Business banking resource
Stretch your income as far as you can

Starting a new business? Avoid the pitfalls, mistakes, and time-wasters.

As you’re likely already well aware, business financing is a whole other world than personal financing. If you’re not ready for the realities that accompany running a business, you may struggle in the beginning.

Step 1: Are You Financially Ready to Start a Business?

If you’ve achieved the following four financial goals, it is likely that you are prepared to start your own business and finally become your own boss.

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Goal 1: Do You have 6 Months’ Worth of Expenses Saved Up?

How much do you need to survive for six months after you start a business?

Business financing 101

Add up all of your monthly business expenses (including personal expenses) and multiply them by six.

That’s what you need.

You have to assume it’s going to take a while for your business to get going.

You have to assume that Murphy’s Law is coming for you.

When you own a business, you go from juggling three balls to thirty. Mistakes are going to happen.

Keep in mind that businesses are like trains. They take a lot of time and effort to get moving.

Very few are overnight successes.

The best you can hope is to break even. Over time, of course, you’ll learn how to pivot and respond to your market.

Until then, you need to have some savings built up in your bank account. Some people say 3 months, but we say 6.

When disaster strikes, it strikes hard.

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Goal 2: Do You Understand Your Tax Obligations?

Understanding how taxes work when you own a business is quite doable, but, if you’re like most people, you might be better off working with a CPA.

CPAs can look at your business’ financials, and your financial goals, and tell you exactly what you need to do.

Their expertise is not free, but it is worth every penny.

In the long run, they will save you money by helping you avoid unwittingly committing tax fraud or negligence. CPAs are also great when you need to do any kind of business banking, too.

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Goal 3: Are Your Current Debts Paid Off?

Your personal finances should be in order before you try to take on anything else, so it’s paramount that you make one of your immediate financial goals paying off old debts.

The top three you should try to knock out are credit cards, auto loans and student loans.

How much of your debt to income do they take up? The money you spend on them could very well be pivotal to growing your business.

A good rule of thumb is to keep your debts at or below 36% of your monthly income.

Though some lenders will still lend to you if your DTI (debt to income) is between 43-50%, that’s really on an individual basis. You can’t bank on it.

Should you need to take out a loan or do any type of business banking to finance an order, you will have a much better chance of being approved for the loan if your DTI is low.

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Goal 4: Have You Established Proof of Concept?

Depending on what sort of business you want to start, it’s good to have some sort of proof of concept before you start.

You can do this a variety of ways depending on what your business is.

Starting some iteration of your business online is probably the safest route to take for most freshmen entrepreneurs before moving to a brick-and-mortar space.

After you’ve proven there is a need and a want, you may even decide to keep your business entirely online!

Step 2: Know how you will get, receive, and send money

Before you start your business, here are three things to consider.

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Consideration 1: Initial Financing

Business financing can be done a variety of ways.

Some people cash out their 401(k)s, utilize credit cards, find investors, or even crowdfund. However, most people choose to take out a business loan.

Traditionally, community banks, such as Herring Bank, can offer advantages with a variety of loan products and structures.

The likelihood of success for your small business start-up can be maximized by seeking the most advantageous structure.

Three types of loans you’ll want to consider when you’re starting a business include:

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Consideration 2: Merchant Services

Whether you’re a brick and mortar store or run an online service, the right card processing service can maximize your customer experience, leading to better business.

Working with a reputable merchant services partner ensures you’re offering the best payment options for your customers, while managing a fast and reliable payment authorization system.

Herring Bank, for example, offers a range of services so that you can work with just one payment processor that provides affordable transaction rates.

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Consideration 3: Payroll Services

Not just going to be a ‘mom and pop’ operation?

We strongly advise enrolling in a payroll service.

About one third of all small businesses get penalized by the IRS each year because of payroll mistakes. Don’t be one of them.

Fortunately, Herring Bank offers a Premier Pay program that helps both you and your employees. We eliminate lost paychecks along with slow cashing time; instead, we deliver 100% direct deposit, even if some of your employees are unbanked. Plus, they’ll save up to 4% each pay period by not having to use a check cashing center.

It’s a win-win for everyone

Step 3: Have a basic operational plan

As a business owner, you wear many hats. At one time or another, you may wear all of the hats at once.

When you’re juggling staffing challenges, production, increasing expenses, and promotional opportunities, it’s easy to get lost in the shuffle.

These five tips will help you manage a variety of aspects that affect your business’ financial success.

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Tip 1: Keep an Eye on Accounts Receivables

An expanding business has to keep a good handle on their accounts receivable, as unpleasant as the role of debt collector may seem.

At times you may find that long-term customers test their limits by stretching their payment periods. Newer customers may not be familiar with your payment process.

Whatever the case, late payments or unpaid invoices are part of business ownership.

It’s important to be polite, yet firm, when pursuing payment. Your customers expect you to deliver what you promise with your products or services on time. It’s fair that you expect the same courtesy from them.

Have a plan for how you’ll pursue delinquent accounts.

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Tip 2: Manage Debts

Almost every business has to seek financing at some point.

Many new business owners take out a loan to help with start-up costs. Others may need a little help when it comes to new product launches or expansion.

It pays to talk to the experts at your bank to get appropriate financing that you can manage.

The amount borrowed is only one part of the story. Always put careful consideration into an appropriate repayment schedule, and know exactly what incurring this debt will cost you in the long run.

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Tip 3: Staff Strategically

Your staff should be your greatest investment. And like with any investment, you should see a return on what you put into them.

For every member of your team, multiple costs exist apart from salary alone. Additional costs often include the actual space each occupies, the equipment and training needed for their role, taxes, and often health insurance and pension provision.

Consider all of your options before growing your full-time staff beyond what you can manage.

Many businesses look to outsourcing to freelancers as a cost-effective option. While there is nothing like having a team member that is totally devoted to your business, sometimes parts of a single role can be farmed out to a range of different experts at lower overall cost.

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Tip 4: Organize Your Files

This might seem like an insignificant key point in comparison to some others.

Yet, imagine a simple scenario like this one:
Jeff, a member of your team, is on vacation. One of his key clients needs urgent help. Yet you can’t find vital information because nobody else understands ‘Jeff’s filing system.’

When the customer can’t be helped in a timely manner, you might lose them.

Few businesses, particularly new businesses, can afford to lose a client in a situation that could have been planned for and prevented.

Whether online or paper-based – invoices, client notes, and other important financial data should be filed in a way that allows you and other team members to retrieve easily when needed.

A good filing system doesn’t just store your documents; it allows information to be found.

Set up a solid back-up system, just in case your organizational method fails at any point. Many businesses now use cloud storage as a retrievable data source just in case a natural disaster occurs.

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Tip 5: Understand Your Budget

Creating and following a budget will help you prioritize your spending, grow your income, and avoid unpleasant surprises.

Write down a list of your expenses.

Understand where your revenue comes from and how much income you anticipate. Break down and organize your income and output, then figure out if you have enough money to put towards other resources that will grow your business.

Once you’ve made a solid budget, review it often. Note any changes and make the adjustments needed. Make a plan for the event of an emergency.

Sticking to a sensible budget will be key to your business’ financial health.

Step 4: It’s all about the cash-flow and how you manage it

Healthy cash flow is as important to a small business as a strong circulatory system is to our bodies. Strong cash flow management means reducing the time between outgoing payments to suppliers and employees and incoming payments from clients and customers.

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Keep a track record and look at your history

The best way to measure cash flow is to look at your history and make an educated guess about what to expect.

Paying attention to the past year, quarter, or even week can help business owners understand how to act in the present.

Make a plan to survive shortfalls

The key for any successful business is the ability to predict the inevitable times when our sales fall a bit short. Acting in advance and establishing a line of credit is a good way to guard against shortfalls.

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Be more efficient with remote deposit capture

Remote deposit capture allows business owners to scan checks remotely, transmitting the image to the bank for fast and convenient deposits.

Learn in more detail about the unique business solutions that RDC can offer you, and consider a few of the following points.

Manage Growth

Increased sales are always a good sign, but it’s important to make the extra effort in managing finances when a business is growing.

It can be easy to gain a false sense of security when things are going well, and keeping costs and payments in balance is as important as ever.

Step 5: You’ll live and die by your budget

It’s easy to think of a business budget as a statement of what you expect to spend and earn. In reality, it should be more of a planning tool.

Some owners simply feel that revenue is their goal. Yet, unless you know how best to use your revenue, your business is unlikely to grow as you would wish.

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Any budget involves guesswork.

The danger is that, often, in their enthusiasm for a project, owners don’t make sure such guesses are calculated. These should be based on as much sound information as can be gained and assessed.

Paint a picture of an achievable future.

It’s easy to be too bullish. You can’t overcome problems by assuming they will disappear, yet some owners do.

Equally, in tougher financial times, it can be comforting to draw your horns in too far.

So, a budget is also about striking a balance.

This is where research is of vital importance.

Consider past budgets (if applicable) as a model. You can see if there is a pattern of over-enthusiasm in some areas, under-estimation in others.

Compare forecasts to the actual numbers. Question the expenses spent. You can then reassess and learn lessons. Using these, you can make more measured decisions in key areas for the period ahead.

A second area of research is in planning new projects or activities. These might be capital expense-based, such as upgrading facilities. They could be revenue-based in financing increased promotional activities.

Here’s a truth: appreciate that things usually cost more than you imagine.

This brings us to cash flow management in relation to budgeting

It isn’t enough to know how much you are likely to earn. It’s vital to understand when these funds will be available.

Build a picture of how your customers will pay. Some will be swifter than others, so it’s vital to plot cash flow. This is particularly true if much of your revenue will come from a relatively small number of major clients.

If it is likely that you will encounter some period where this could be a problem, it pays to give your bank an early heads-up. This is always better than having to ask for emergency funding, which often suggests a lack of clear planning.

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A business budget also needs a degree of flexibility built into it

The unexpected always happens! Keeping it so tight that there is no wriggle room will lead to problems.

A final often-asked question: how often should I budget?

Obviously, one tied to your fiscal year makes sense. However, there is also often a need for longer-term planning and short-term on-going assessment. The former will likely have a looser structure, and be more of a future plan than a tied-down budget. The latter is useful for regular reviews, ongoing measurement, and maintaining cash flow management.

The analysis of key spreadsheets keeps you abreast of what’s happening.

The key is to plan and control your business activities in a way that works best for you.

It also pays to be in regular touch with the business experts at your bank to keep them informed and pick their brains.

It’s great to have an on-your-side sounding board!

Herring Bank offers a variety of merchant services to our business customers. If you have questions about managing your business’ financial success with any of our merchant services, please call (888) 283-4564. A Herring Bank representative would be happy to help you!