To be a successful small business owner, wearing multiple hats is crucial: one for marketing, one for advertising, and another one for management and finance. And while every owner will have their strengths and weaknesses, most small business owners lack a background in finance. Without that knowledge, monitoring a business’ assets and securing a business’ future can be extremely difficult.
It’s a necessary job, though, and as the business owner, you shouldn’t just pass it on to an accountant with no working knowledge of your business. If you want to build a solid plan for your company’s future, here are some key elements to consider.
3 Key Elements to Secure the Financial Future of Your Small Business
1. Cash Flow
Some of the most successful companies in the world have suffered bankruptcy by one simple problem – they ran out of cash. Cash is the lifeblood of your business; if you have no cash on hand, you are at risk of being run out of business, regardless of the revenue you might be generating.
Small business owners need a plan to deal with their cash flow. How much money do you need on hand to pay for your monthly expenses? How much can be invested in marketing and advertising? These are questions that need exact answers to avoid taking unnecessary risks.
A good place to start is finding your regular expenses on utilities, taxes, and payroll. Then develop a plan to pay those off first with your revenue. Once you’ve got the main expenses taken care of, you’ll have the flexibility to use the rest of your money to improve your business.
It’s very common for small businesses to borrow money because it allows the business to improve quickly. But a loan will create a debt that will affect your revenue until it’s paid off. That’s why some people will try to scare you off loans. The truth is a loan can be extremely helpful – it just requires planning before you ever take it.
Start by simply asking yourself these questions: Can your business comfortably make the payments? Will your business still be able to do so a year from now? Two years? These are the questions and projections that a business owner must answer before taking a loan.
When in doubt, you’re probably borrowing too much. And if you’re borrowing money to pay regular expenses, you’re already in trouble. The key here is to make sure that the items you will be spending borrowed money on will objectively improve your business, provide better service to customers, and give you an increase in revenue. Accruing debt for anything less is probably not worth the trouble.
3. Exit Strategy
All businesses either end or change owners eventually. From a financial standpoint, what is your goal with your small business? When do you want to retire? How long do you want to remain as the owner? And then, do you want to sell the company? Or pass it on to your family?
These are important questions that can dramatically change the way you manage your business. Por example, if you plan to sell your company, you need to maximize your current revenue as much as possible to get the best price for your business in the future. But if you want to keep the business in the family, your financial decisions will veer towards protecting the long-term health of your business.
Making smart financial decisions starts with a meticulous research of your present situation and a clear vision of the future. What do you want to accomplish with your small business? With that answer in mind, you can prepare for the future and give your business the best chance to succeed.
Alex Briggs is a contributing author for BMH Taxes.