Many entrepreneurships fail to realize their potential for one simple reason, financial mismanagement. Imagine for a moment you started a profitable restaurant, which ran at a profit within two years. Now similarly imagine a slow period during the third year and an eventual filing of bankruptcy because of the decrease in business volume.
The question is begged, how does one insulate oneself from the inevitable ebbs and flows of business volume? Can this ebb and flow be softened or pushed in one direction if guided by the mind of a prudent financial manager? The leading answer to the leading question is a clear affirmative. Yes we can insulate ourselves!
The idea of “financial insulation” necessitates a careful planning approach to opening a business, running a business, and expanding a business. With these temporal categories established, let us explore tips during each phase of business.
Financial Management Tips for Opening a Business
- Estimate all initial costs.
- To test judgment, estimate what you believe costs are and then calculate numeric overhead. Get a sense of being able to estimate so future costs and expenses can be roughly tracked.
- Set money aside for attorneys and legal expenses.
- Many businesses require special licenses which are granted on a local level. Some businesses must be filed as formal business entities. Ensure funds are set aside to address any potential issues unearthed by legal counsel.
- Assess and brainstorm liabilities.
- This can be greatly boosted with the assist of legal counsel. However, be practical and creative, think about the worst-case scenario during business start-up and have resources available to meet challenges.
Financial Management Tips for Running a Business
- No-nonsense audit.
- When it comes to business an honest assessment of costs and profits is necessary. Often an individual cannot see with the necessary level of scrutiny so hiring an outside consultant to do an audit is recommended.
- Collate business profits and create a “fatty” layer of insulation.
- Assuming the business is profitable after an audit, ensure the profits are funneled into the appropriate channels. This will often lead to expanding or diversifying.
- Assess business partners or colleagues.
- Assess all parties which enable your business to happen. For example, notaries who run their business from their home may be renting scanning equipment instead of owning it. Assess all others who you rely on for business needs and see if the open market has better partners or can be used as leverage to lower overhead costs.
Financial Management Tips for Expanding a Business
- Keep a layer of fat, do not let your business starve!
- Think of the insulation like the human body. Although humans can operate with very little body fat, this is not optimum. Like the human body, ensure business profits run at least between 12-20%.
- Expand or diversify if the business is obese.
- Again like the human body business “obesity” is not always desired. Why? On first glance one would assume a profitable business which is too busy is desirable. This is only half true. If the business is inundated, perhaps opening another one could capture more clients. Consult with a financial expert and see how to best allocate profits. Diversifying could mean opening a business which accomplishes a task necessary to your business. This creates a synergistic effect and when done right, greatly increases profits.
- Have an end goal.
- Life can be unpredictable. Health or harm can befall anyone at any time. At all times it is worth it to know the selling price of your business. If a dynasty is desired, grooming friends or family to take over the business takes advance planning and foresight. Be honest and practical in your assessments of your future.
