First-time small business owners shouldn't be expected to be experts in financial planning. If everyone who began a new venture had a thorough understanding of their finances, the success rate for neophyte businesses would probably be much higher.
While there are a number of factors that bring down new businesses, one significant one is a misunderstanding of the financial plan. An inability to properly manage this aspect of your new venture can easily lead to its downfall.
"In many instances, [financial mistakes] are due to poor financial planning on the front end of starting the business," Marc Price, director of operations at ExpertBusinessAdvice.com, told Business News Daily. "Entrepreneurs underestimate the true costs of launching the business. Subsequently, working through initial growing pains that may transpire after the doors are open can be threatened without proper funding."
For advice on how to better manage your small business' finances, take a look at the tips below:
1. Living by the plastic
Sometimes, business owners resort to repeated credit cards swipes in order to push through the lean economic stages of a fresh pursuit, Business News Daily explained. This is especially true when proper financial planning isn't in place – something that can leave anyone stuck in a rut before their business ever really takes off. However, due to the nature of credit card transactions, over-reliance on plastic isn't likely to end well. Find another way to fund your decisions, because using the credit card too much will only build debt before you have the resources to handle it.
2. Do your math
Calculating interest rates properly isn't always an obvious task, and many small business owners get it wrong, Entrepreneur noted. The publication gave an example of improper interest calculations. If you borrow $1,000 and pay back $1,100 over the course of three months on weekly installments, your interest rate is not 10 percent. When taking into consideration the timeframe and average principal of the deal, the actual interest reveals itself to be closer to 80 percent. APR should be calculated based on the outstanding amount at every point in time, the publication explained.
3. Avoid starting with nothing
It's a known fact that starting a business will take investments, Business News Daily noted. So why begin your venture without cash reserves long enough to maintain it until it reaches profitability? It will take several quarters before you start seeing any income, the publication explained, and profit will be even further down the line. Make sure that when you begin your business, you do so with the capital reserves required for a series of investments over a number of quarters.
4. Remember the intangibles of a loan
For the short-term loans that new businesses often deal in, interest rates may not be as important as they are for longer-term loans that allow time for interest to build, according to Business News Daily. Short-term loans should be approached with a different attitude than loans that are stretched over a lengthier period of time. A fast pay-back period for loans under six months means that you can get away with not putting too much consideration into the interest rate, and enjoy the luxury of not prioritizing the loan over other expenditures. This doesn't mean don't pay it back. Instead, your debt won't build with a short-term loan like it will with one that runs over six months. For example, if you hire a bookkeeper to take care of a short-term loan, you may end up compensating him or her more than is worth it to pay back the amount in a timely fashion.
Use these four tips in order to avoid the financial pitfalls that have hampered many businesses for years.