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small business finance

Tags: personal

Finance Essentials for Small Businesses

  • All businesses start small
  • Often killed by:
    • Insufficent capital
    • Poor cash management
    • Poor record keeping and controls
    • Improper product pricing
    • Uncontrolled growth

Finance Essentials for Small Businesses

  • Often small businesses don’t think through the costs
  • What are the costs of a software business?
    • Place
      • Rent
      • Internet, electricity, etc
    • Infra
      • Cloud, hosting, etc
      • Lawyers?
      • Licensing?
      • Insurance
    • Money needed to start a business

Insufficient Capital

  • Expenses need to be paid
  • Vendors will often need to be paid before you are paid
  • Many businesses fail before they have a chance to demonstrate their viablility
  • Overestimation of cash inflows and underestimation of cash outflows
  • Carefully and realistically map out your expected cash inflows and outflows for the first six months of business
  • Cash forecast needed for any financing

Cash Flow Management

  • Balance expected cash collections and cash payments
  • Even after the first few months, the sufficient cash inflows and outflows are needed
  • Managing cash is critical for the well-being, and does not happen by chance
  • Prepare a cash forecast or budget
  • Two types costs
    • Fixed costs
    • Variable costs
  • Identify all fixed and variable costs
    • Only as good as inputs!
  • Variable relative to what?
    • Variable relative to customers?
  • Answer: how many customers can you realistically expect?
    • Scoping out competitions
    • Surveying potential customers
    • Assessing population growth
  • Answer: types of variables costs?
  • Draft up a cash forecast

Drafting a cash budget

  • Starting cash
  • +Revenue
  • -Fixed costs
  • -Variable costs

Bookkeeping

  • Developing a system of tracking inflows and outflows, and your obligations to others and their obligations to you
  • Helps with:
    • Accurate information informs better decisions
    • Investors and banks need accurate information
    • Need to track tax obligations
  • Record keeping and controls
    • Bad information will control to the lack of success
  • Controls - Procedures to ensure accounting information is accurate and reliable to safeguard your assets and records
    • How will you document this?

Pricing a consulting job

  • Account for all the costs, including the costs that will not be actually billed
  • See if others are willing to evaluate other options
  • Try to fix the profitability issues before trying
  • Unmanaged growth will kill companies
    • Growth often requires cash, and new businesses often do not have cash
  • Lessons
    • Be careful with inventory
    • Use of credit to grow business
    • Management focus on keeping expenses down and under control