Considering that money is the driving force behind most, if not all, businesses, it’s surprising how many business owners do not know how to manage their money. It’s one thing to be able to make money — but it’s another thing entirely to be able to grow your money with solid financial strategies. In fact, 82% of small businesses fail due to cash flow issues, according to a study by U.S Bank. And under close examination, cash flow issues are usually revealed to be a blanket term for a host of other financial problems.
3 Pieces of Financial Advice for Business Owners
Now, while you do not need an MBA to successfully manage your business finances, there are quite a few tips and financial strategies that you can and should study. Proper application of these strategies can help you properly manage your business finances. Here are three of the top pieces of financial advice for business owners.
1. Revamp and Optimize Your Pricing Strategy
Pricing is often where business owners run into financial problems. If you are not making enough money to meet your target margins, you will run into cash flow issues. To properly price your product/services, you need to first understand your true labor cost, and not just in the creation of the product/service but also in delivering it to the customer. With a proper understanding of your true labor cost, you can create a pricing model that makes sure your gross income covers your working capital and then some.
Also, if the money is not coming in at the right time, you can run into cash flow issues. For example, if you are getting paid for a project two months from now and payroll day is a month from now, you won’t have enough working capital to sustain your business. The solution to this is to pick the right pricing model (milestone-driven, fixed fee, value-based pricing, etc.) that allows you to get enough working capital at the moment even if you have to wait for your profits to come in at a later date.
2. Eliminate Low-Margin Clients
Low-margin clients are the bane of a growing business. A lot of business owners, especially when they are starting out, take on a lot of low-paying clients just to have a high work volume. While this is not essentially bad, you need to eliminate these types of clients as soon as you can and replace them with higher-value clients. Low-margin clients will take up a lot of valuable work time from your staff while paying you just enough for you to break even or even operate at a loss. Most business owners keep these types of clients because they cannot afford to lose the cash flow or due to struggles in finding better clients, but over time, they’ll cost you more than they will ever pay you.
3. Create a Cash Reserve and Apply for a Business Loan
If you didn’t create a cash reserve before you started your business (and most business owners don’t), then you need to start creating one now. Your business might be doing great at the moment but what happens if there is an economic downturn? Or a shift in industry focus that requires you to shell out cash to keep up? Having a cash reserve can help you manage these situations until there’s a turnaround. If you need fast funding and don’t have a cash reserve on hand, consider applying for a small business loan. Start by asking yourself what type of loan you need and how you’ll plan to pay it back. Asking these types of questions will help you choose the right loan for your business.
Long-term Financial Success
In the end, the most important thing to remember is that spending more money does not equal making more. It is how you spend it and what you spend it on that matters the most. Following these tips will help you create a long-term plan to successfully manage your business finances.
