Starting up a business is a very admirable yet stressful endeavor. If you’re thinking of creating a small business – or you already have – then you’ll realize that there are several unavoidable challenges to this.
In our ‘Small Business Hurdles’ series, we’ll take a look at the major problems that you’ll come across. In the post, “Are you cut out for owning your own business?”, the first question that Tim Berry asks is:
Are you willing and able to bear great financial risk?
The reason I’m repeating it here is because this factor has to sink in before you jump into anything entrepreneurial. So firstly, let’s focus on getting this big one out of the way.
THE MATTER OF MONEY
1. Startup Capital
Let’s assume that you’ve already done your market research and planning; you know what you have to do, and now you just need to get started.
To begin with, your business venture will need funds to cover expenses for at least the first year of operation. With these, you can pay for any licenses, insurance, office rent, utilities & supplies, equipment and production, payroll, marketing, and so forth.
Of course, sometimes you won’t need much startup capital if you work from home, if you’re the sole employee, and/or you don’t use many resources. But if you do, then funds can be sourced from:
a) Bank loans
b) Friends & family
c) Your own savings
d) The government
e) Business partners/associates
f) Venture capitalists or angel investors
If any of the above are not working for you, you can think about non-traditional ways of acquiring funds. To the obtain funds and/or to make the process easier, consider these points:
- Before presenting to investors, learn about financial legalese.
- Do you have a concrete business idea that will interest people?
- Do you truly believe that your business will deliver what you promise?
- Will you be able to pay back any monthly installments or interests on loans?
- When applying for a small business loan make sure you have a thorough business plan ready.
- In the case of equity capital, are you willing to give away a part your company, or do you want to retain full ownership?
Here are more funding tips for small businesses.
2. Money Management
Keeping track of all your transactions – be it loans, savings, profits, or expenses – is essential to business success. And it can get a little complicated too. From the beginning, you should estimate realistic costs of your company. This includes your expenses, assets, and financing.
But the planning stage is obviously very different to actual accounting. Keep an eye on your income (profit & loss), your balance, and your cash flow. Familiarize yourself with the aforementioned statements to get a good grip on your finances. In the end, you need to see profits coming in. Observe your sales growth and determine if it’s enough to pay all your business expenses.
Additionally, your original business plan has a role to play in money management. Did your expectations align with the reality? How did things change in relation to: growth of the business, number of team members, pricing, product modifications, inflation, and other external factors?
If business accounting becomes overwhelming, it’s advisable to get professional help. A reliable and trustworthy bookkeeper might prevent things from getting unmanageable. It could even save money in the long run, because it gives you more time and energy to focus on expanding the business.
Sometimes bad things happen. During its time, a small business may face many financial obstacles and woes. You will come across severe taxes, debt, restrictions, undercapitalization, etc., and bankruptcy will always be a very threatening possibility. The economy is volatile, so the best that you can do is:
i) Have an excellent business plan with a break-even analysis.
ii) Have products or services that you truly believe in, and produce/provide them to the best of your ability. Balance quality and business growth.
iii) Have cash reserves in place, and don’t spend more than you can afford. On that note, many people start their small businesses while working full-time. Although this can be tricky, it’s a very safe course of action, and the probability of running out of money will decrease.
Of course, no one wants to let their business dream die. But you have to think about the risks before you begin. If you have a good strategy in place, and if you learn how to manage your money, your small business is off to a great start.