small business finance

small business finance

The Essential Guide to Small Business Finance

1. Introduction to Small Business Finance

Since the days of ancient geeks, money has been a concern for the maker. Today, the individual capabilities are still essential if a business is to survive and make a profit. Many businesses have failed not in the lack of ideas, intellect, or even talented creators, but rather from a shortage of the needed funds to keep the profit going. It doesn’t take a PhD in economics to understand that the critical element in the life of any commercial enterprise is money. What’s not always very clear to the small business person is how to get that vital courage and keep it. There are five main methods of financing, and they can each provide almost all the money any business is capable of producing. Each method of finance is extremely flexible, and there are a quite remarkable number of facilities for securing that backing. Each business will at some time grow so big it has to find enough money to finance ideas, stocks, a growing market, fight off competitors, and to allow it to strut and vie in the economic landscape; and that’s what any of the five methods can do. Of the five, one may be even more flexible than the others, and since it’s straightforward to understand, let’s study it before going to the other four.

Failing to anticipate finance needs in your business might not kill it exactly, but you might find that your business is on life support for far, far longer than you and your banker would prefer. The lifeblood of every business is cash flow, and the secret is to ensure your business has more than enough cash to see it through (and not just survive) and to have enough cash for any financial surprises. A big part of cash flow management is making sure your business has the money coming in at the same rate as it’s leaving your business, and the money is secure and in sufficient quantity to meet your business needs. The most significant cause of business failure is inadequate financing. Surprisingly, many business people do not realize the various options available for financing a business. The main aim for business people is to have established financing before the operation runs out of cash.

2. Financial Planning and Budgeting for Small Businesses

Small business planning is, for once, not too different from big business planning, and it shares many tools and techniques. The process may be on a smaller scale and take less time, but the power of the planning process lies in meeting and deciding fundamental issues. This chapter covers some of the main applications of small business planning, which can help a business to chart its course, operate within realistic time scales, and take advantage of opportunities and markets. The end product helps owners to understand their businesses and make better decisions, which can help them to achieve the main purpose of owning a business, whether for profit or satisfaction – security.

For many small business owners, financial planning is regarded as a necessary evil or is neglected completely. There is often little planning beyond survival or trying to compensate for crises, such as when a major client is lost. But there is no reason why financial planning should not be as relevant to small businesses as it is to large. The process should contribute directly to making money, with sales growth being real and sustainable. It is not just about ‘bean counting’, but can provide accurate and up-to-date information needed for coherent business management. It facilitates decision making by forcing a company to consider its future before it happens.

3. Sources of Financing for Small Businesses

2. Equity financing: Equity financing involves selling shares of your business to raising investors. As a small business that is just beginning, it won’t be very hard to get a loan. What you do is sell your business idea to people who have money and care a bit about how your way of doing business might work or would make them get their money back and acquire some profit. Since the endeavor is risky, the very factor that would entice investors would be the prospect of your business to yield a major profit.

1. Debt financing: Banks are the first type of financial institution that comes to mind when a business owner considers getting a loan to operate his or her business. One of the more widely used financial services of a bank is to provide loans. Banks have made it their business to do this so that they can keep the nation’s businesses operating, as well as maintain their position as a major center for banking activity. The bank then either offers a direct loan to the business or operates by providing a line of credit to the business (short-term or otherwise), which merely allows it to draw the money up to a certain limit that the bank extends its credit to the business.

4. Financial Management and Decision Making

Briefly, the Profit and Loss account shows: the sales (or income or turnover), purchases, the cost of sales (what it cost to buy or produce the goods that were sold), the trading profit (the difference between the sales and the cost of goods sold), then other expenses: salaries, general expenses, interest, and other earnings, gross profit (the difference between the cost of sales and the gross profit), operating profit (the company’s earnings before deduction of interest and taxes), any earnings from other sources, then total earnings before taxes, amounts payable (in taxes), and the net profit (after tax). A strong profit and loss statement can provide information about the enterprise’s ability to generate profitability and boost income.

Profit and Loss Account (Income and Expenditure Account): Small business financial statements always start with an income and expenditure statement. It shows all the revenue generated by the business, all the expenses incurred in order to make that happen, and the profit (or loss) that resulted in a period of time. There are many expenses that businesses incur in trading which are not related to the goods or services they produce but are necessary for them to trade. These are the overheads and may include costs for rent, rates, depreciation of fixed assets. All such expenses are summarized under trading expenses.

Understand what your financial statements mean and use them to monitor how your business is doing, to help you make decisions, and inform your partners (e.g. bank, employees). A summary of small business financial ratios is included at the end of this section, and key ratios are explained in more detail.

5. Case Studies and Best Practices

Dr. Malachowski used data from the U.S. Internal Revenue Service for 34,000 sites of hair salons and barber shops. The average firm is reporting revenues of about $200,000. Most of those clients are reported to be net losers, averaging about $61,000 in losses. Salons have increasing profits with age, with about half breaking even by age 13. High sales, high bills, and fewer employees are other indicators of success. With half of salons breaking even within 13 years, some efficiencies are possible in a firm that reaches this milestone inside of 9 years. Establishing best practices for reporting to the IRS at the earliest possible date is one of the simpler takeaways.

Putting together the stories of successful cases allows us to identify the best practices that drive small business financial performance. There are many recipes for business success, but when it comes to financial performance, there is less ambiguity. Access to credit is essential for growth and profitability. Good financial reporting likewise. Cash flow management must be a core business skill. And losses are the path to failure.