Startup Financial Management
Of the three keys to business success, financial management is often the most feared among entrepreneurs. Even if you don't consider yourself a "numbers person," keep in mind that the reality of running a business is in the numbers.
If the business isn't profitable, it won't last long. Managing finances the right way is actually not that complicated, especially with the tools available, but is a critical factor in the success of any business.
There are a few things to think about before starting your business that will simplify the financial management.
Managing your business finances is more than just keeping the books. Successful entrepreneurs schedule periodic reviews of the basic financial statements to identify opportunities to improve profitability. They calculate basic ratios and learn what they mean in comparison to both the business's past performance and to the available industry averages.
With the accounting software now available, these tasks are far easier to complete than ever before. The basic financial statements can be produced with a few clicks of the mouse, and learning what the numbers mean is not as complicated as most people think.
Another key component of financial management is forecasting and budgeting - essentially future planning for financial management. Many new entrepreneurs have trouble with these processes, electing to simply up their previous performance by a standard percentage for each new year, if they bother at all.
In fact, forecasting sales and expenses and setting budgets for various aspects of the business should be completed periodically in the same manner as good startup forecasts are developed, considering any changes and anticipating any threats or opportunities along the way.
Good forecasts allow you to be more flexible in, for example, your marketing efforts. If you have a clear sales target, you are more likely to evaluate the outcomes from each of your marketing tools and make better decisions about the best use of your marketing budget. Setting budgets for expenses allows you to identify problem areas before they are out of control and make changes in your business's internal processes to improve efficiency and profitability.
Developing solid sales forecasts and expense budgets require thorough planning. There are three basic methods for determining the sales forecast - Value-Based, Resource-Based, and Market-Based - that tell you the minimum sales that will be acceptable [or your break-even point], the maximum sales your business can produce with the resources available, and the amount of sales your market assessment deems you should be able to close.
If your Market-Based forecast does not fall between the minimum and maximum forecasts, you need to make some changes! All three of these forecasts should be performed during your startup planning and any time your business undergoes major changes.
Your initial expense budget should be as accurate as possible, meaning you should take the time to research your business needs and find the best resources for purchasing all furniture, fixtures & equipment, inventory, marketing, and services you will need before you start spending money. Once your business is up and running, schedule time once per quarter to review the actual expenses against your budget. Make adjustments as needed, but also set objectives for controlling or reducing expenses where possible, and always be on the lookout for better deals on supplies or services.
If you are planning for growth, forecasting and budgeting are even more important. The sales forecast calculations will help you identify which resources [employee, equipment, etc.] you will need to increase and when, and your expense budget will help you set cash aside to do so. Without financial planning, growing businesses often find themselves unprepared for growth.
A sudden burst of business or opportunities to expand into new markets are either missed or handled through knee-jerk reactions that cut into the profit potential. Taking the time to include financial management in your ongoing planning process will keep your venture poised to exploit opportunities as they come along.
Consistent periodic review of your financials is critical to the long-term success of your business. As a business owner, it is to your benefit to learn and be comfortable with the numbers. No single part of financial management is all that difficult to master and understanding how each aspect of your business affects the others allows you to make the best decisions to improve profitability.
The three keys to success -- planning, marketing, and financial management -- are true for any type of business. Begin your business development with these principles in mind and arm yourself with all the tools you need to effectively plan for success.