Having a superb product or service is only part of what it takes to create a successful business. You also need to find a way of making money out of it and of managing that money in a way which sustains your business and allows you to generate a profit. If there’s one financial lesson every business person should know, it is that cash flow is king and hence it often makes a lot of sense to use finance for purchases, rather than splurging all available funds. Here, therefore, are three tips to using finance successfully.
Keep on top of your business plan
Your business plan needs to be a reflection of what your company is actually doing now and what you want it to do in the future, rather than what you were doing when you first created it and what you thought then that your future plans would be. This is critical to ensuring you are managing your finances correctly, using your funds wisely and getting the appropriate type of financing for your company. For example, if your business plan indicates that it would be appropriate for you to build up assets, in the form of equipment, then you may wish to look at hire purchase deals where you ultimately own the asset in question. If, however, it’s irrelevant whether you actually end up with the asset or even if you’d prefer to hand it back at the end of the finance period to save on storage, then you might be better to use finance or operating leases or contract hire.
Make the most of data
Words like “data analysis” and “statistics” can make people shiver, but actually they can both be massively useful for your business. For example, keeping track of your income month on month as well as year on year will let you have a clear view of fluctuations and whether or not they are regular, e.g. seasonal. This may or may not tally with what you think you remember. You can then put this information to use when managing your cash flow, for example you could request that your finance provider tailor your hire-purchase repayments in line with your income stream rather than having 12 equal payments throughout the year.
Likewise, keeping track of your business processes will help to guide you as to what you need in the way of equipment and resources at what point(s) in time. For example, you may discover that your regular set up may be fine for most of the year, but that there are a few months each year when you are particularly busy and would benefit hugely from having extra equipment. These months might or might not be consecutive. This would be the time to make use of options such as contract hire or operating lease.
Benchmark yourself financially
This may take some effort but it can be time very well spent. Basically, you want to know where your income and expenditure stands when compared to your industry as a whole (or at least your part thereof if you are operating in a major industry). Your default assumption may be that as a small company you can expect to pay more for pretty much everything since you lack the financial muscle of bigger names. There is often some degree of truth in this, but if you find major discrepancies between what you are paying and what your counterparts appear to be paying, then it can be very worthwhile investigating further to determine precisely why this is and to see if you need to renegotiate with your current vendor or find a new one. Basically this is the business equivalent of the advice often given to consumers to check regularly to make sure that they are always on the best deal for any products they buy and services they use. You may discover that it actually more cost-effective to use financing to get a better deal than to continue on your current one, even if you can afford it.
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