Starting a small business can be highly rewarding. With so much to offer your customers, and so much you’re hoping to gain from your new enterprise, it’s important that you manage your finances accordingly to ensure you don’t fall into debt or fail within the first year. Did you know many small businesses fail within the first five years? This expert guide will give you insight into the reasons why businesses fail and the top financial tips you can utilize to avoid this so you can push your start up towards success. But first:
Why Do Businesses Fail In The First Five Years?
There are two primary reasons why small businesses fail within the first five years. These include, but aren’t limited to:
1. Poor Financial Management
Poor financial management refers to the inability to properly and effectively manage funds or money that can lead to positive accomplishments of goal objectives. Bad financial management can have repercussions on any business and can determine whether or not your business goes into debt.
2. Poor Cash Flow Management
Your cash flow is the amount of net cash, or cash equivalents, moving out and into your business. When a business is cash flow positive, it means that its financial income is greater than its outgoings during the same period. Naturally, positive cash flow is advantageous however it doesn’t necessarily protect your business against any unforeseen financial challenges in the future. When cash flow isn’t managed effectively, it can lead to major problems for your business.
4 Financial Tips To Improve Your Small Business Success
1. Know Your Financial Position
When building your business, you need to be mindful of your finances at all times. If your finances aren’t managed correctly, you could end up struggling before you’ve even begun. As suggested in the top two points, it’s important to understand the concept of cash flow and how you will manage your in-goings and outgoings. The best ways to do this is to keep records of all your financial transactions, including revenue received and expenditure. Use this to create a profit and loss statement as your guide.
This will help you to know where you stand with your business’s finances and whether you’re starting to operate in the red. If you’re having problems managing your business budget, it might be best to seek professional help and guidance from an accountant or financial advisor.
2. Build A Good Business Model
The next thing to consider is building a good business model. This involves researching and reviewing the competing businesses in your industry and see how they operate.
It’s a good idea to analyse your competition to be able to build a business plan that combines strategic marketing, financial forecasting, and competitor activities. When creating your plan also incorporate a chart for milestones with your objectives and tasks.
This will help you to manage your business more effectively, measure success and keep on track both financially and operationally.
Read Also: How To Build a Good Business Reputation
3. Watch For Over expansion and Rapid Growth
On some occasions, start-ups may grow faster than expected and may require more and more funds to be pushed into the business to keep up with this rapid growth and expansion. If you’re not ready for this it can lead your business into the red.
Another problem can occur when you believe a product is going to be in high demand. You purchase it in abundance and then have problems actually moving it. This can lead to major financial trouble.
To avoid problems with rapid growth, or over expansion, you need to manage your operations and create a well thought out plan that should include:
- Regional and local demographics and spending trends.
- The rate the product is selling with other competitors.
- An estimate of how much stock is required.
- Whether you have future development plans as your business growth increases.
Before expanding your business, you need to ensure your business model is profitable and robust. Instead of ordering an abundance of stock, have measures in place to fulfill customer needs quickly and efficiently through a streamlined ordering process. Planning ahead can help you to reduce strain on your finances and your resources.
4. Clear Bad Debts As Soon As Possible
Bad debts can occur while operating your business, however many business owners tend to take on more bad debt than focusing to pay the debt off. It’s important to manage debt effectively before committing yourself to additional risk.
If you’re struggling to pay a debt off now, you need to stop and revise your budget and finances to see where your position is.
Talk to your debtors and see whether you can setup a repayment plan to help pay down the debt while still having enough credit to operate your business. Monitoring and repaying will place you in a stronger financial position.
In order for your business to be successful you must be on top of your finances. By keeping a close eye on your financial position you’ll be able to improve your rate of success without succumbing to the fate of many other small business start-ups. A qualified accounting or financial professional can offer invaluable help. Are you watching your business finances closely?
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Steven McMeechan is a strategic marketing and communications specialist with over twenty years’ experience in senior marketing management roles across a range of industries including Information Technology and Financial Services. He works for Capstone Financial Planning and lives in Melbourne, Australia.