7 Financial Fundamentals That Will Help Ensure Business Success

By: Alan Haut, District Director
North Dakota District Office

It’s no surprise that knowing how to manage money is a big part of business success. The good news is that you don’t need to be an accountant to successfully manage your business finances. Experts are always available to answer any questions you may have. Understanding the basics of business finance can put your start-up on the path to success. Here are seven things to consider when starting a small business:

First, Know Your Own (and Your Family’s) Tolerance for Financial Risk: During the start-up phase and beyond, the owner is often the last one to be paid. While the rewards of business ownership are many, so are the risks. Fluctuating economic trends, changing consumer tastes, supply chain disruptions and many other factors can make business success a less-than-guaranteed proposition. Make sure everyone involved has the emotional and financial capacity for a high level of uncertainty.

Understand What You Will Need to Properly Fund Your Business: Some businesses can be started on a shoestring budget. Others need a lot of money. Focusing on expenses that directly relate to income generation is key to managing a start-up. Buying new equipment when lower-cost used options will do, can soak up cash that could be used for marketing, inventory and other important business needs. Every start-up expense should answer the question: “How does this contribute to the bottom line and get me closer to breakeven?” Also, make sure your start-up projections are realistic. Often, estimates for income growth are too optimistic, expenses are too low, and breakeven timeframes are too short. A good rule of thumb is to take your projections and double the cost to get to breakeven, and triple the timeframes. Being prepared for a worst case scenario is good insurance against running out of time and money on the verge of success.

Understand How a Legal Business Structure Can Impact Your Taxes and Liability Protection: There are many types of business structures – sole proprietorships, partnerships, corporations and limited liability companies (LLC), to name a few. Choosing the best structure for your business should be based on several factors including the number of owners, potential tax benefits and consequences, and liability risk and protection. As an example, a sole proprietorship is limited to you as the owner, you are taxed as an individual, and you are liable for everything the company does or owes.  A C-corporation can have many owners and is taxed as a corporate entity; but the owners will have to pay income tax on their individual earnings, which is often termed double taxation.  However, corporations do offer some liability protection for the owners.  Decisions about the pros and cons of each entity can be complex and should involve experts – tax accountants and attorneys.

Understand How Cash Flow Keeps a Business Alive: Cash flow is the lifeblood of your business. A business can be profitable on paper, yet fail from a lack of cash flow. Successful business owners manage cash going in and out of a business. The basic cash cycle begins when you pay cash to buy inventory or raw materials, add value to the materials, and ends when you collect cash from sales. The fewer number of days in this cycle will give you more cash on hand and a lesser need to borrow. There are many factors that can affect this cycle including how much you have spent on inventory; how much you have had to borrow; how long you have to hold inventory before it sells or spoils; and how long it takes to collect the cash from your customers. Developing a cash flow projection can help answer these questions and ensure you have cash to pay your vendors, your staff, your lenders, and often last – yourself!

Learn How to Read and Use Business Financial Statements: Three financial statements make up a business’s financial report card: balance sheet, income statement and cash flow statement.  A balance sheet lists what your company owns (assets), what it owes to others (liabilities), and what it owes to the owners (equity). Use the balance sheet to track changes in your business, to show financial strength for securing loans and as a basis for forecasting. The income statement (also known as a profit and loss statement) summarizes income, expenses and profits for a period of time.  It is a record of your company’s operations and its ability to generate profits, which are essential for long-term survival.  A cash flow statement shows how long it takes between the time you spend cash until you get cash back. It is important to keep this time to a minimum to make sure you have enough cash on hand to pay everyone, including yourself!

Learn How Business Insurance Can Protect Your Investment: This is an important, but often overlooked part of starting a business. There are many types to consider: general liability, property loss, commercial auto, life, hazard, theft, professional liability, directors and officers, and business interruption, among others.  For some, the cost might be relatively high and the possibility of loss extremely low.  Contact your local insurance agent to discuss the pros and cons of each insurance type and weigh the potential benefits against the cost.

Understand the Financial Implications of a New Hire: Making the decision to hire someone should go beyond thinking about if you can afford to pay their wages. Two questions should be answered before you hire anyone: how will they help the business increase income, and how will they help the business to be more productive? Answering these questions will help determine if a new hire is really worth what you will pay them in terms of wages, benefits and training time. Avoiding the temptation to hire too soon is one of a business owner’s major challenges.

These are just a few of the financial items you need to consider when starting a business. Addressing these items will improve your chances of succeeding in business.

Money Smart for Small Business provides a practical introduction to topics related to starting and managing a business. Developed by the SBA and the Federal Deposit Insurance Corporation (FDIC), it provides 13 modules to increase your business skills.  For more information, visit Money Smart for Small Business at www.sba.gov/starting-business/business-financials/your-business-fiscally-fit.

Al Haut was selected to lead the SBA’s North Dakota District Ofifce in 2017. He received a Bachelor of Science and Masters of Business Administration from Minnesota State University-Moorhead. Al grew up working in a family small business in central North Dakota and has also served as an adjunct professor with the University of Mary – Fargo. He can be reached at alan.haut@sba.gov(link sends e-mail).

SOURCE: https://www.sba.gov/offices/district/nd/fargo/resources/7-financial-fundamentals-will-help-ensure-business-success