Entrepreneurs stumble upon all sorts of situations that force them to make financial decisions that may affect how their companies develop in the future. New business owners don’t have much experience in the field of business finance, which means that they can use all the tips that professionals are willing to offer.
Gathering the best pieces of advice from the Internet is not enough. One also has to apply everything he’s learned according to the needs, requirements, and specifics of his own businesses.
The whole purpose of learning how to manage finances is to generate more profit. This is the backbone of the company, the very essence that keeps it going. People that have complex expertise in managing money can talk from their past experience, which is the most precious information one can receive.
This article combines the most relevant, actionable tips that entrepreneurs can apply in their own situation.
1. Effective cash flow management
Cash flow management involves a series of practices that will maintain the inflow and outflow of a company’s funds. Before anything else, it is paramount to define the importance of a good cash flow management strategy. But why?
First of all, it offers credibility to companies. Credibility leads to attracting foreign investments and it eases the process of raising funds. Perfect cash flow increases the company’s creditworthiness, which might be decisive in the future.
The indicators entrepreneurs should learn more about including the EBITDA value (Income + Interest + Taxes + Depreciation + Amortization), the FCFF value (Net Income + Depreciation + Interest and WC Investments), and the FCFE value (the indicator of the actual cash outflow).
If a company’s cash flow is already good, managing the surplus funds will make the difference, and this is a matter that is rarely discussed. Reaping future returns can only be done if the surplus funds are invested properly.
The last tip would be to develop mutual trust. The relationship between entrepreneurs and their employees can be improved by paying salaries on time and handling receivables & payables before deadlines. This will boost both vendor and employee relationships. It represents one way to attract beneficial collaborations and encourage productivity within the company. Such action will result in a bigger profit.
2. Venture funding – loans a good idea?
No matter the reason behind the necessity of financial resources, entrepreneurs must find ways to finance their activities. There are multiple options for venture funding: venture capitalists, investment bankers, banks, alternative banking companies and so on. Depending on what purpose one has as an entrepreneur (e.g. starting a business or making business improvements), a certain modality is preferred.
Obtaining business loans is not difficult, as long as the requirements of the financial institution are respected. The one criterion that matters most in this situation is the business’ credit score. These scores determine whether a company can secure good terms when they apply for a loan.
Banks and other financial institutions will collect payment information from the business’ past, including payments made to vendors, payments made to other financing sources and so on. Each bureau has a different method of calculating a company’s credit score.
Getting rid of previous debt and replacing old credits might be required. The credit score will improve quite rapidly if the appropriate measurements are applied.
3. Constantly improving financial intelligence
Once the company achieves a steady financial situation that is convenient and mirrors the goals that were previously set, entrepreneurs must focus on insightful sources of information that could help them make better decisions related to business finance. Reading finance books is the first step in learning from other people’s experiences. Attending seminars, webinars and conferences where finance-related topics are debated can be resourceful and helpful.
The financial intelligence of an entrepreneur should always be improved, regardless of the current situation of his business. Short-term finance/accountability courses can help tremendously in the long run too.
Getting informed about the latest technological advancements can help too. There are all sorts of programs that entrepreneurs can use to automate some accountability processes, such as generating invoices.
4. Common mistakes in handling business finance
There are several financial mistakes that entrepreneurs, especially new ones, tend to make when dealing with their business’ money. Building a company that will grow considerably in the future years is not possible without co-founders, so the first tip is to never do it alone.
Brainstorming with more people will surely result in great ideas that help the company strive. But be warned, you need to do it with the right group of people, as taking advice from the wrong people is the second most common mistake in business finance.
Entrepreneurs who get their ideas from people who never worked in the business field might be misguided. Another problem that occurs for most business owners is the small market. Smaller markets are obstacles in obtaining bigger profits in shorter periods of time, not to mention that there is a high chance that the company will hit a brick wall quite rapidly.
5. Creating a financial plan
Accounting does not mean simply updating some registers. Keeping evidence is an obligation by law, so entrepreneurs have to make sure that their business’ records, transaction reports, and accounts are up to date permanently, by hiring a professional to deal with this aspect. To create a good financial plan for annual expenses, entrepreneurs must:
- Set financial goals from the very beginning of the year and reevaluate these when six months go by.
- Review all of the expenses that occur within the company.
- Get informed about the company’s credit report.
- Review all the fees that are related to the company.
- Increase the savings rate to invest the amounts saved in other aspects that may improve the business.
- Evaluate beneficiaries.