There are a number of pitfalls when it comes to financing. So that you don’t stumble, here are the most important tips:
Excessive start-up financing, for which you would have to pay an unnecessarily high interest rate and which might make you lose sight of making profits, will help you just as little as too tight a start-up financing. You should determine your capital requirements as realistically as possible. Nevertheless: It is essential that you remember to plan a sufficient reserve for the unforeseen and do everything you can to secure your liquidity. Planning an additional 20 percent as a buffer is a sensible rule of thumb that saves nerves.
Factor in taxes
Taxes can be a real stumbling block for founders, especially when business is going better than expected.
Let’s say you pay a low tax rate the first year because you expected sales to grow slowly. In fact, you make more money than you thought. After a year you make your tax return , which means that the tax office will charge you with a hefty back tax payment. Together with the tax assessment, you will receive the message that you have to make a higher advance tax payment with immediate effect – even retrospectively for the current year.
Our tip: As soon as you make imputed profits – this is often the case in a partnership where the entrepreneur does not receive a salary, often in the first year – you should regularly transfer a fixed proportion of your income to a reserve account or savings account. In this way, you are always prepared for any additional tax payments. Ask your accountant for the appropriate percentage or use 30 percent as a rule of thumb.
When the financing is in place, the loan is approved and you can finally get started, many founders get into a real frenzy: they spend the money with their hands. The premises are furnished in the finest fashion, mountains of advertising material are ordered or a chic company car is leased. But if everything doesn’t go as planned, there is no more money for the really important things: for salaries, goods or rent, for example.
Don’t let it get to that point. With every investment, check very carefully whether it is really necessary. The conversion of the escape routes , which the authorities have made a requirement for your company, is definitely one of them. An expensive reception counter made of marble, on the other hand, probably not.
Get creative: Not everything has to be brand new, many things can also be bought used. Start as lean as possible and first test whether your idea really works.
Always remember: Every additional shilling spent must first be earned again. For example, if you have a 20 percent profit margin on your sales, a Ksh1,000 counter means you would need to make Ksh500 in sales to earn it.