Entrepreneurs start with dreams and ideas but they all need capital to bring those dreams and ideas to reality. Most face the basic dilemma of choosing between equity and debt financing when starting a company.
Equity financing means using your own money or giving up part of your company. Debt financing means paying somebody else for the use of their money.
Both forms of financing involve risk and you need to decide how much risk you are willing to take, and whether you want to pay for that risk now or in the future.
No business can ever be a success without money and it is fundamental for business owners to understand the importance of start-up money, how to source it and how to use it. In addition they have to understand how to subsequently make money and how to manage money, in order to preserve the success of their business.
Once the initial capital is in place…in whatever form you decide…you face the ongoing difficulty of managing the obligations of the capital in terms of the business assets you acquire, the revenues you create and the operating cash flow you generate.
Financial management is a critical element of any small business operation and means more than simply keeping an accurate set of books and balancing the company bank account. Financial management responsibilities encompass all aspects of your business.
Many small businessmen are terrific at what they make and sell but encounter difficulties when faced with the financial management aspect of their business.
In those situations they need to acquire the expertise in order to handle the financial management obligations appropriately.
Cash Flow and Debt Ratios
Cash flow and debt ratios are critical elements in any business success. They must both be managed in an appropriate fashion so that external capital providers continue to have the confidence that your business is worth them taking an investment risk.
Make no mistake…the ongoing support of trade creditors and bankers and other external stakeholders., is critical to the success of any business and each of those entities conducts their own risk assessment before committing initial or ongoing support. Cash flow indicates to stakeholders that a business will generate the funds to honour all of its obligations. One long-standing adage of all bankers is that “cash flow will repay a loan…every time”.
Debt ratios are another critical element of risk assessment. Leverage is a good thing…but only to a point. Once debt becomes too high there is too much pressure on the company to produce cash flow to service the debt.
Those two elements are prime examples of why management of all financial relationships is vitally important, and that management starts with ensuring that your business is in sound financial shape.
Business cycles are an inescapable element of running any operation and it is important for business owners to prepare for those periods when things are difficult. Here again, prudent planning allows any business to withstand the vagaries of “the cycle” and maintain business momentum.
At the same time, business success can also provide problems particularly if the attendant growth creates strains on available capital. In these situations having a prudent financial plan in place will allow the business to seek additional capital to properly finance the growth with as few problems as possible.
Financing payroll is perhaps the biggest, ongoing element facing business owners. Missing payroll is the sure way to kill a business. An integral of financial planning is to make sure that you have cover for at least two future payroll periods…this is vitally important to the integrity of your business.
Most businesses purchase assets in order to generate revenue. It is vitally important that these capital expenditures acquire assets that will generate more revenue than the cost of maintaining the assets.
Operating cash flow must be managed to ensure that there is always enough cash available to cover all fixed costs and variable costs and leave enough left over to generate an acceptable return on the risk of being in business. Small business owners have to be sure that they are not simply “buying themselves a job”.
Cash management involves a constant review of your pricing, a review of your ongoing operating costs, and forward planning for such items as asset acquisitions and tax obligations.
The Importance of Finance
Finance is vital to the formation and orderly operation of just about any business. The strategic use of finance is key to the success of any business and it is extremely important that every company…large or small…have a handle on its finances and understand how to manage them properly to preserve the business as a viable entity.
All facets of a company depend upon the orderly process of finance. When any element of the finance process breaks down a company faces a heightened threat of becoming insolvent or, at the very least, failing to meet its potential and short-changing any stakeholder who has supported the company.
Financial Management – Advantages and Disadvantages
Any business must pay attention to several elements of its operations in order to flourish. Finance impacts just about everything a company does and probably must be considered the most important element.
Financial management requires a significant amount of information, which must be collected and analyzed, and then reviewed with senior business management. Many small businessmen need the input of an external financial expert to get the most out of this process.
The cost of financial management is evident and must be taken into account when considering other elements of the company operations.
Financial needs of any company change on an ongoing basis. Supply costs increase, delivery costs change, employee costs increase, collection periods lengthen. Any, or all, of these conditions will mean that your financial needs must be revisited. Financial management is not a “do it and leave it” function. It must be undertaken on a frequent, ongoing basis.
One advantage of good money management is that you know what you’re earning and what you’re spending. This means that it is less likely you’ll run into debt problems and you’ll be able to meet your company’s obligations as they come due.
Similarly, proper money management and regular review of what is happening financially allows you to create new strategies for your company and plan from both a short-term and long-term perspective
It also forces everyone in your company to be accountable for what is being spent and to show that each expenditure will pay for itself through profitable operations.
Financial management is the back bone of any business operation and it must be given the attention that it deserves…on an ongoing basis. Creating a proper financial management protocol in your company will go a long way to ensuring its longevity and success.