As a business owner, you’ll find yourself in a difficult situation between the obligation to burn cash and the necessity to run a frugal business. Inexperienced and first-time entrepreneurs have a particularly large problem juggling between these responsibilities. The only way to get there is to understand all your financial responsibilities a lot better. So, here are several thoughts and tips on how to get your business finances in order as soon as possible.
Separation of funds
No matter how hard you try, there’s always a possibility that your business adventure won’t end the way you want it to. This is why you need to separate your personal funds from your business funds. The easiest way to do so is to register as an LLC (limited liability company), even if it makes more sense to run as a sole proprietor. Most people opt for the latter one due to the fact that they don’t have to pay separate taxes. However, this also means that, should things go south, there won’t be a difference between private and business assets.
Three major expenses
The next thing to keep in mind is the fact that most of your expenses may be divided into three major categories. First, you have day-to-day operations, for supplies, operational costs and paychecks. The latter may seem as a month-to-month expense, rather than a day-to-day, however, remember that your employees are paid by the hour, which can’t be changed by the frequency of payments.
Next, you have repayments and reports, which is money repaid to the bank, investors or shareholders. Finally, you have taxes, which we already mentioned in the previous paragraph. By keeping your eye on all three of these things, you can easily predict the bulk of your overhead for the next month.
This one is fairly simple, in order to start a business, you need to make an investment of your own or someone else’s money. Leasing an office, purchasing supplies, hiring people and registering a company all cost a substantial amount of money. So, in order to be considered profitable, your business needs to make more money than was invested in it.
From the very start, you need to determine how far off is a break-even point and work towards getting there as soon as possible. The best way to achieve this much sooner is to create an ERP system that provides you with a strong financial control, like one provided by The Leverage Technologies.
Another thing worth considering is your credit score, especially if you don’t need a loan at the moment. As an entrepreneur, you’ll definitely need a loan sometimes in the future, so why not think about this ahead of time, instead of worrying about this once it already becomes a problem.
Get a small loan you won’t have trouble paying off and make sure you get all payments in time. Aside from this, you should also focus on eliminating the debt instead of moving it around and avoid opening new credit cards, unless absolutely necessary.
Maintaining a healthy cash flow is probably the most important item on this entire list so you need to understand fully what options you have available to keep it up. If your business doesn’t generate enough money at the moment, loans, selling account receivables or even hiring a debt collection agency in order to get the money you’re owed sound like reasonable solutions to a problem. Remember that, even when you do get it, cash is a scarce resource, which is why you need to use every last dollar in the most efficient manner possible.
Lastly, sometimes doing things in-house simply won’t be worth your time and money. Imagine a scenario where you want to start a new department, only to figure out that the costs are so high you can’t possibly hope to match them. Acquisition of new equipment, licenses for specialized software, training for the staff and bringing in experts to act as team leaders are usually sizable investments that you can’t afford at the moment. It’s not even just about long-term vs. short-term, especially since even some of the largest conglomerates outsource. Sometimes it’s about performance and here, a specialized agency always outperforms a smaller business.
By exploring these six aspects of your business finances, you’ll get an idea of what needs to be done in order to set your company on the right path. This is important, seeing as how it gives you a much more universal approach to this problem, instead of giving you a formula that might not even apply to your specific situation. When it comes to getting your finances in order, versatility and flexibility are what you need.