When you run a business, you need to be cautious in many areas. The products and services you choose, the people you employ, the price you mark up your products and the way you market your goods are just a small sample of the decisions you need to make every day.
But it all revolves around having an adequate supply of cash. Money is critical to your business and you always need to have suitable reserves for that unexpected opportunity or bill. So, when is the best time to use other people’s money?
All businesses at some stage require funding. Big or small, these businesses need to expand and grow. No business can afford to stand still. Life changes, so do the needs of your clients and your business.
While using your own money to save paying interest is admirable, it isn’t always the best choice. You still need to live, and the business is there to afford you a better lifestyle, otherwise you may as well go and get a job! The business should be profitable enough for you to maintain your lifestyle and expand. However, rarely are small business able to afford cash-flowing their own development, it takes time and resources. You certainly can’t do it in a short period of time. This is where finance comes into the picture.
It is normal to want to invest your own money, but you must get the balance right between your income and outgoings, but still expand and grow.
Once your business starts to show profits, it’s a great sign that you’re on the right track. This means your product and services have been accepted in the market. Rather than digging into your personal reserves, it may be time to consider borrowing funds to make the business grow even further. The business should be able to cover any borrowings, if not you may need to look at other things that may require a little tweaking, such as your services or products, to give you more margin. Borrowing money means you also have tax deductions; these deductions and expenses will reduce your taxable income and give you more equity in the business with more assets.
You are more important to the business when you are relaxed and refreshed. Sometimes spending the money on a holiday will do more for your business than putting that money into new equipment. The business should borrow the money and it can then be balanced against payments and future profits. You can receive loans for all sorts of reasons, including that holiday.
There are many ways to finance the business. You can use a Finance Company to finance invoices and collect the payments for your goods early so you can do more with the money. This is leveraging, your projected cashflow. Giving a bit away in interest to a lender can mean putting your cash to work earlier and buying more stock to sell or equipment to build. There are fewer benefits in using your own cash for this purpose. You will need licensed financial adviser to help you with your strategies and advice.
If you want to buy 100 items and you can bulk buy at a discount, you will make a lot more money and better margins by financing the 100 items than using your available cash, rather than buying 10 items at a time. Apart from possibly missing the advantage of the bulk purchase you will have less stock to do spot deals quickly. Making opportunities and taking them quickly is key to good business.
Just because you own your equipment doesn’t mean you are making the most from your assets. If you have the cashflow, owning half the equipment and investing the other half in more equipment could mean you can do twice the amount of work with twice the profit.
Usually, purchasing smaller items for cash means you are more likely to keep it and run it into the ground, while incurring costs in maintenance and loss of efficiencies. Rolling over leases regularly means you have the latest equipment, covered by warranty, producing the best quality products with technology of that time. Faster, more reliable products with the leading technology also makes for a very good sales pitch.
Many people say they want to be debt free in their business. But waiting to pay it all off can be a false economy as the equipment ages and becomes less effective. Then there is the depreciation factor. Depreciating your equipment until it is worthless means you have no real investment in the business, with the plant and equipment being unsalable and old.
In business there is one rule you should always consider. If you use your own money, then you are losing the opportunity costs of what that money could have generated for you in other areas.
Risk and profitability are directly related. The higher the risk, the higher the reward. Proof of concept is always carried by the owner, and the funds to purchase the equipment is usually supplied by the development of the business. But after the risk is reduced, you should consider using financial services money to magnify your reward.
Managing debt is not necessarily about paying it down. Utilising the level of debt is sometimes the smartest way to grow your business.
As discussed previously, your own money should be used in areas of the business that have the highest rate of return. Such as:
- Buying a database for instant growth
- Building customer lists
- Research and Development of new products
- Increasing Staffing or Education of staffing
- Developing new strategies
- Testing new channels and business opportunities
Do your numbers, know your market and shoot for what you think you can afford to support. No sense in biting off too much. Then use finance to expend beyond your original estimates. Don’t overextend your cost base and monitor your income against this constantly.
Use finance to leverage products and equipment, keeping in mind that you need good cashflow to cover your back. To do this you need a clear business plan.
You can take the challenges out of business by maintaining good and consistent management strategy and surveillance. And then treating yourself when you are on a roll.