Finance and Funding
Understanding and managing money is one of the most critical skills for any entrepreneur. Strong financial literacy empowers you to make smart decisions, plan for growth, and build a resilient business. This guide will walk you through the fundamentals of business finance, from understanding your numbers to exploring your funding options.
Understanding Your Financial Health
Before you can seek funding or make strategic plans, you must have a clear picture of your business’s financial health. This understanding comes from three key financial statements.
- Profit and Loss (P&L) Statement: Also known as an income statement, this shows your revenues and expenses over a specific period (like a month or a quarter). It answers the question: "Is my business profitable?"
- Cash Flow Statement: This tracks the actual cash moving in and out of your business. It's crucial for managing day-to-day operations and answers the question: "Do I have enough cash to pay my bills?" A business can be profitable on paper but fail due to poor cash flow.
- Balance Sheet: This provides a snapshot of your business's financial position at a single point in time, showing your assets, liabilities, and equity. It answers the question: "What is my business worth?"
A Critical First Step: From day one, open a separate business bank account. Co-mingling personal and business funds is a common mistake that creates accounting nightmares and can put your personal assets at risk.
Exploring Your Funding Options
Securing capital can feel daunting, but there are more pathways to funding than you might think. The right option depends on your business stage, industry, and goals.
- Bootstrapping This means self-funding your business using your own savings.
- Pros: You retain 100% ownership and control of your company. You are forced to be resourceful and manage your cash flow carefully from the start.
- Cons: Your growth may be slower, and it puts your personal finances at greater risk.
2. Friends & Family Accepting money from friends and family is a common way to get started.
- Pros: They often offer more flexible terms than traditional lenders.
- Cons: It can strain personal relationships if the business struggles. Always treat it as a formal business transaction with a written loan agreement to protect everyone involved.
3. Small Business Loans This is a more traditional route through a bank or credit union.
- The U.S. Small Business Administration (SBA) doesn't lend money directly but guarantees loans made by lending partners, making it easier for small businesses to get approved.
- To apply, you will need a solid business plan, strong personal credit, and detailed financial projections. We recommend connecting with a local SBDC or SCORE mentor to prepare your loan application.
4. Grants Grants are essentially free money, but they are highly competitive and often designated for specific purposes, industries, or demographics.
- Look for grants from federal agencies, state economic development programs, and private foundations.
- Grant writing is a skill. Be prepared to invest significant time in the application process.
Managing Your Money Day-to-Day
Once you have funding, managing it wisely is key to long-term success.
- Track Everything: Use accounting software or a simple spreadsheet to track every dollar that comes in and goes out. This makes tax time easier and gives you real-time insight into your business's health.
- Set Aside Money for Taxes: A good rule of thumb is to set aside 25-30% of your profits for federal, state, and local taxes. Consult with a tax professional to understand your specific obligations.
- Pay Yourself: It's important to pay yourself a reasonable salary. This helps you maintain your personal financial stability and forces you to operate the business as a separate, viable entity.
- Review Regularly: Don't wait until the end of the year. Review your financial statements at least once a month. This allows you to spot trends, manage cash flow, and make proactive adjustments to your strategy.
