Accounting and Financial Advice to Help Grow your Small Business

Many skilled people go into business because they are a great plumber, gifted lawyer, or talented cook. They decide to open up their own company and be their own boss. Then, once the business is born and reality sets in, they realize the skills, tools and strategies it takes to become a great business owner or manager involves much more than being a skilled or talented tradesperson.

What they usually don’t know is the how to make the move from being the talent of the business into that of being the owner of the business. What does it take financially to move or go back and forth between the two roles? Let’s look at some of the financial factors that impact this process.

Managing money and finances comes down to how you decide to allocate resources. In business, an owner has a certain amount of resources available to them and their primary job is to allocate those resources. Successful business owners know it’s not a lack of resources but lack of resourcefulness that attributes to most of their challenges.

Growing your business will always require cash in some form so the ultimate question is, how will you finance your growth and then how will you manage and distribute those resources that will maximize the cash flow of your business?

Financing growth comes from 3 primary sources:

  1. Lender – Can you partner with a bank to provide you with the financing you need? This form of financing will cost you money in the form of interest which is simply rent on the money you are borrowing.
  2. Investor – Can you find someone that is willing to invest in your business? Some investors are silent while others are more involved. This may impact how decisions are made within the business. This form of financing can cost you money in the form of interest or if stock is involved, in the form of ownership, which also sometimes means someone else is sharing in the decision making.
  3. Owner – The owner can fund growth one of two ways:
  • Like an investor, the owner puts his own money into the business.
  • The owner diverts, postpones and reallocates resources by putting more money back into the business by leaving money in the business as opposed to taking it out of the business for their own personal use in terms of a payroll check or draw.

The average business does not make a profit for 5 years, yet some owners prematurely take money out of the business, drawing a large wage. This is different than an established business where the owner should be taking a regular wage or draw.

One mistake that causes some business owners stress is they create a personal lifestyle that requires them to withdraw X amount of money out of the business every month. This makes cash tight within the business causing them to panic at the end of the month wondering, “Where is all the cash going?” Sound advice from a financial perspective is to wait until the business is financially sound before drawing funds from the company and to live within your means so you have the choice to withdraw or leave funds in the business as opposed to having to withdraw them to support personal commitments you have made. Raise your standard of living only once you now the business will consistently keep producing at a desired level. You don’t want to increase your standard of living without that because if business goes dips or you only had a temporary spike in business that won’t continue long term you may find your personal financial commitments difficult to make.

Once the owner decides where the financing is going to come from they will have to be able to manage cash flow. Cash flow can be affected by:

  • Sales – How much will sales be, will the numbers increase and how are you going to increase them? Have you down a sales forecast to determine how many customers you need, or the average dollar purchase per transition, or how many prospects you need, and what your conversation ratio needs to be to acquire the amount of customers you need to hit your goals. How long will it take you to obtain these goals and how does that impact your cash flow or financing needs.
  • Expenses – When a business is growing so are the expenses. You have to make sure they are not growing as fast as or faster than your revenue.
  • Accounts Receivable – You may be selling a lot but are you collecting the bill or cash quick enough to pay your bills.
  • Accounts Payable – Are you able to pay your bills on time and can you manage your payables so there is always cash in the checking account?
  • Inventory – Not all small business have inventory but if you do, are you turning your inventory fast enough? Keep in mind inventory is a form of cash until it is sold.
  • Owner’s Compensation – While you are growing your business, what do you need to support your standard of living, how much do you want to take home, could you live without taking a wage or what could you get by with, if so how long? Are you eventually going to want to hire someone to replace you or perform some of your responsibilities? If so how will that impact your bottom line, what additional costs will you incur, how will you have to reallocate resources? How much are you willing to leave in the business so it has the resources to grow and create wealth for you long term and not just short term?

To sustainably grow your business you will need to make some knowledgeable choices. This may require you to switch from the talent hat to the owner hat, on a regular basis allowing you to work ON your business or IN your business whichever you prefer.

To learn more about how to financially navigate the future growth of your small business contact us or call 262-796-1040.

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