6 Small-Business Finance Fundamentals
Few entrepreneurs endeavor to start their own businesses for the thrill of managing the finances. Not many business leaders are overly excited about the prospect of balancing budgets and orchestrating expenditures. However, to run a business successfully, every business owner needs to have firm financial literacy — which means taking time to become educated in […]
Few entrepreneurs endeavor to start their own businesses for the thrill of managing the finances. Not many business leaders are overly excited about the prospect of balancing budgets and orchestrating expenditures. However, to run a business successfully, every business owner needs to have firm financial literacy — which means taking time to become educated in finance fundamentals.
It is important that business leaders obtain a formal education in business finance. The best online MBA programs teach students not only about business finance, but also accounting, marketing, sales, and leadership. Yet, until then, struggling business owners can survive by picking up a few basic business finance tricks.
Separate Life and Work
Business owners should know the difference between their personal accounts and their business accounts. Just as it is unethical to dip into business savings for personal mortgage payments, it is wrong to use personal funds to supplement a business. Even bootstrappers should understand that after an initial investment of cash, personal money and business money should be kept separate, to include credit and debit cards. When life and work are financially distinct, owners can better keep track of business-related profits and expenses and evaluate the financial health of their business.
Keep Costs Low
It’s likely that a startup or small business won’t reach the black until about five years of operation, so in the meantime, business owners must be careful to keep costs low to avoid digging themselves into an even deeper hole. There are several ways to cut costs without hindering business productivity, including:
- Buying carefully. Shopping around, avoiding long-term contracts, and acquiring goods during suppliers’ dry periods will create better prices.
- Trade services. Many firms are willing to forego money in exchange for valuable services. For example, a PEO might trade benefits management in exchange for a marketing company’s campaign management.
- Going off-brand. Using generic or off-brand tools and technologies is often cheaper. In fact, the web offers dozens of free tools for businesses.
Consider the Future
Beginning a business is easily one of the most financially taxing endeavors, so it makes sense for business owners to prepare themselves as much as possible. Enrolling in the best online MBA program will give business owners a firm foundation in finance fundamentals, so they can avoid major missteps and secure a successful future. Because MBA programs are two years or less, they require a meager investment of time and money compared to business owners’ gains of financial (and economic, accounting, marketing, and more) knowledge and skill.
Improve Cash Flow
Cash flow is one of the most common problems new business owners face. Sometimes, startups experience long dry spells without any income. Business owners should facilitate cash flow by reviewing terms of payment: If the invoice is vague, clients won’t pay on time, and the business will suffer. Additionally, business owners should allow electronic and mobile payments, which are more convenient for most consumers. There are plenty of other solutions for poor cash flow, including selling unused equipment or limiting employee benefits programs, but such drastic measures should be taken as a last resort.
Be Savvy About Funding Options
Business funding isn’t a one-and-done endeavor; even successful businesses seek additional funding to bolster their profits and grow strong. Therefore, it behooves business owners to know about all available funding options. Some lesser known funding sources include:
- Merchant cash advances. Merchant services providers will advance money from credit and debit sales, but interest rates can be steep. Therefore, it’s best for fast and certain growth.
- Business lines of credit. This is a useful funding tool that every business should have, much like business credit cards. It can be used to resolve cash flow issues, as well.
- Invoice factoring. Another cash flow improvement method, factoring involves selling unpaid invoices to a third-party company.
- Microloans. Though every lender has a different definition, microloans are generally less than $50,000. Because they are so small, they are easier to pay off — and many nonprofits give them to struggling businesses with reasonable terms.
A business owner that doesn’t know where their money is, what it is doing, and why is not financially secure. It is vital that business owners monitor their finances in every possible way, devising in-depth financial statements to better understand the business’s performance and prospects. Specifically, business owners should keep an eye on the gross profit margin, the net profit, the net profit margin, accounts receivables, and current assets to liabilities. Fortunately, there is software that can help track these complex figures.