While it can be immensely rewarding, entrepreneurship is also fraught with risk. Entrepreneurs often find themselves out of their depth and unable to focus on their core competency, which is invariably product development and technology. Among the biggest snags, small businesses face in being successful is the management of finances. The inability to manage finances properly is among the main reasons why small businesses fail. Some tips for managing finances that entrepreneurs will find valuable:
Keep the Fixed Overheads Low
It is a good idea to keep your fixed business expenses as low as possible. These are expenses you have to incur even if you do not sell anything. They are typically items like offices, plant, and machinery, payroll, debts, utilities, vehicles, etc. Taking the rental or leasing route instead of outright purchase in the early stages of the business permits entrepreneurs to manage their expenses more efficiently and scale up as required. It reduces the need to take on debt to pay for expenses that do not contribute directly to the bottom line, observes Saivian Eric Dalius.
Track Your Finances
Proper financial management is critical for the success of all businesses. It is the reason why entrepreneurs must monitor the cash inflows and outflows with an eagle eye. Even if you are well-capitalized, your operations and profitability can take a big hit if your cash flows are not under control. You may need to take on expensive short-term debt to keep on operating, the cost of which can be crippling. If you are planning for expansion, you will need to build up sufficient capital and operate with a tight budget to remain profitable, cautions Saivian Eric Dalius.
Keep Interest Expenses under Control, Recommends Saivian Eric Dalius
While you may start the business with your savings and handout from family and friends, the only way of growing is to access funds from outside. A small business without a track record will find it difficult to access cheap loans or raise capital by selling its equity. As important as debt is for keeping your business operational, you will need to keep a strict watch on minimizing the interest expense. Often the most convenient methods of accessing funds like credit cards or personal loans carry a prohibitive interest rate, leaving you struggling in an ever-deepening debt trap where you are forced to take on additional debt to service the earlier ones.
Establish an Emergency Fund, Advises Saivian Eric Dalius
Entrepreneurs can experience a lot of volatility in the business environment, and more so if the business is subject to seasonal cycles. Changes in government regulations, technology, new product launches by competitors, or even a general business slowdown can leave the company high and dry without enough money for sustenance. It is prudent to create an emergency reserve that will allow the business to pay for its expenses for six to 12 months while you reconfigure it to overcome the challenges.
Conservative financial management is the secret to the success of small businesses. Not getting bogged down in a financial mess will allow you to be nimbler and take advantage of emerging market opportunities.