Financial Management: The key to your start-up

Financial Management: The key to your start-up

A sound Financial Management plan is the basic step to keep your business solvent and profitable. Many businessmen start their businesses without focusing on capital management which results in failure and insolvency. To effectively plan a business it is important to know the investment needed to start up a venture and how much money it requires to be sustainable in the competitive market, i.e. the operating costs. Once you have worked on these two important ideas, it’s time to work on planning, organizing, coordinating and controlling. Buying equipment, accounting, salaries, marketing and promotions, infrastructure, support, income, licenses and registrations all come under start-up budget, whereas operating budget includes everything starting from personnel to maintenance.

One should have a fair knowledge of the industry before plunging a high investment into the business. We need to know two things, one is how much a business typically needs to spend to open its doors and secondly how long will it take for the firm to break even and more importantly, to post profits. An appropriate opinion from the people of the same industry and help from government associations can be fruitful enough to guide a start-up company to achieve its objectives and thrive in the market. To get real information and knowledge of the business world, one needs to establish good contacts. Ask business owners what costs took them by surprise when they first opened, how to keep cost low during initial days of business, what would be the cost effective marketing methods and what should be the initial wages of the employees. Maintaining liquidity and profitability are big responsibilities and at the initial level with a small staff one has to be very careful in paying supplier bills or making loan payments.

Growth in current assets is directly proportional to the growth in sales. Higher sales volumes can only increase with increase in productivity and higher productivity requires a higher investment in inventories. Or we can say sales growth requires more working capital (cash used in day to day activities). Therefore for growth one needs policies for effective working capital management especially for a start-up with inadequate resources. Start-up firms with a small staff face challenges like securing finance, finding customers and most importantly, managing inventory. For small businesses their inventory will be the biggest expense. They don’t have money to waste so they can’t tie themselves up in maintaining an idle inventory. Inventory management requires lot of organizing, therefore a business owner will have to keep track of the present inventory,their future needs and the time taken to restock their current inventory.

When you have a good idea in your mind the first thing to think over is whether your business will succeed or fail. Break–even analysis is the best financial tool to determine whether your business idea will be profitable and also calculates what your revenues must be for your business to produce profit. The key to using this tool is to be realistic in your expected revenues and conservative in your expected costs. The break-even analysis will force you to check whether it is the right decision to pursue your business venture or not.

A good business plan would surely attract lenders and investors and they would be ready to invest seeing the company’s potential but one of the major hazards of securing finances from too many sources can be risky. The partners or lenders might be in conflict over the profit which you make out of the business and the argument gains heat when you are not able to meet everyone’s expectations when it comes to distribution of profit, which results in disturbing consequences. Another important thing to keep in mind is the cash flow management. Many new business owners burn through their capital money too quickly and fail to reach positive cash flow status in a timely manner. Some factors like economic slowdown or late product delivery may be beyond your control but other factors like overly high expenses and unnecessary spending are the factors which are under the control of accounting departments. Financial supporters don’t take gently to that sort of management and they would stop their flow of resource without even thinking about the consequences and then all your efforts would fail.

Managing a startup business is not an easy task but managing it by keeping the above mentioned points in mind would make it successful and encourage owners to come up with new ideas on regular basis. Fresh entrepreneurs lack business experience but taking a risk with proper research and adequate measures will certainly minimize setbacks.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

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