Small businesses drive the economy of every nation, but that should not be mistaken to mean that all of them meet success. In an ideal world they should (hint: but in the actual world they don’t). As many as 80% of them cease to exist after the first year and a half, a fact that has been thoroughly researched and published on Bloomberg. The reasons behind this failure are often linked to mismanagement of available financial resources, lack of innovation, error in the hiring process leading to incompetent staffing, lack of flexibility to adapt to the changing business environment, lack of access to capital and cumbersome immigration policies.
The importance of small business to the economy was buttressed by the United States Small Business Administration (SBA) which said that since 1995 small businesses make up 99.7% of firms that have created 64% of new jobs. On this premise, America’s economy – although very progressive and attractive – would be better off if all the failed businesses succeeded. Most small businesses are conceived on big ideas instead of big finances, which is an obvious anomaly. Here are some tips to help you manage the funds of your business, and fan the flames of an excellent business idea!
1. Study the cash flow of your business
It is bad that financial advisers are not carried along in the planning and hatching of business ideas. However, what is worse is that the small business owners, most often, do not have background knowledge of finance or anything related to its proper management. The majority of small business owners live in curiosity about the cash flow (inflow and outflow) of their business.
A typical small business owner can easily tell you the amount of profit made by buying a specific product, and selling the same at a given amount above the cost price. Sadly, that is often the limit of their financial knowledge. Other critical outflows, like fixed and recurrent expenditures, private and business inventory purchases as well as loan payments are not accounted for.
It is crucial that companies maintain a reasonable cash flow at all times and for this to happen, the inflow and outflow figures need to be balanced. Funds to cover bills and operational costs are adequately managed by an efficient cash flow system, as well as allowing predictions to be made for potential future problems.
2. All spending should be accounted for and justified
The early stage of a business is financially involving. Expenses will be coming from all directions. It may be incredibly expensive to get an employee to do the book work, because of its propensity to upset the balance of your cash flow. A better alternative is to employ accounting software to organize your finances. Small businesses often kick off on a low budget, and financial availability and the use of accounting software is a smart way to conserve already-insufficient funds.
Accounting software cannot entirely take the place of a professional, but at the early stage of your business it will help you effectively manage your cash flow, and make life easier when it is time to offset the tax. As your business grows and accounting becomes more complex, a professional should be employed.
Larry Alton advises small businesses to do all it takes not to run out of finance. There are a few options available in the case of eventualities. Giving out equity to angel investors in exchange for financial support seems to be the most lucrative, because you will not have to pay back the money. However, by seeking the intervention of angel investors, you lose some level of control over the company.
3. Hire consultants, not full-time employees
One of the pitfalls a small business owner may fall into is to attempt to hire full-time employees to cover every function. It is almost impossible for a small business to hit a home run in everything - but to succeed, all critical services have to be executed with pinpoint accuracy.
In this case, you have to draw up a comparison between the cost of hiring a full-time employee and place it side-by-side with the cost of a consultant – and be sure to go for the cheaper option. Business resources can be conserved, and a greater result achieved by hiring a short-term consultant to provide seasonal marketing services.
Another good example is to use freight services or transport companies to convey materials, rather than owning the car and footing the bills - including paying the driver. Care should be taken to ensure the consultant’s service is just for a short term, or it may be incredibly expensive to sustain over an extended period.
4. Being optimistic alone is not enough
It is good to be optimistic about whatever you do because it gives you a reason to push further into the world of uncertainties. It may be hard to predict from the beginning if your business will turn into something big, or if it will fail. So stay optimistic - but it’s still good to prepare for the worst. Don’t be in a rush to trade your job or eliminate your primary source of income until your business has grown enough to take over that role.
There is no such thing as too much preparation for a potentially bad situation. Irrespective of your preparation, bad things may happen – and sometimes when they are least expected. Therefore, it is wise to keep personal and business reserves for emergency situations.
As an entrepreneur, you should be looking at your retirement already because it is your responsibility. Try both large and micro-investing, as well as exploiting every opportunity at your disposal because anything – no matter how small – is better than nothing.
Remember that your biggest asset is your time. This should be kept into consideration when planning your daily schedule. Make every second count because any second invested into something unrelated to your business can be considered wasted time – and by extension, money.
5. Embrace strict financial discipline
Strict financial discipline is a habit that should be pursued with vigor by everyone in the business field. Strict financial discipline should be tied to the passion that birthed your business idea. Your annual budget should accommodate dips and spikes in your field, as well as capital expenditures. Once this budget has been generated, make sure you stick to it and never spend beyond what you have budgeted.
This is not the time to acquire that fancy equipment or take expensive trips. Your spending should be channeled towards investing. If your purchase leads to an increase in profit, go for it; if not, seek an affordable alternative, or move on without it.
6. Data leaks equal business stagnancy
It is never too early to protect your data.
As a new business, you have to be aware that you are already seen as a competitor in the global market, and some of your competitors may go outside of business ethics to weed off competition. Use passwords and VPN to prevent an average hacker from gaining access to your data while on a Wi-Fi source. VPN is affordable and can shield you from data breaches which makes it a great tool for surfing the web.
Ready to take a headstart by managing your finances efficiently? Be sure to share the results in the comments section below, and let us know if you would like to add any points to this article.