So, you have finally decided to start your own business. After working in whatever it is that you were working in for many years, you made a choice, quit your current job, and took the plunge. You consulted with your friends and family, made a suitable business plan, and found the perfect location for your enterprise. You hired the services of a reputable architecture and construction firm, and now everything is ready to go.
It is a story familiar to many entrepreneurs and new business owners, a story filled with opportunity and expectations. Yet, many times it quickly turns into a nightmare. You find yourself unable to maintain your company running, and before you know it, your CV is back on all the employment and recruitment sites you can think of.
In many cases, business failure is not due to poor timing or wrong product or service. While these and others are important factors, oftentimes, startups go under due to poor management of your finances and negligence.
With that in mind, let us look at three key pieces of financial advice for starting entrepreneurs.
Fixed and Variable Costs
If you remember your Accounting 101 class as a freshman at the university, you might recall the terms fixed and variable costs. If you don’t, fear not, for you are in the right place.
Fixed costs are expenses that remain constant over time. Examples include rent, the payment of loans, salaries, and utility bills like water, gas, and electricity. Variable costs change based on your company’s activity and performance. Some of the most common ones are taxes and operational expenses.
Whether your company is big or small or how innovative and unique your product or service might be, sales are not guaranteed. As such, there is, but so much you can do to control changes in monthly variable expenses.
But this doesn’t mean you cannot save on the fixed ones, especially at the beginning. If you don’t need a lot of space, why would you invest in a large office? If you can use part-timers and freelance workers, why hire full-time employees?
Long-Term Financial Goals
If you decided to become an entrepreneur and start your own business, there is a high probability you did it because you wanted stability and more financial resources. Of course, there are many reasons why a person would want to establish a new company. Among the most common ones are the desire to make a difference in the world, leave a legacy, and spend most of your time doing something you are passionate about. Still, nobody would deny that they went into business for the chance of making more money.
There are two types of financial goals you can have in your enterprise. The first one sounds something like, “I want to make the most money possible and be able to afford the lifestyle I want for myself and my family.” While this is a noble and admirable proposition, it is far from a good one. First, it is not specific nor measurable. Second, it lacks a timeframe.
On the other hand, if your company’s business goal is to “reach a minimum of 100 thousand dollars in sales and a profit of 5 to 10 percent by the end of the year,” it is not only precise, but it also gives you a clear target to strive for. Thus, it will allow you to develop the best time-based strategy.
Monitoring Cash Flow
The concept of cash flow is quite simple. It monitors how much money is coming into your enterprise and how much money is going out. If you are the owner of an ice cream shop inside a department store and sell three cones for two dollars apiece, the money coming in will be six dollars. If you spend 10 dollars of your company’s money for lunch, those are the funds going out.
As you can see, it is not rocket science, and you don’t need to have Albert Einstein’s IQ to figure it out. Yet, as effortless and manageable this process is, many entrepreneurs fail in exercising it.
The reason is not their mathematical ability nor their logical thinking skills. Sadly, their companies go belly up because of a lack of detail. They forget to check every single penny coming in and going out, and after a while, the business finds itself unable to survive.
Whether it is a tiny or gigantic expense or piece of revenue, keep track of it. And do it in an efficient, organized way. Your company’s financial health depends on it.
Three pieces of financial advice for starting entrepreneurs are minimizing fixed costs, establishing clear long-term goals, and monitoring cash flow. They are basic yet efficient ways to keep a company running as smoothly as possible.