The Harvard Business Review Entrepreneur's Handbook: Everything You Need to Launch and Grow Your New Business

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One commonly known fact – so common as to be enshrined in tax law – is that new businesses typically don’t make money. Rather, for the first few years, most subsist on loans and investor funds and whatever the owners have saved up. Still, even before your startup becomes profitable, it’s important to begin cultivating meaningful financial wellness.

How can you put your business in the best possible financial position when getting it off the ground? You can take a number of different steps, but they all come together to create long-term solvency.

Be Budget Savvy

It can feel untenable to try to stick to a rigid budget when you’re not bringing in enough money to pay the bills, but it’s important to get into the habit of creating and following a budget now. A budget will show you one-time and occasional expenses, what vendors or service providers take up the bulk of your budget, and where debt accumulates. As your income increases, you can steadily readjust your budget until it’s balanced.

Develop Additional Income Streams

One of the best ways to increase your income in the long-term is by developing passive income streams. Any passive income source should be something of a ‘one-and-done’ task, such as creating an eBook or downloadable course. Passive income streams support your existing business, but they don’t demand the time and energy that the main operation does.

Monitor The Ins And Outs

If you’re not making sure your invoices are paid and not just sent out, you’re going to have a problem. Many businesses and freelancers accumulate bad debts or debts unlikely to be paid from a consistent set of clients. Unfortunately, the pattern underlying bad debt often isn’t obvious unless you’re carefully tracking your invoices.

Tracking bad debt isn’t just bad news because it points out problem clients but because small businesses and startups tend to have more of it than major corporations. Big businesses can hire people to chase down those debts. Over time, this accumulated debt can actually drive a small business to bankruptcy, so it needs to be tracked.

Know Your Options

Speaking of bankruptcy, strong small businesses aren’t just those that avoid bankruptcy; they’re also the startups that understand their options. In other words, they know debt doesn’t need to be the end of the road. As bankruptcy lawyer Rowdy Williams explains, “Every business owner needs to understand that [Chapter 11] bankruptcy doesn’t mean closing your doors forever. It can be a way to start over, to address your debts honorably, but with some added breathing room.”

Chapter 11 bankruptcy allows businesses to take stock of their debts and make arrangements with their creditors to eventually pay off their debts. Depending on your business’s situation, this can be a better option than taking out a loan. And it’s definitely more tenable than hoping to attract enough new clients to cover your costs. 

The Art Of Financial Wellness

Many will argue that financial wellness is ultimately a matter of establishing strong cash flows and minimizing cash loss. But until you get down to the details, you can’t really understand what’s at stake. By looking beyond the basic budget and at the mechanics and underlying causes of business debt, though, you can give your startup a critical edge in a competitive market.

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