The success of a business hinges on sound financial management, especially when you’re just starting out. To nudge your business towards healthier finances, here are the basic things you need to know about securing your start-up’s finances, your financing options, and several suggestions on financial management.
Sources of finance
There are several ways to finance your business. Here are a few examples:
Most businesses, particularly start-ups, use the founder’s personal sources. These include:
Personal savings (i.e. nest egg)
Entrepreneurs usually invest personal savings, otherwise known as their nest egg, into a start-up. Personal savings are a readily available, inexpensive form of finance.
The use of credit cards is a popular way of financing start-ups. An entrepreneur can use the card to pay for business-related costs.
Borrowing from friends and family
Loans from friends and family are faster than the average bank application, and repayment is usually more flexible. The problem is that debt might cause relationship tensions.
This refers to the start-up’s own sources of finance.
This refers to the money generated by the start-up when it becomes profitable.
Money raised by issuing shares, typically in return for cash.
The outside sources of cash that an entrepreneur may apply for.
An entrepreneur can apply for a bank loan to finance the start-up.
An overdraft is a financing option that lets people borrow money from the bank when the bank account’s balance goes below zero.
External investors may choose to invest in the start-up, and their investments can be used as a source of funding for the business.
Does your start-up have some sort of novel technology or idea but is too small to raise capital in public markets? Venture capital can give your business funding from investors looking for long-term growth potential.
Note that governments normally don’t finance small businesses, but depending on circumstances, you might be entitled to a grant.
Raising funds for small businesses can pose a challenge to the entrepreneur. Here are some suggestions to get you through this:
Step #1: Evaluate your financial needs
While raising funds is important, especially for start-ups, a business can run into cash flow problems for other reasons, such as:
- Unsuccessful business trading
- Higher expenses
- Changes to market conditions
Thus the need to evaluate your financial standing and needs. You need to find out the cause of your cash flow problem because merely getting more funding might not be the appropriate solution. For instance, using a different approach like giving volume discounts might generate extra revenue and eliminate the need to borrow more money.
Step #2: Ready your financial plan
Every business needs a financial plan for it to succeed. Think of it as a map that you need to follow to achieve your goals. There’s no template for making a financial plan, but a good one should have the following:
- A list of your start-up’s goals.
- The financial goals of your business
- List of establishment costs, which show the total funds needed to set up the business and cover the operating expenses until the venture starts making money.
- Projections for profits and losses, sales forecasts, profit targets, and cost budgets during the start-up period.
Don’t forget to ask your accountant to review your financial plan and see if it’s complete.
Step #3: Study your funding options
As detailed at the beginning of the article, you have many possible sources of finance. A study in which finance source is readily available to you. Take note that not everything is accessible on the outset.
If you’re a new business owner, look for legal and accounting advice for your financial decisions because it will have business ownership and tax implications.
Financial management tips
Be careful with your expenses: Your spending would directly affect your capital, especially if your business isn’t profitable yet. Reining in your expenses would let you make the most of your capital.
Seek help from professionals: An accountant, financial advisor, and auditor can help you prepare your financial plan, advise you on financial concerns you need to address and warn you about potential problems.
Save for a rainy day: Businesses can be affected by many external factors you have no control over, but saving for lean months would help you prepare for potential troubles.
Factor your salary: You didn’t go into business for free. Don’t forget to include your salary when computing for everyone’s salaries. If in the future, your business isn’t meeting your salary expectations, then you might have to consider its viability.
Be realistic with your targets: It’s good to be ambitious, but keep your projections and financial targets grounded, no matter how seemingly “unique” you view your product or service.