Financing a Business
Most businesses need to make a profit to continue to exist. Even ‘not-for-profit’ organisations, or charity organisations, need to at least cover their costs. Costs can include staffing, travel, purchasing items to sell, marketing, fuel bills, and so on. Costs can often be hidden, so it is important for any business to be thoroughly aware of the costs involved in what they are producing or selling.
Every business needs money to get started, and money to keep going.
Businesses typically start with an injection of some money that may come from the owner(s), investor(s), borrowed funds (e.g. from a bank), or a combination of these things. This initial amount of money can be very small or very large. Some businesses commence with no more than the meager savings of an individual owner, while others may commence with borrowings that exceed what any individual might expect to earn across an entire lifetime.
The amount of money invested should always be less than the value of the business.
A significant amount of liquidity should be kept in reserve. Don’t spend everything you have available. Businesses are often started with a budget that may be based upon spending only between 50 and 70% of the finance available; and keeping 30 to 50% in reserve.
It is important to recognise that cash flow is not only affected by the rate at which money flows out of a business; but also the rate at which it flows in.
Any viable business will have both debtors and creditors. Some people or organisations will be taking money out of the business, and others will be paying money into the business.
There needs to always be a balance between what is being paid out and what is being paid in.
If a business has more money owed to it than what it owes to others it should be seeing a profit - but that is not always the case. Consider a business that tolerates customers delaying payments for months while employees, contractors and suppliers are always paid on time. It is feasible that more money may be spent each month than what is received. Over time, this can lead to a depletion of cash reserves.
Also consider how you are paid. If you have a business selling books, for example, every time you sell a book you will make money. But say you have a business offering a longer term service, for example, painting and decorating. You may not be paid for weeks or even months if you are painting a large building. If this is the case, you need to carefully balance your finances to ensure that you budget for the months when there will be no income. You may have to ask for a deposit, or part payments for work completed.
Are you looking to start a business. Look at our 100 hour course on Starting A Small Business.
Are you looking to expand or move a business forward, or improve your contribution to it? Look at this selection of courses covering areas such as running an office, marketing, supervision, and business practices:
View our full range of Business And Management Courses here.
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