According to a report published on Inc42.com in 2016, the primary reason behind many startup shutdowns was due to lack of funding. In 2017 lack of market demand was the primary reason for the startup shutdowns.
Starting your business venture can be a daunting but rewarding process. While a great business plan is imperative for entrepreneurs, financing is one of the most crucial elements that help a startup succeed. Many entrepreneurs often take help from a business coach to receive fundraising guidance.
Securing funding to launch a startup can be difficult. More often than not, entrepreneurs use their savings to start their businesses. Another report by NASSCOM states that around 25% of Indian startups shut down untimely due to failure to raise follow-on funding rounds beyond Pre-Series. A good and effective management of finances can make a massive difference between a business that keeps climbing the ladder of success and one that falls at the very first challenge.
Here are five financial tips that would help every entrepreneur or small business owner manage their finances better:
1. Create a Dedicated Emergency Fund
A contingency or an emergency fund to provide financial security in desperate times. This fund helps an organization meet significant expenses in unforeseen circumstances. Ideally, one should have six months of living expenses as a contingency fund.
If you own a business, it is suggested to create a larger emergency fund if your company has seasonal cash-flow fluctuations. It is best to build such a fund and invest it in a mutual debt fund as it will give far better returns than a savings account and help you encounter unforeseen challenges.
Having an emergency fund will also give you peace of mind, and you can make more confident decisions for your business. A good business mentor will help you how to create a dedicated emergency fund.
2. Avoid Expensive Credit Loans
Credit is the lifeblood of any business, especially for startups. Hence, entrepreneurs need to keep their credit scores high. Always pay your bills on time. When it comes to financing your business, the cost of credit is a critical factor, especially in the initial months of operation.
In the beginning, when the business has not even reached the break-even point, the company's financing should be done by keeping the interest cost at the bare minimum. This will reduce cost and attain profitability. Never miss a payment or delay the payment date, even if you face a financial crunch.
Also, keep your credit utilization ratio under consideration. The credit utilization ratio is the percentage of your available credit limits that you borrow during the month. Keeping your credit utilization ratio below 30% will help you maintain a better credit score.
3. Keep personal & business accounts separate
It is wise to keep your business and personal bank account separately. It will provide the benefit of easier accounting at the end of the financial year for tax purposes and eliminate the cash crunch situations in business caused due to withdrawals for personal expenditure.
4. Bad Debts
Debts that cannot be recovered are called bad debts. When credit sales are not recovered, bad debts are created. Entrepreneurs should eliminate the situation of a fund crunch in business due to withdrawals for personal expenditure. Instead, these debts should be repaid in the next year so that a healthy financial position of the company can be showcased in front of potential stakeholders. You can also take guidance from a best business coach to plan your finances.
5. Develop Financial Goals
Keeping the in-flow and out-flow of your finances is extremely important. Planning a year for significant expenses in advance can help small business owners to reduce the financial burden. If your future business goals involve expanding and launching new products or services in the market, it is essential to plan everything related to finances.
If you are not sure how to manage your finances or ensure a solid financial future, you can also take the help of a certified financial planner. A financial advisor can also help you build a strategy to meet your business objectives.
Instead of investing all your profits back into your startup venture, save for your future by investing your funds into multiple investment schemes. A wide array of investment schemes is available, from stocks to mutual funds. You do not have to invest every last penny into your business; save for your future.
If you can improve your finances with a better emergency fund, a solid credit score, and a robust retirement savings portfolio aside from the equity you own in your business, you can run your startup with a more focused and peaceful mind.
And for business owners, who are some of the busiest people in this world, having financial security is genuinely priceless. Are you planning to launch your dream startup business but worried about managing your finances?
Do you have any other financial tips for our entrepreneurs? Please share them with us in the comment section below.
The idea of managing a business is more straightforward said than done, and we agree with you. This is why to help you move forward with your business goals, we at Bada Business offer an exclusive Business Coaching Program that comes with Foundation courses, specialized courses, and value-added courses.
To know more, visit www.badabusiness.com.