When you hear the word “business”, most likely, one of the things you immediately associate with it is money. This is a natural, almost instinctive, reaction. After all, business does promote money – it needs money for capital, it generates money for profit, and it also loses it. Money, therefore, is essential in every stage of a business’ life cycle. The bottom line is: you need money for business.
Assuming that you are set in putting up your business, and that you already have a business plan ready to be executed, it is safe to say that you are confident enough in your capacity to shell out for the capital. You have probably signed a loan agreement with the bank already, or you have sleeping investments that you would like to instead use for the purpose of opening up your business. You may even have a rich relative who is interested in funding your dream business project, effectively becoming your investor as well. Regardless of where you get the money from to get your business running, what is more important is your ability to keep this money circulating enough to continue breathing life into your business.
Unfortunately, the reality is that not everyone who has a smart business idea has the knack for handling the business’ finances. This is not a very good combination, and that is why there are more than plenty of stories going around regarding failed businesses because the owner mishandled the finances. Depending on how bad you are with your business math, the time between opening up your shop to closing it down with deathly finality can easily be anywhere between a couple of months to a couple of years. The point is, that is not why you decided to get into business. You have a goal of setting up a brand and making it successful enough to last you a long time, and so you that is what you should be keeping in mind, and you can be a step closer to achieving this through proper financial handling.
Money, money, money
This is not necessarily a financial advice in its most strict and technical form. However, if you are to go into business, no matter the kind, you have to learn how to be comfortable with it. By comfortable, it’s not just about being comfortable receiving it as profit. More than that, you have to be comfortable with the possibility that you will inevitably lose money — as capital, as a cycling fund, as a straight-up loss. Now, this does not mean that just because these losses naturally occur, you should be fine with it all the time. The point is that you will have to lose some money in business through various expenses in order for you to be able to regain a bigger profit.
The Finance Basics
For you to fully appreciate the importance of proper financial handling in business, you first have to understand the financial statements. This is obviously important because after all, you went into business to earn some good money. As such, you have to know how to read them. Properly reading financial statements would include understanding the elements of cash flow, profit and loss and balance sheets.
According to the Government of Western Australia’s (GWA) Small Business Development Corporation, profit and loss basically includes reports on your income, expenses, and profits gained over a period of time. The balance sheet, meanwhile, “reports on the assets, liabilities and net equity of a business at a given point in time. If you are not entirely confident of your know-how in these topics, you can seek the help of a professional accountant. At the very least, though, you should be able to have a primary understanding of how it works, and your accountant will be there only to fill in the more complex gaps for you.
Bookkeeping
As the matter of bookkeeping is already raised by way of balance sheets, it must now be noted that keeping proper documentation of all your business papers be provided. Obviously, there will be nothing for you to understand if you do not have the material needed to be read. Religiously keeping “accurate and regular financial information allows you to monitor the success or failure of your business,” the GWA tips.
By maintaining a credible and efficient archive of all your business expense and gains, you could easily identify what are the items costing you the most in terms of liabilities, and which ones are necessary to further bring in profit. At the same time, because you do have regular expenses, such as payments for the lease, electricity, employee’s salaries and other necessary logistics, you should be able to better plot out your budget for the coming period. This also gives you the opportunity to properly file your taxes, backed with the correct proof.
Business Management is Money Management
As the introduction above expressed, business is practically synonymous with money. As such, if you are to handle your business well, it means that you must be able to handle your money well, too. Counting profits is not the only essential thing in running a business. Inevitably, you will also enter into contracts with other business that is necessary for the operation of your own company. You may have suppliers or landlords or creditors. Cash flow management relates to how well you are able to pay these obligations you have with other entities. You can’t meet your obligations with invoices. So, even if you have a lot of customers, if you can’t turn your customers into cash fast, your cash flow may dry up. More often than not, it is when creditors remain unpaid and they begin hounding the business owner for the payment they owe that the business begins to unravel. Therefore, it is important to look into methods for maximizing your cash flow like invoice factoring or shortening your customers’ terms of repayment.
It is best to have an idea how much money you have, how much of this you can actually move around, and how much is meant to be spent paying off dues. Having a sound financial forecast could save you a whole lot of trouble by providing you not only foresight, but also insight, into the realistic status of your business.
About the Author
Rabie Fares is the CEO and founder of Associare.com, a professional networking site designed to help entrepreneurs meet investors, and investors meet entrepreneurs.
Originally posted on January 28, 2014 @ 7:16 am