financial foundationEvery business owner needs a basic financial parachute in place. What does this really include, though?

  • If you want to get down to just the basics, that includes insurance and at least one month’s rent and payroll expenses in your bank account as a buffer.
  • If your business is cyclical, then you’ll likely need more, enough to cover your slower months.
  • If you’re in retail and collect sales tax, keep the tax collected in a separate savings account and consider it off limits. You heard me—put it somewhere you are not tempted to spend it.

Okay, but you don’t want just a parachute; you want to grow, right? That old saying “it takes money to make money” is true; you can’t just save. Growth often requires that you spend and invest before you’re able to reap the rewards. You’ve got to invest in your business at some point. But remember, you are building a financial foundation. You’re going to want to establish access to a credit line before you need it. Plus, if you keep the potential debt amount healthy, then this might be something you could use to help you get through unexpected slow moths.

Remember, I said a healthy amount of debt. It might be tempting, but you’ve got to keep a lid on it. Going deeper than 3-4 months will prove debilitating. It’s got to be manageable. You need to invest in your business, but not by overspending. Moderation—like exercising and eating healthy—keeps the end goal lean and streamlined.

Is this starting to sound a little complicated? Relax. In the most basic form, there are five things you can do to make establishing a financial foundation more manageable:

1.    Calculate the minimum monthly income needed and determine the number of hours or customers that will require.
2.    Build up to at least one month of fixed expenses and payroll.
3.    Find appropriate health coverage and get disability insurance as well as life insurance if you have dependents.
4.    Create a debt payoff plan.
5.    Meet with a banker to see what they will need to approve a line of credit, and if you are in a position to start saving for retirement now, then go ahead and maximize those tax sheltered retirement contributions.

Once that is all in place, there is one more step—Celebrate! You are on your way to building a strong financial foundation!