There’s a horror story that, unfortunately, discourages many budding businessmen from ever getting their ideas off the ground. There are many versions, but in each version, the story always ends up in disaster; the startup business loses money and has to close down shop.
Each person values each dollar, and the thought of losing all those naturally induces the fear of even trying to start their own businesses. Hence, they lose the opportunity even before they begin. The truth is that the key to avoiding the financial disaster all entrepreneurs fear is sound financial management.
It is far from simple, but financial management gives control back to the entrepreneur, which lessens some of that fear and instead encourages more positive action. But how can the owner of a startup effectively manage its neophyte company’s finances?
Monitor Cash Flows
Entrepreneur.com considers cash flow monitoring as the most important skill every businessman should practice. Proprietors should always be on top of the situation when it comes to their finances. It may sound like a lot of work, but knowing where every dollar came from and where it went is critical to keeping your coffers from being depleted quickly.
Establish A Budget
Knowing how much to spend every month without sacrificing your essentials will keep a new business’ finances healthy. The financial capabilities of startups are inherently rocky; they don’t have many customers or clients that continually feed revenues and sustain their operating expenses.
Hence, it’s important for an entrepreneur to establish a sufficient budget every month and to stick to it until the startup’s cash flows become more solid. This budget should be also be periodically revisited together with the cash flow.
Separate Business and Personal Expenses
This is a practice in common sense, but some businessmen still make the mistake of using business credit to make personal payments, and vice versa. This should be avoided for various reasons.
One, it can make tax accounting difficult and confusing. Second, blurring the lines between personal and business expenses can negatively affect the startup’s cash flow by diverting much-needed cash from its reserves.
Create an Emergency Fund
Life is unpredictable. Businesses are even more volatile than people’s personal lives. Some months see a startup recording a profit, while others may bring the venture a dry spell. While revenues may change, the company’s operating expenses do not. It will, however, continue to siphon cash. That’s where an emergency fund comes in.
This fund should, ideally, have enough funds to sustain three to six months of operations. When getting a business loan to fund their startups, entrepreneurs should factor in foreseeable operating expenses like labor, power, water, and even food.
Save Money on Labor By Outsourcing
There are many benefits to outsourcing processes to third parties. These external companies will provide for the salaries and benefits of their employees as well as invest in the necessary equipment to fulfill their contractual obligations.
All the startup needs to spend is the monthly rate the third party charges, which, in turn, results in significant savings on operating and capital expenses.
Keep the Expenses Lean
The less cash that flows towards expenses, the better. Thus, startup entrepreneurs must take a look at their cash flows and find expenses that are not giving much value in return. Every businessman wants to take care of their employees, but if everybody’s eating catered meals every day of the week, the neophyte firm will run out of money in as fast as six months.
Another example – a monthly huddle outside the office is a healthy dose of diversion for the workforce, but doing more in a given period will bleed the company dry.
Invest More in Growing Customer or Client Base
Last but not least, if the business has to divert cash, it has to go towards efforts that generate a clientele or customer base. These necessary expenses include marketing, which by itself is a comprehensive set of techniques and disciplines that are worth spending money on.
A healthy expense to revenue ratio is vital to business longevity. With sound financial management, businessmen can keep as much of the cash that comes in as possible within their startup’s accounts. This means looking at how the company is spending those revenues and cutting off any expenditure that is causing the startup to lose more money than it is accumulating.
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