Regardless of the business you run, the financial segment is crucial, both at the beginning as the investment and at the end as profit. In order to ensure this journey from investment to profit occurs, you’re going to have to manage your finances well in order not to lose money on important matters. There are several tips we could give you on how to achieve this but here are just the 6 most helpful ones.
Know where your money is going to
Expenses are an integral part of any business. After all, you need to invest money to make money. However, each dollar has to go to the place where it is projected by the financial plan. This seems logical enough but in reality, lower management tends to dissipate money on unimportant projects that are irrelevant to the main business goal. That is why you have to track the cash flow and restrict spending money on things not directly related to your business enterprise. Check the balance sheet regularly to find out if you are losing money in some place. If you know where your money is at all times, there will be less reason to feel stressed.
Never stop investing
Any good entrepreneur will tell you that those who constantly invest their profits back into the market can never lose their money. Basically, once in the market, the money acts as if it were alive and requires a constant flow. That is why saving money is generally a bad idea and in any business operation, it is the worst possible course of action an investor can take. Any difference that is created between the money you started the business with and the money you make should be directed back into the business so it could create a “snowball effect” and enlarge your capital. Money invested like this does not count as an expense because you are basically boosting your profits. That is why the previous point that no money should we wasted gains ground as that money could serve as additional investment funds.
Don’t spend the money you don’t have
Lines of credit offered by banks are an excellent example of how people spend the money they don’t have and get themselves in trouble. Even worse, by taking out a loan, they destroy the last glimmer of hope that they could profit from their personal income, i.e. the salary. The same principle is in action when it comes to commercial business operations. Instead of having to deal with banks as the “bad guys,” entrepreneurs are their own worst enemies. Namely, businesses are often tempted into spending the money they don’t have for various purposes. This cannot count as an investment because you cannot invest something that you don’t have! Quite the contrary, you are creating debts by spending funds that are not at your disposal and this creates serious problems in the long run. After all, a similar mechanism was behind the 2008 world financial crisis that shut down many businesses.
How to prevent chargebacks
Speaking of crises, your company faces its own every time a chargeback occurs. Whatever your industry might be, fraudulent customers and indolent bank management have probably caused you problems more than once. The thing is, a chargeback is really a dispute between the cardholder and their bank, and the merchant is really the collateral damage. In order not to lose both the merchandise and the money, you need to prevent chargebacks in any way that you can. One way to reduce your chargebacks is to leverage your relationships with the issuing banks through mediary companies which specialize in chargebacks reduction. One chargeback is not a big deal but excessive chargebacks could spell disaster, as they might stall the entire financial infrastructure of your company.
Start-up owners know best that they have to look for alternative ways of funding after a few years if the product hasn’t yet yielded the desired profits. In general, every business needs to diversify their financing as you never know when you might need to pump in extra cash. Regardless of where your initial funds came from, you have to be ready to search for alternative sources of funding. Children sell lemonade at street stands and political parties hold fundraising dinners, while your business could advertise looking for investors. Alternatively, you could ask the bank for a loan or apply for governmental subsidies if there any are available. In any case, don’t just jump into a business venture without planning for extra funds alternative.
You have probably realized by now that you have to enter the market with a good financial plan. This includes emergency funds that could very well save your enterprise from disaster early on. This is the money that is not used in the day-to-day transaction but it sits in an account ready to be withdrawn when things start to go downhill. The amount of money you delegate for the contingent fund really depends on the size of your business but in the case of a start-up, it is anywhere between 10% and 20%. Essentially, if your business hits the rocks, the company needs to have sufficient contingency funds to keep operating normally for at least a quarter of the fiscal year. Some firms choose to put their emergency fund on a saving account but this can be a risky move.
We hope that the 6 tips provided here will help your company’s finances in the future. Remember, profit goes hand in hand with responsible financial management.
Author: Victoria Lim