Building a company from the ground is one of the most difficult things to do. Starting your business venture can be daunting but a rewarding process. While a great business plan is imperative for entrepreneurs, financing is one of the most crucial elements that help a startup to succeed.
However, when it comes to financing management, the requirements of entrepreneurs are different. Not only an entrepreneur lacks the stability of predictable incomes, but they also have different spending decisions.
Securing funding to launch a startup can be difficult. More often than not entrepreneurs use their savings to start their business. While this act showcases their immense commitment, it impacts their finances, and in few cases, leads to a severe cash crunch.
According to a report published on Inc42.com, in 2016, the major reason behind a large number of startup shutdowns was due to lack of funding. In 2017 lack of market demand was the major reason for the startup shutdowns.
Another report by NASSCOM states that around 25% of Indian startups shutdown untimely, due to failure in raising follow-on funding rounds majorly beyond Pre-Series A.
Good and effective management of finances can make a huge difference between a business that keeps climbing the ladder of success and one that falls at the very first challenge.
Here are 5 financial tips that would help every entrepreneur or small business owner manage their finances better:
- Create an Emergency Fund
A contingency or an emergency fund is created to provide financial security in desperate times. This fund helps an organization to meet large expenses in unforeseen circumstances. Ideally one should have six months of living expenses as a contingency fund.
If you own a business, it is suggested to create a larger emergency fund, in case your business has seasonal cash-flow fluctuations. It is best to build such a fund and invest it in a debt mutual fund as it will give far better returns than a savings account and help you encounter unforeseen challenges.
Having an emergency fund will also give you peace of mind and you can make more confident decisions for your business.
- Costly Credit must be avoided
Credit is the lifeblood of any business, especially for startups. Hence, entrepreneurs need to keep their credit scores high. Always pay your bills on time. Never miss a payment or delay the payment date, even if you are facing a financial crunch.
The cost of credit is a critical factor, when it comes to financing your business, especially in the initial months of operation. In the beginning, when the business has not even reached the break-even point, the financing of the business should be done keeping the interest cost at the bare minimum. This will reduce cost and attain profitability.
Also, keep your credit utilization ratio under consideration. The credit utilization ratio is the percentage of your available credit limits that you are borrowing during the month. Keeping your credit utilization ratio below 30% will help you to maintain a better credit score.
- Keep personal & business account separate
It is wise to keep your business and personal bank account separately. It will not only provide the benefit of easier accounting at the end of the financial year for tax purposes but will also eliminate the cash crunch situations in business caused due to withdrawals for personal expenditure.
- Bad Debts
Debts that cannot be recovered are called Bad DEBTS. When credit sales are not recovered, bad debts are created. Entrepreneurs should eliminate the situation of a fund crunch in business due to withdrawals for personal expenditure. Instead, these debts should be repaid in the next year so that a healthy financial position of the business can be showcased in front of potential stakeholders.
- Develop Financial Goals
Keeping the in-flow and out-flow of your finances is extremely important. Planning a year for large expenses in advance can help small business owners to reduce the financial burden. If your future business goals involve the expansion and the launch of new products or services in the market, it is essential to plan everything related to finances.
If you are not sure how to manage your finances or how to ensure a strong financial future, you can also take the help of a certified financial planner. A financial advisor can also help you to build a strategy to meet your business objectives.
Instead of investing all your profits back into your startup venture, save for your future by investing your funds into multiple investment schemes. From stocks to mutual funds there is a wide array of investment schemes available. You do not have to invest every last penny into your business, save for your future as well.
If you can improve your finances with a better emergency fund, a solid credit score, and a strong portfolio of retirement savings aside from the equity that you own in your business, you can run your startup with a more focused and peaceful mind.
And for business owners, who are some of the busiest people in this world, having financial security is truly priceless. Are you planning to launch your dream startup business, but worried about managing your finances?
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Do you have any other financial tips for our entrepreneurs? Share them with us in the comment section below.
