There are a lot of financial matters which are a cause for concern for businesses. Business depends upon investment to grow and capital to carry out the day to day management of the company and its trade. Knowing how to perform or achieve these essential business functions is a big part of effective business management, whether you’re managing a large or small business.
A lot of businesses maintain cashflow in their company through a line of credit. While there are good reasons for this on occasions, in general many people who do this are misusing credit. The ideal situation would be to steadily build up a reserve of capital in their company, which can then be dipped into when the company’s current account runs dry; thereby eliminating interest payments.
This situation has a number of benefits besides saving money being paid as interest. Firstly, if you place those reserve funds into a savings account, that money will accrue interest as well, so even while not in use your money will be making money. Secondly, it leaves your business’s line of credit untapped, which will allow you another reserve of money to dip into when you’re in need of an investment.
Businesses gain investment through two different strategies; via a bank’s loan, or by an independent investor in return for a stake in the company. Each of these have there pros and cons, which every business owner should back to front before they reach their own decision:
|You get somebody who is committed to the continued success of your enterprise. Someone who could potential contribute to more need for capital.||You have to give up part of your stake in the company, which means that when it succeeds you don’t receive all of the benefit.|
|Investors are usually pretty experienced business people, and they can be an incredible advantage for those just starting out with a business venture, purely on account of their expertise.||They can potentially have a lot of power to prevent you from carrying out your business plan.|
|Getting a loan allows you to maintain a large amount of power over your business and how it operates.||Banks are typically inflexible about repayment plans.|
|Banks don’t take a stake in your business, so as long as you’re still able to make payments their interest in how your business is doing is limited, so you can continue to follow your own business plan.||Once banks have made their loan, they are going to be far less willing than an investor to make a further commitment; they may prefer to take your collateral and run.|
The financial issues that we’ve just touched are one part of the puzzle of effective management of your business’s finances, but another big part is figuring out how to deal with financial disasters. This is what is known as your risk mitigation strategy, which involves your business insurance and cash reserves. It also requires you to put in place a plan of action for what assets get sacrificed in the event that all the other strategies aren’t enough.
A lot of small to medium sized businesses have owners and directors who aren’t necessarily the most financially literate people. This is totally fine, you can be business savvy in other ways; a lot of people enter business because they’ve got faith in their product or in their ability to provide a solid service. In order to make up for that gap in expertise, these businesses could be well served by getting the services of an experienced business finance advisor.