As an entrepreneur, it’s easy to focus on creating new products or services and chasing after getting customers to sustain the business in the early years. That’s all well and good, but when you don’t manage the company’s finances or its expenses, it can lead to big trouble down the line.
Many new businesses fail principally because of insufficient capital, mismanagement of finances, or employee fraud. This brings into stark relief that while finding customers is certainly critically important, it’s by far not the most important thing to get right; plenty of other happenings can bankrupt a business despite healthy sales.
In this article, we will cover some important considerations for business owners with a newer company to provide insight that should prove useful.
Investment Capital Considerations
Many small businesses start life with too little capital.
It’s important that the figures are fairly accurate. This way, spending and expansion plans can be adjusted based on a realistic assessment of business prospects.
Almost every business owner miscalculates the figures for their business. Usually, by a significant margin and invariably not in their business’ favor. This leads to a variety of early financial problems for the business that grows over time and eventually comes to a head.
When the financial numbers are wrong, the capital invested in the business that could be from personal savings, a bank loan, a partner, or early seed investors will be too little. This will result in needing to raise more capital for a young business that’s not long since opened its doors.
Depending on the state of the business at the time, the capital might not be available, or the cost of borrowing will be too high. Even if new investors can be found to inject capital into the business, the valuation on the business might be sufficiently low enough that a sizable chunk of the business – perhaps a controlling stake – must be offered to secure the funding.
Managing Expenses Frugally
Young companies often overspend. Leased offices are filled with new furniture. Sometimes, the furniture is bought on business credit to make it affordable. Then there are new computers, printers and so forth. It all adds up.
Ultimately, when starting a new business and being unsure of what the business will cost to develop, it’s sensible to stretch the initial capital as far as it will go. This avoids overspending and needing to leverage or sell off part of the company to keep going.
The stance should be taken to spend as little as possible on setting up the office and all future expenses. No one cares if the office desk is previously used or new. A one or two-year-old PC is going to run just as well as a new computer. Indeed, there are plenty of refurbished Dell pcs available sold by the PC maker directly. There are also other vendors that sell refurbished PCs, laser printers, routers, and more to reduce the costs of getting started.
Similarly, office furniture is available from businesses that buy items cheaply from companies that went bankrupt, which avoids buying new.
Buying Quality
Frugal doesn’t mean cheap. You need quality office desks, chairs, cabinets and so on. Therefore, don’t mistake a better price with a lower quality. Often, the items sold by retailers that offer previously owned business equipment and furniture are selling items that were very expensive initially.
The same goes for IT equipment. Most companies do not need state-of-the-art IT gear. What they require are PCs that can perform the tasks that staff need to complete. Software is also required. This is now available via affordable subscriptions like Office 365, which makes it easier for companies to track the licenses they need.
Using Lean Principles in Your Business
The idea of lean principles can be seen as an extension of business frugality in some respects. Lean operations remove excess and waste from the business.
For companies, this could mean reducing the time from receiving the product for sale to when it gets shipped out. Doing so means needing a smaller warehouse because of holding less inventory for shorter periods of time. It’s more efficient for working capital while not restricting the total sales that the company can achieve.
There are business courses on lean principles and many books on different aspects of it too. It works similarly to using a minimum viable product approach to product development where a company doesn’t overdevelop the first version of their latest product. Instead, they produce a basic prototype and market test it to gauge the reaction. This ensures they don’t overinvest in a dud product and blow a considerable portion of their funds in the process.
It’s worth noting that companies must also avoid being so lean that they fail to take advantage of clear business opportunities. Not going into new areas because the company keeps too tight a hold on expenses can lead to missed chances to double or triple sales that year. It’s necessary to pick and choose where to apply lean methodologies to maximize the benefits while avoiding missed opportunities.
Managing Cash Balances and Long-term Investments
Studying financial matters to learn how to manage cash flow, choose business bank accounts and what to do with spare funds is very useful.
In the early days, you won’t have an accounts department and will be relying on an outside accountant to do the books. However, they won’t be able to furnish investment advice, which leaves a bit of a gap.
Taking a Chartered Wealth Manager (CISI qualification) course is a great way to learn how to manage (future) profits in the business. For example, you can let the bank sweep balances to a savings account overnight and then return them to the bank account in the morning. This provides a small return on cash balances. It’s also possible to place the cash in commercial paper or money market accounts for a high return where balances can be returned to the bank account within a few days.
For longer-term investment returns on retained earnings, it’s necessary to learn about the types of investments open to businesses. These are sometimes different from individuals looking for where to invest for their retirement. By getting comprehensive training in this area, it’s possible to get the best return on retained earnings without needing to pay for expensive outside advice. This way, you’ll know your decisions are impartial and in your company’s best interests too.
There is more that goes into the company finances and managing expenses than people think. The battle to survive as a business in the first few years is often won or lost on the balance sheet and profit and loss statements; not with sales. That is to say, failing to financially estimate properly and well, not keeping expenses as low as it practical and sensible, risks disaster down the road.
Plenty of businesses do not survive despite selling enough products or service subscriptions because the money was managed poorly. Keeping a sound head on your shoulders and the financial books looking reasonably good means the business can trade its way to substantial profitability earlier than expected. Not needing to go cap in hand to the bank asking for a business loan means you stay in control of the company and that’s important too.
