Are you tired of slaving away at your repetitive corporate job? Do you feel a sudden urge to break into the business world and call the shots yourself?
As tantalizing as the prospect sounds, the truth is you’ll need to do some adequate preparation to succeed in business. Being an entrepreneur or freelancer is a great test of courage that not everyone can succeed in. You’ll need a great deal of skill, luck, and determination to get far in your chosen field.
But that’s not all. You’ll also need to know how to handle the systems and operations of the business—and a major component of that is handling the financials.
Without proper financial management, succeeding in a new career path will be a big challenge. This is especially true for entrepreneurs who often have to take out loans to gain enough capital to operate.
If you want to ensure you’re finances are in order during your career transition, read on for six useful tips on how to effectively manage your finances.
1. Create a financial roadmap
Entrepreneurs and freelancers should set goals and targets to work towards. Goals serve as accountability measures that keep you in check. It helps create something tangible to aim for, which can spell all the difference in achieving success in your field.
That said, the act of goal creation is much more complex than it sounds. A well-articulated goal is one that’s SMART—specific, measurable, achievable, relevant, and time-bound. If your goal fits these defined criteria, then it becomes much easier to track and progress towards.
Furthermore, a financial roadmap also helps you map out future business decisions in the short term and long term. For instance, it can give you an expectation of your expenditures during the initial phase of your business.
But most importantly, it can set the tone of mapping out how much revenue you should be generating during certain quarters.
With a comprehensive financial roadmap, you can be more informed about your business’s direction—making it easier for you to make level-headed and data-driven decisions.
2. Diversify your client base
As an age-old adage goes, never put all your eggs in one basket. For budding entrepreneurs and freelancers, the same rules apply.
Relying on a single client for the bulk of your income is akin to waiting for a ticking financial time bomb to reach zero. It only takes a single dismissal or restructuring procedure to leave your financial stability in shambles.
A good idea, therefore, is to diversify your client base and ensure that you have more than one source of income. Make it a habit to not have any client providing you with more than 30% of your income. This way, you won’t be overly reliant on a client in case they suddenly end the partnership.
Besides that, it’s also important to strike a balance and ensure you’re not overworking yourself. If you fail to provide the results you promised due to getting too many clients, you may end up losing all that you’ve worked so hard for. Be realistic with your workload and keep your clients happy in your relationship with them.
3. Separate your personal and business bank account
If you’re serious about opening a business from scratch, your financial management system needs to reflect that. And the first thing you should do is to open a separate business bank account for your business.
A business bank account is ideal for multiple reasons. One, it helps make tracking your expenses and transactions a much easier task for you and your finance team. This makes it easier to look at cash inflows and outflows, as well as tax-deductible transactions.
Secondly, a business bank account usually indicates that you own an LLC business, which is a type of structure that prevents lenders from chasing your personal assets in case your business defaults.
Another perk of owning a business bank account is the legitimacy it exudes to other third parties, whether they’re your clients, suppliers, or other business partners. This legitimacy can grant you better deals and contracts with your stakeholders, allowing you to scale more easily and freely.
Related: Why Open a Business Account for Your Business?
4. Manage your cash outflow
As a business owner, especially a new one, you’re expected to purchase a lot of assets—whether they’re equipment or inventory.
You’re also expected to incur a variety of fixed and variable expenses every month, which can add up and take away from your revenue.
To ensure that your expenses are under control, you must keep a close eye on your cash outflow. This means making regular monthly glances at your fixed and variable expenses.
If you find a particular expense category too high, then you can make the necessary adjustments to keep it at bay.
For instance, you can use digital tools instead of relying on contractual workers for certain tasks. You may also choose to rent a co-working space instead of renting a full-fledged office.
Besides that, it’s also important to ensure you aren’t postponing your debt payments. If your interest rates and late penalty fees get out of control, it can be extremely difficult to tame them and stay profitable.
Therefore, efficient cash flow management is key to ensuring business continuity. Develop a plan to keep your general expenses low and hone in on the ones that contribute to your business growth.
5. Develop an emergency fund
Freelancers and business owners should always have a dedicated stash of cash—an emergency fund, in other words—for when they run into emergencies.
This accessible and highly liquid asset can help pull you out of a pinch, whether it’s business-related or otherwise. Ideally, you should set this amount away from your personal and business account and only access it during times of financial trouble.
Common uses of emergency funds in business are for instances wherein your equipment fails to work or when you lose a major client.
A good rule of thumb is that the emergency fund should be enough to cover at least 3 to 6 months of normal business expenses. This should be more than enough to give you peace of mind and enough leeway to focus on growing your business and taking healthy risks.
6. Get support from other professionals
Transitioning from one career to another can be a major life decision, and the implications of the move can drastically impact your entire life trajectory.
As such, you want to ensure that your decision is a fruitful one for your long-term prospects. A good way to get a headstart is by networking and talking with other professionals in your desired field.
Engaging with these subject-matter experts gives you a leg up in acquiring the knowledge needed to succeed in your chosen field. Besides that, linking up with professionals also gives you a potential list of clients and partners to tap into, further bolstering your opportunities.
If you want to build a successful business, you should remain open-minded and concentrate on the goal you have set in place. With the right team and the right strategy, you can make a name in your chosen industry and truly become a successful and respectable businessperson.