Financial Decisions: Raising and Protecting Your Cash Cow
Whole books have been written on the myriad topics related to company finances. Here are a few things to consider so that you are prepared when the time comes to make strategic and operational financial decisions.
Financing is a top issue for all companies, but the good news is that the methods for finding funding expanded after banks became more risk averse, and innovative lending and funding approaches emerged to meet the needs that the banks weren’t prepared to address.
Making financial decisions to secure funding is usually triggered by three events:
Starting up the company: You need to decide how much money you need and what is the best source. In addition to conventional sources of funding, such as bank loans, family, and friends, you have access to other sources such as crowdfunding, microfinancing, and peer loans.
Operating the company: You may need to seek funds to help you manage your cash in tough economic conditions or slow seasons, or to acquire new assets. Funds for acquiring assets can come from your current cash flow or from a loan or investor.
Growing and expanding into new markets: You may seek financing to support your company’s growth (size) as well as its expansion into new markets. Funds for this purpose come from internal cash flow or external investors such as private equity or venture capital firms.
Sustaining cash flow
One of the most valuable tools for making financial decisions is a cash flow statement. Why? Because making better decisions is just easier when you can see how much money is coming in, how much is going out, and how much you have left at the end of each month over a 12-month operational period.
Cash flow statements are used to manage growth and make big purchases. For that reason, knowing how your cash requirements match up against monthly revenues and business revenue cycles over the year enables you to better finance your company’s growth and make decisions about acquiring new assets. Templates for preparing a cash flow statement are available online.
Avoiding the five most common financial errors
The fortunes of a company are based on two major factors. The first is the relevance of a company’s purpose to what’s important to customers, and this leads to the second: the company’s profitability. If you clear those hurdles successfully, the next step is to ensure that the money is managed wisely. Here are the five ways financial decisions fall down and ways you can avoid these traps:
Overestimating projected revenues: Err on the conservative side so that, if your customers aren’t as enthusiastic as you think they’ll be, you’re prepared.
Underestimating or not addressing your immediate budgetary requirements: There is a temptation to ask for less than you need, but doing so works against your success. If you need $50,000 to launch, ask for at least that much.
Thinking that, if you have revenue, you also have cash flow: Revenue means cash is coming in. Cash flow tells you how much is staying behind to cover surprises and unexpected expenses. Rely on your cash flow to see how incoming and outgoing funds balance out.
Forgetting about taxes and other regulatory costs: It’s especially easy as a sole proprietor to forget to set aside money for the taxman. Set up a separate account for your tax money so you don’t think you have access to cash that will be claimed by the government later.
Underestimating business development cycles: Every business is different in terms of how long it takes from the time you promote your services and products to the time you gain new customers, much less keep them. Research the average development time characteristic of your business and then use a conservative estimate when calculating growth or revenue projections.
Gaining experience in the marketplace helps. Over time, you’ll get better at deciding what lies ahead while managing what is in the bank account.