June 10, 2024
Until not long ago, startups were associated almost exclusively with Silicon Valley, whereas now they’re more far-reaching and can be found outside the United States as well. A startup is a new business with immediate growth potential that aims to fill a void in the marketplace by developing and offering a new and unique product, process, or service. The issue of entrepreneurship is multifaceted and, hence, complex. Financial knowledge is positively correlated with business success, empowering entrepreneurs to navigate the evolving landscape with confidence. Entrepreneurs must quickly learn how to balance income streams with short-term expenses and long-term investments. This is anything but easy.
Running a business presents many opportunities, but it also comes with its own challenges and financial risks, ranging from internal issues (e.g., competitor pricing ploys) to external pressures (e.g., market fluctuations and macroeconomic trends). The ability to manage these problems effectively can make the difference between barely surviving and growing your profit. Let’s take a closer look at some key financial considerations to keep in mind when starting your business.
There’s a false assumption that as long as a company is profitable, the business is sound. An organisation can fail when it runs on profit, regardless of its size, and this reinforces the adage “cash is king.” The flow of money isn’t always regular or consistent, so it can be many weeks or months between payments. Cryptocurrencies like Ethereum can generate cash flow under certain circumstances, so it belongs in every financial toolbox. Subsequent changes in the Ethereum price don’t alter the amount recognised by the company as revenue; that’s the case irrespective of the situation. If you want to create a steady cash flow, very few investments provide the return that cryptocurrency does.
Startups have a 50/50 chance of survival, and that largely depends on how you manage the business – the more efficient you are, the lower the failure rate. Management of cash flow is about implementing strategies that ensure there is enough cash in the business to operate on a daily basis and reduce the risk of a liquidity crisis. For example, you can capitalise on automation to ensure on-time payment and protect your business from financial risk. More prevalent and timely billing can expedite liquidity management. If you don’t have a formal working capital strategy, you’re missing out on opportunities to fund growth.
When launching a new venture, it’s necessary to open a dedicated bank account to maintain a clear distinction between business and personal finances. Even if your company is established and has separate checking and credit card accounts, don’t pay business expenses from your personal account – or the other way around – especially during tough times. Not only is it more challenging to manage cash flow, payroll, and taxes, but it’s also difficult to monitor the company’s financial performance. Be proactive in separating your personal and financial lives. Failing to draw a clear distinction between the two puts your personal assets and wealth at risk.
Anything you own that holds financial value is vulnerable to business risks along the lines of implicit or explicit claims contingent on the organisational form and whether you’ve made a commitment to make it happen. By way of illustration, if a banking institution grants an unsecured loan to a business, it has an implicit claim on all organisational assets. By pledging personal assets as collateral to secure the loan, you augment the claim on your personal wealth. The risk is substantial. Merging personal and business funds can pierce the corporate veil and leave your assets subject to debt, loss, and even lawsuits.
Good financial management is of the essence for the success of any organisation. Weaknesses in accountability are associated with weaknesses in accounting, expenditure control, cash management, auditing, and the management of financial records. Financial records must be managed from creation to destruction or transfer to an archive’s repository. Good practice has been defined from a number of sources, including the International Standards Organisation standard ISO 15489, which applies to records in any format, structure, or technological environment. Managing records can be hard, especially if you have to follow international standards. Monitor the performance and effectiveness of the records management system to spot issues, challenges, and areas for improvement.
If the numbers are inaccurate, you’re forced to rely on erroneous, misleading, or confusing information to guide your decisions, which can drastically affect your organisation’s performance. You must categorise every expense to enhance visibility and maximise write-offs. Accrual accounting gives a better indication of business performance since it shows when incomes and expenses occur, but some companies prefer using cash basis accounting to track the money coming into the business. Receipts serve as proof of financial transactions between a company and its customers or suppliers. Keeping receipts is a vital part of the process.
Businesses may pay several types of taxes besides corporate income taxes, such as insurance premium tax, health care provider surcharges and provider taxes, occupation tax, and so forth. A general understanding of the responsibilities and duties under the various laws is required when conducting business and their impact on your finances. A common pitfall for many entrepreneurs is failing to set aside money for income tax. The rate can change from time to time, so become familiar with the rate for the income year you’re reporting on. Accuracy matters because you can face penalties if you underpay.
Understanding how much you’re responsible for paying can help you make smart financial decisions. If you regularly buy and sell cryptocurrencies, you must treat the income as taxable, just as you would for fiat currencies. You pay taxes if you sell or use your cryptocurrency in a transaction, and its value is higher than when you purchased it. The revenue service can go back as far as three years to audit your tax return if an error is identified. You have the right to disagree with the assessment and can seek legal representation if the matter goes to court.
