Small Business Finances: The Key Financial Pillars of Building a Start-Up

Small Business Finances: The Key Financial Pillars of Building a Start-Up

Here’s a note from a reader:

“…thank you for the information you provided on Entrepreneurship on Fire. I was deeply encouraged and felt led to contact you. I am a 24 year old entrepreneur, economics and finance major, former athlete. Recently I quit my IT sales job to focus on my a project I have been working on since December.

My partner and I are launching the site in 6 weeks- online sports media business. Just wanted to ask a question- What are the key financial pillars of building a start-up?

Building a start-up is a challenging task, start by making things legal with a partnership agreement and an LLC. Be sure to keep the business finances separate from your personal finances, and don’t forget to save for your future.

Create a Partnership Agreement

Create a partnership agreement and roles and responsibilities document. If you’re sharing the workload with someone else, this step is essential. I don’t have personal experience with this, as I am more prone to working alone, but this is as important as anything directly financial. The Wall Street Journal has a great piece on this topic. The key takeaway:

“Every agreement should address three crucial areas: compensation, exit clauses, and roles and responsibilities. Include who owns what percentage of the business, who is investing what, where the money is coming from, and how and when partners will be paid.”

We’ve all read horror stories about people who went into business together only to face an ugly split. Don’t risk losing all your money, getting trapped in a business arrangement that doesn’t work for you, or any number of catastrophes. Creating a solid partnership agreement, with everyone’s duties and compensation in writing can help you avoid those pitfalls.

Separate Business from Personal Finances

You need to keep your business finances completely separate from personal finances. This means at a minimum opening up a business checking account. I’ve found it useful to get a business credit card and Dwolla and/or PayPal account as well.

It’s tough to make decisions about your business when they are mixed in with your personal finances. Tax time can be unnecessarily tough when you have to split everything. Plus, by keeping your personal financial life separate from your business, you help avoid any appearance of unethical behavior regarding the business or employees.

Here’s a list of free checking accounts. (Business accounts are towards the bottom of the list.)

Track Business Income and Expenses

Track your income and expenses using Quickbooks Online or other software. You can tie this software to your checking account, credit card, and payment account. This will help you to know where you stand with your business throughout the year and it makes tax time a lot easier for you and your accountant. You’ll get professional reports and invoicing as well.

Without clear bookkeeping and records for your business, how will you gauge your success? It’s essential to keep track of all expenses related to your business, just as you should for your personal life. Budgeting for your business can help you identify areas for improvement.

If you’d like to outsource this check out Bench’s online bookkeeping services. Here’s our full review of Bench.

Form an LLC or Other Official Entity

Once you start making some cheddar you might want to form an LLC or other official entity type to further separate your business from your personal life.

You will also need to start making estimated tax payments…but you get a pass your first year on this.

Related: How to Form an LLC in 10 Easy Steps

Build Business Credit

Along with maintaining separate financial accounts for your business and your personal life, you’ll want to build up business credit. Your LLC will have its own separate credit score, not tied to your own individual credit score. One good way to build your business credit is to open up net-30 vendor accounts with companies that will report all transactions to the credit bureaus.

If you need ideas on how to build business credit, a good place to start would be Nav. They offer free services like 24/7 business and personal credit alerts, one-on-one access to credit and lending specialists, a summary of your business credit and scores, and cash flow alerts and insights. Nav also researches hundreds of financing options for you to save you time and help you pick the best one for your business.

Nav Check and monitor your business credit. Get Started Nav We earn a commission if you click this link and make a purchase at no additional cost to you.

Save For Retirement

I get it, believe me. Your business is in its newer stages, so you might be worried about not making enough income to even think about retirement.

But don’t stay in that start-up phase for too long! Your retirement is too important to put off for years, so please make this a priority. At a minimum, as soon as you’re able, open up a Roth IRA and contribute the max each year. If you want to do more, consider a SEP IRA or Solo 401K (like me), which will help you shelter some of your business income from taxes.

Related:How to Avoid Going Broke in Retirement

Bottom Line

I’m a bootstrapper, so I know nothing of the funding world or taking out loans. My businesses are pretty simple….I make sure I make more than I spend. If you follow one financial rule, that’s the one to choose. Focus on that as your primary business goal, and follow sound financial advice for the rest of the details.

All right readers, did I miss anything? What do you believe are the key financial pillars of building a start-up?

Small Business Finances: The Key Financial Pillars of Building a Start-Up
About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  1. Craftyborrower says

    My brother wanted to start a business. He kept telling me all about his product but when I asked him about his finance plans he would always say something vague about finding angel investors.

    I’m just an amateur and even I could tell him that he’s got the cart in front of the horse.