Many people struggle with the financial side of managing their small business. Not everyone has a head for figures – or goes into business seemingly to become a part-time accountant.
While there are many things to get through in an average day and finance might be something you find hard or uninspiring, it's something you can't ignore.
Managing your business finances
Owners with more start up cash might employ someone to take care of the financial management of their business. More complex tasks might be delegated to an out-of-house accountant. But if your budget is tighter, your involvement will need to be more hands-on.
In any case, you can't divorce yourself completely from the numbers. Being up to speed with your cash position is pivotal to making day-to-day decisions, while keeping an eye on the overall financial picture of your business will help you to make important calls that affect the future.
Maybe, despite a lack of knowledge and experience, you're relishing the prospect of crunching the numbers. Even fairly basic financial know-how can prove valuable, while information technology has made financial management easier than ever.
Key financial tasks
A key task for new businesses is to work out your start-up costs. As well as launching your business, obviously, you need to be able to financially make it through that all-important first 12 months.
Costs must be kept to a minimum, which requires resourcefulness, willingness to make sacrifices and often some good old-fashioned cheek.
Learning how to minimise costs from the start is a good habit that can help take your business on to greater things. When times get tough, cutting costs might be the only way you can steer your business through stormy waters.
As well as working out your start-up and operating costs, you'll need to be able to predict sales. Welcome to the world of forecasting – a science requiring a dash of art and thorough knowledge of the market.
To predict sales revenue, you'll also need to know how to set prices. For example, will you simply add markup to your costs (known as cost-plus pricing) or will you base your price on the value your customer will place on your goods or services? Whichever method you choose, you'll need to get your prices right if your business is to succeed.
Once you know how much money you require to launch your business, you can decide whether you can do it with your own cash or whether you need to secure start-up funding from elsewhere. There are various sources of start-up finance to consider.
Ensuring healthy cash flow
As any small-business owner or adviser worth their salt will tell you – cash is king. It's a familiar mantra, but what does it mean?
As many profitable businesses have found to their cost, it doesn't necessarily matter how many sales you make or even how much margin you add. If you don't have enough cash in the bank and your creditors demand their money, the game's over, even if on the face of it you're running a 'profitable' business.
Maintaining healthy cash flow is critical – and it's not just about making sure you spend less than you turn over. You also need to ensure you get paid on time, which will demand all of your credit-control powers. It doesn't pay to be overly generous with your credit terms. When payment is overdue, sometimes you'll have to cajole customers, while with others you'll need to be much more forceful.
cash flow difficulties are enough to have the most seasoned small-business managers worried. However, learning to spot the classic signs of cash flow problems as early as possible provides the best chance of averting disaster.
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