A business owner’s ability to get a business up and running and to keep the business operating smoothly hinges largely on prudent financial management. Regardless of the quality of a product or service or how compelling of a need it fills, a company can’t be viable in the long run unless it is successful financially.
There are many practical issues involved in the prudent financial management of a business. A business owner must be aware of how much money the business has in the bank and if that amount is sufficient to satisfy the business’s financial obligations. Just because a business is successful doesn’t mean that it doesn’t face financial challenges. For example, many small businesses that sell their products to larger companies, such as Motorola, 3M, and Home Depot, don’t get paid for 30 to 60 days from the time they make a sale. Think about the difficulty this scenario creates. The small firm must buy parts, pay its employees, pay its routine bills, ship its products, and wait for one to two months for payment. Unless a business manages its money extremely carefully, it is easy to run out of cash, even if its products or services are selling like hotcakes. Similarly, as a company grows, its cash demands often increase to service a growing clientele. A business needs to accurately anticipate whether it will be able to fund its growth through earnings or if it will need to establish a line of credit at a bank or look for investment capital.
Just because a business is successful doesn’t mean that it doesn’t face financial challenges.
The financial management of a business deals with questions such as the following on an ongoing basis:
How are we doing? Are we making or losing money?
How much cash do we have on hand?
Do we have enough cash to meet our short-term obligations?
How efficiently are we utilizing our assets?
How do our growth and net profits compare to those of our industry peers?
Where will the funds we need for capital improvements come from?
Are there ways we can partner with other firms to share risk and reduce the amount of cash we need?
Overall, are we in good shape financially?
A properly managed business stays on top of the issues suggested by these questions through the tools and techniques discussed in Truth 47, “Managing a business’s finances,” and Truth 48, “The nitty-gritty: Forecasts, budgets, and financial statements”.
Particularly important issues for first-time business owners
First-time business owners need to be aware of two additional issues that play a role in financial management.
First, many businesses are viable and ongoing once they get started. The trick is to get them started. Unless your business is cash flow positive from the beginning, which is rare, there will be a period when you’ll lose money while you’re ramping up the business. For example, you may be planning to open a fitness center and have determined that you’ll make money if you can sign up 1,200 or more members. But you won’t have 1,200 members the day you open. It may take you six months to a year to reach your membership goal. In the meantime, all your fixed expenses (and most of your variable expenses) will march on. Most businesses do experience a start-up period during which they lose money (or make little money) until they are fully up to speed and reach profitability. Businesses need to be fully aware that this period will take place and to plan for it. The worst time to go to a bank, family member, or investor to help meet a cash shortfall is when you’re facing a cash crisis.
Many businesses are viable and ongoing once they get started. The trick is to get them started.
The second thing to be mindful of if you are a first-time business owner is that most people are not familiar with how to complete the types of forecasts, budgets, and financial statements that are needed to prudently manage the finances of a growing business. If you fall into this category (as most people do), don’t wing it. Get help. The financial management of a business is too imperative not to take it seriously. A good source for one-on-one help is SCORE, an organization mentioned several times in this book. Small Business Develop Centers (SBDCs) frequently hold workshops on how to complete financial statements and learn accounting and budgeting software programs.