Few business owners went into business on their own because they are excellent bookkeepers or accountants. You might have had a passion for good food, fun clothing, or developing products to simplify people’s lives. But you will have to learn some financial skills if your business is to prosper.
Financial management consists of learned skills that will help your business grow and succeed. There is no mystery to them, and following them consistently will yield excellent results.
It is the rare business which doesn’t have an “off” or slow season. Restaurants do well in February, with Valentine’s Day, but could slow down in later months if people go out of town. A boutique could have booming sales during the holidays but an empty store in January. Successful business owners know to plan for the slow times and make sure that they have enough money to cover their operating expenses.
Try to set aside a percentage of your profits during the busy season to build a savings account for when it is slow. Budget for tighter cash flow, or no cash flow, if it will be a while before your product is ready to launch. You can either set aside this money from revenues or save some of the capital from any small business loan you might have taken out. Or consider taking out a new small business loan, but try to do it before revenues drop off.
It is also a good idea to have an open business line of credit that you can draw on if cash flow becomes tight. Business lines of credit stay open for an extended time, and often you do not have to pay a fee or interest until you have drawn on them. Then you can repay the amount you took out when revenues have picked up.
Use your free time during your slow season to catch up and prepare for the months to come. Now is the time to reconcile the checkbook, especially if you lost track while trying to manage a holiday rush. Part of planning for next season is to take stock of inventory, examine machinery and equipment for wear and tear, and plan for the future.
Evaluate what sold, or did not sell, during your busy season, and plan for upcoming orders. Perhaps you want to expand your product line, or a customer has indicated that they would like to consolidate their vendors and would like you to carry an additional item. Put together your plan for next season and start placing orders. Working capital loans are excellent management tools for businesses with high inventory turnover or volatile operating expenses because you often have to order inventory far in advance of when it will sell.
Machinery and equipment can be in constant use when you have a lot of orders or a full restaurant. Will that oven last another six months? What about the printing press? Decide on what needs to be replaced and take action.
Equipment financing loans offer lower rates and terms that align with the equipment’s expected life, but this is because the equipment serves as collateral. You will have to give the lender details about the new equipment that will secure the loan, so you will need some lead time before making the purchase.
If you structured your business as an LLC or an S-Corp, it will offer you some protection in the case of litigation or business losses. But if you do not keep your business and personal finances separate, sometimes you can lose this protection in court. As well, muddling business and personal finances will make it difficult to track your business’ success.
When applying for a short-term business loan, lenders will often ask to see bank statements, in addition to revenues or financial statements. If you have been running your personal expenses through the business, it will be hard for them to evaluate your financials or determine your actual cash flow. It also does not look very professional.
Alternately, your personal income may have been keeping the business afloat. If you are dipping into personal funds, or a spouse’s salary, to cover your business’ operating expenses your business may not actually be successful.
As well, muddling your finances prevents you from building separate business credit. Opening a business checking account and credit card, and using it just for business expenses, helps you build credit that is separate from your personal credit score. This will be helpful when applying for more business credit, such as a term loan, in the future.
Your credit score is something you might not think about much – until you need it. While alternative lenders will lend to small business owners who have credit scores down to 550, traditional banks insist upon stellar credit. Every business owner should know what their credit score is, its importance, and how to build and protect it.
A credit score is a reflection of how well you handle money. Paying your bills late or defaulting on a loan, will drag it lower because they demonstrate that you do not handle credit well. Building good credit is an important part of managing a business. It will improve your access to capital, and you will pay lower interest rates because you are seen as being less-risk. If your credit score is currently subpar, look into how you can improve it.
At some point, you will need to borrow to grow your business. You may have this need for capital built into your business plan, or it could be a surprise when a key piece of machinery breaks down. Your credit score will matter when it comes time to apply for a loan even if it is a bad credit business loan.
Whether it is a credit card, a personal loan, or a small business loan, you should know your cost of capital. Cost of capital is what you pay to use someone else’s money. It is reflected in the interest rate that you are charged. If you are making a payment on any form of financing, it costs you something.
In your budget spreadsheet, you should have a tab for borrowed funds. Rank the interest rates on each form of financing that you have obtained from highest to lowest. If it is a variable rate, such as prime plus a percentage which is often charged on lines of credit, check it monthly. When paying off debt, it is always advisable to prioritize your extra payments from highest to lowest interest rate.
High-interest rate debt costs you more. Paying it off frees up working capital to invest more in your business. Since your interest rates on certain products can change, the ranking of your debts can also fluctuate. Keep an eye on the interest rates you are paying.
An easy mistake to make is waiting until your business is in financial trouble before applying for business loans or other credit. This is a terrible mistake to make because, often, it may mean that you cannot qualify for the capital that you need at that point.
If revenues are slipping, or inventory is not selling, think about applying for a business loan before the situation becomes unsolvable. To be approved, your business’ fundamentals should be in decent shape. If you wait until you have exhausted a savings account and gone into the red, a lender is unlikely to consider you an attractive borrower.
While you can take out a short term business loan if you need a large, lump-sum cash infusion, make sure that you have a plan to turn things around once the money is received. You do not want to find yourself in the position of needing to borrow again in a few months. If you are not sure how much you will need, or when, a business line of credit gives you some peace of mind without costing you anything until you need the funds.
It is always better to take out a business loan slightly before you need it, rather than when the situation is urgent.
Be cheap from the moment you take a loan. Don’t spend wastefully when the loan money is deposited into your account. You had a plan when you applied for a loan, so stick to it, or you will risk frittering away the capital without generating the revenue from it that you had intended.
Create a spreadsheet to track the loan’s performance over time. Monitor where the funds are being spent, and direct them only towards your original project. Also, keep track of revenue growth that your new project should be generating. If it not on track, it could help you identify where you need to shift priorities or make changes to your plan.
Too many small business owners merely sign a vendor’s contract without attempting to negotiate its terms. This is a mistake which can impact your cash flow management. From terms to discounts, to prices increases, it is all negotiable.
If you have a good relationship with the vendor, ask about a longer time to pay, from Net 30 to Net 60. You can also look for vendors that offer net 30 terms to the public. It will help you smooth over slower cash flow seasons. If they offer a 3% discount for Net 10 payment ask them if they would be willing to go higher. If they do not offer a discount for prompt payment, ask them why. You might be surprised by the difference that extended payment times, and a 1-2% discount can make.
Many vendor contracts contain provisions that limit the percentage that they can raise prices for the length of the contract. For example, they might state that the vendor can only increase prices by 3% during a year due to market conditions. If the vendor’s standard contract does not contain this language, see if you can negotiate that it be added.
You may have to agree to a minimum level of purchases to get it, but it benefits both of you. They can count on regular cash flow, and you can budget for regular expenses. Cost control is a crucial aspect of financial management
With that said, be ready for unexpected costs. A water main in your building bursts and you have to close the store for a few days, plus inventory is ruined. Your business insurance will cover it eventually, but in the meantime, you need to reopen. Or you didn’t negotiate your vendor contracts, it was a bad year for strawberries, and your produce vendor just upped their price by a dollar.
These are the types of situations where a private business loan can save your business. Having access to quickly accessible funds that you can tap for unexpected costs could keep your business afloat. While some cost increases can be passed onto customers, you are often limited in the short-term and have to absorb them. If you build some flexibility into your budget, do not plan on using every penny, and maintain an open line of credit you will be ready for those unpleasant surprises.
When it comes to complicated financing consequences and for best results, speak with an accountant or financial advisor or keep one on retainer, so they are a phone call away when you have complicated questions. They can help you set up a budget, or evaluate the potential impact of two different loan products on your business. If you need advice on how to improve your credit or how to plan for taxes, they can guide you. A small upfront cost for the consultation will save a lot more money over time.
A smart business owner knows when they lack expertise and consults the experts.
If you are making payments on business loans, automate your payments. When business is good, it can be easy to let bookkeeping fall aside. But forgetting a payment can hurt your credit score and cost you late fees. Set up automatic withdrawals for all your debt.
It saves you the headache of worrying if you remembered to pay this month. It helps you avoid nasty fees or phone calls about missed payments. It protects your credit score. And it builds a good relationship with your lender. Lenders also sometimes offer small interest rate reductions if you set up auto-pay.
Becoming a successful small business owner takes hard work, perseverance, and financial skills. Given that few businesses can grow without capital infusions handling credit well is perhaps one of the biggest contributors to your eventual growth.
