills often can’t, so stay aware of your cash balance if outflows end up bunched together.
  • Make a plan for big purchases: Remember that savings plan we talked about above? This is where it comes into play. Do yourself a favor and think about big purchases ahead of time, don’t make them impulsively, and make a plan for them.

Cash flow don’ts

  • Confuse profit with cash flow: See our example above.
  • Spend money that you haven’t received: This might seem like an obvious DON’T, but it’s seriously tempting to spend money that you’re expecting to hit your bank account. Then life happens—customers pay late (here’s how to avoid that), an emergency expense comes up, or some other unexpected event arises, putting you in a pinch. Stay disciplined with your cash outflows, and these tight spots will be fewer in number.  
  • Use a credit card unless you have a plan for paying it off: Speaking of temptation, credit cards! Points, airline miles, upgrades, cash back, life back, the list of perks is endless. But all those perks are moot if you run a balance month after month after month.

If you need to make a purchase on a credit card, be sure to make a payoff plan. That plan might be as simple as paying off the balance when it’s due or making installments over several weeks or months.

A payoff plan will be crucial because the alternative is not pretty. According to Value Penguin, the annual interest rates on business credit cards average anywhere from 13% to 15%. Every month you run a balance (i.e., don’t pay it off), interest gets added to the total amount you owe.

Sure, you can make minimum payments until you’re ready to pay off the total, but they cover mostly the interest, and don’t pay off any of the principal due. This means your total balance due can snowball fast, if you’re not careful. It will be critical to not let other spending derail your payoff plan.

Marketing

Virtually every new business needs to get the word out. How else do your customers know that they need what you’re selling? How else do they know that you’re in business at all? Marketing helps creates that knowledge and brand awareness, and it will be crucial to your success. So let’s cover some basics.

  • Websites: Your website will often be the first impression your potential customers will have of your business, so you’ll want to make it a good one. Fortunately, these days, building a great-looking website is easier than ever. Platforms like Wix and Squarespace are designed to allow virtually anyone with the time and patience to create a great website, no technical skills needed.
  • PR: Public relations can be a great way to get free publicity. A compelling story about a new business opening can be just the thing a reporter is looking to write about. The trick to PR is persistence. Building relationships with local journalists can help generate some coverage for your business when significant developments occur.
  • Social media: One of the easiest (and cheapest!) ways to market your new business is using social media. If you have a good understanding of your customer, then you can probably figure out where many of them like to spend their time. Likewise, the nature of your business may lend itself well to one social media platform or another (e.g., restaurants or flower shops on Instagram). By building a following on social media, you have an automatic fanbase ready to eat up the news you’re publishing about your business.
  • Email: Email is still a big part of all our lives, so it shouldn’t be overlooked as a useful marketing tool. The challenge, like most things marketing, is making yours unique and interesting, the kind of email that people look forward to reading. But before we get too far, you’ll want to choose an email marketing vendor. MailChimp and Constant Contact are two of the most popular, and they’re good choices for small businesses: easy to use, reasonably priced, and they’ll integrate with many other platforms including your website and social media accounts.    

And this is just scratching the surface. Don’t be afraid to experiment, knowing full well that you might stumble onto something that works while trying something else that doesn’t. The important thing is to get your business out there and in front of the right people (YOUR FUTURE CUSTOMERS).

From here to eternity! You’re up and running, now it’s time to get growing

Who knew starting a business would be so much work? (We did, actually. We mentioned it up top.)

But now the real fun begins. You actually get to do the thing you set out to do. Whether that’s running an art gallery, making granola, or dog-walking, you’ve done the hard work of setting up a foundation for creating and running a business.

Where things go from here are largely up to you. On occasion, running a small business means doing it alone, and not having any employees. If your business is growing, however, you’re going to find that doing everything yourself is not really possible. Having part-time help can help ease growing pains, or using contractors might work better for you.

Hiring full-time employees (FTE) may be inevitable, though, and there are significant differences between FTE, part-time employees, and contractors. The differences are so substantial that we recommend you check our definitive guide to hiring. It will cover everything from getting ready for your first hire to the minimum wage to offer letters to tax forms and more. It’s the perfect place to get a handle on things to consider when you’re ready to start hiring.

But if you’re tapped out, we understand. For now, celebrate that you made it through this giant article. Bookmark this page so you can find it quickly and come back when you need to. It’s a lot to take in, but it can be a helpful reference for anyone ready to start a business. Good luck!

Updated: June 26, 2019

Caleb Newquist
Caleb Newquist Caleb is Editor-at-Large at Gusto. In 2009, he became the founding editor of Going Concern, the one-of-a-kind voice on the accounting profession, serving in the role for 9 years. Prior to Going Concern, Caleb worked as a CPA for nearly 6 years in New York and Denver. He lives in Denver with his wife, daughter, and two cats.

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