Savvy financial management is essential for the long term survival of any small business. However, your work begins even before you ever set up a business. Perhaps that’s why financial institutions insist on entrepreneurs, creating a viable business plan; to make us carefully analyse and consider all the potential costs a business may incur throughout its day-to-day running.
Before You Begin – Creating a Business Plan
No bank or financial institution will provide you with a loan or investment without first having been presented with a solid business plan. The content of a business plan is quite simple; to introduce your business idea and outline just exactly how you propose to make money. During the creation of a business plan, entrepreneurs must make financial projections and demonstrate how a financial investment will produce a solid return.
The process is quite simple. Firstly, you need to consider how much cash you need to invest to get started. Secondly, you must calculate how much it will cost to provide your service or bring your product to the market and lastly, you have to calculate the day-to-day running costs and include items like rent, input costs, power, staffing, transport, administration and all other relevant costs.
In the end, the figures have to add up and you have to show that your business is likely to make you more money than you have invested.
Perhaps one of the most crucial elements of proper start-up financial management is smart pricing. Pitching the price of your product or service at the right level to allow you to make enough money might just be the most important aspects of initial financial planning.
Once You Are Up and Running
When I set up my company, I was extremely cautious and probably rightly so. Keeping a close eye on your day-to-day spending is absolutely essential and you must try to stay within budget.
There are a few things we were smart about, before setting up our company:
- Keeping Fixed Costs Low: Fixed costs include items like rent, licenses and insurance and we made sure to wait until we had found reasonably priced business premises and good value insurance. Shopping around and having a bit of patience certainly paid off in our case.
- Managing Your Variable Costs: If you are providing a service, variable cost include items like phone and electricity, advertising and staffing. While these costs obviously vary, you can make an effort to manage these costs and try to keep them reasonably low. Again, it’s vital to stay within budget. For manufacturers, input costs must be carefully monitored and you may find more reasonably priced sources of raw materials.
- Investing in Good Accounting Software: Don’t manage your finances on paper, invest in a good accountancy software package. Most of the currently available packages allow you to enter all the costs and sales, produce financial reports and show you a detailed analysis of your company’s financial health, anytime you wish. This is an excellent way of monitoring costs and ensuring that you stay within budget.
- Get Yourself a Good Financial Advisor or Accountant: I got myself a really smart accountant who kept a very close eye on all of my business activity. If he felt savings could be made, he would show me how. He also got me to increase my fees a couple of times and made me think twice before hiring staff and making other major financial investments. On occasion, he also got me to loosen the purse strings a little, simply because he knew where further investment was necessary and sensible.
Ultimately, it took quite some time for us to find our financial feet, pitch prices correctly and manage day-to-day spending. The most important thing is to remain aware of your financial situation, spend wisely and charge clients sufficiently.
A Word on Cash-Flow
Cash-flow describes the amount of cash you have available for the day-to-day running of your company. Potentially, poor cash-flow can bring a financially viable business to its knees.
A client of mine was manufacturing food products. He had to purchase all the ingredients with cash and was expected to give his clients – several major supermarket – 60 days credit. Though his products were popular, the cash-flow figures did not add up. Cash-flow ground to a halt and if he hadn’t played hard-ball with his supermarket clients, he would have gone out of business.
My advice to all clients has since been: don’t give credit if you can’t afford to do so.
Smart and Vigilant
Running a profitable small business requires quite a lot of intelligence and vigilance and perhaps the support of a financial advisor will just make the difference between success and failure.