Small Business Economics And Finance
One of the main reasons a new business venture fails is basic small business economics – usually under funding. Essentially not having the requisite money to set up the venture and see it through to a position where cash flow becomes sufficient to take the business forward by itself without further injection of capital.
One of the reasons you have to produce a sound business plan is so that you can analyse your financial predictions. You cannot beat putting down on paper the facts and figures related to the start up and development of your business from concept to it being ‘up and running’.
There are two main areas for small business finance to consider from the off.
- Set-up costs
- Ensuing cash flow
Set up costs is the easier to calculate inasmuch as much of this will be based on cold hard facts, or at least figures that can be produced from reliable sources. For example if you are establishing a shop you will know how much your rent and rates are, how much equipment and stock will cost. Any gaps such as power, communication costs etc can be gleaned from conversations with your accountant (or even solicitor) who will most likely have comparable facts and figures to hand from other clients with similar businesses. Items - such as marketing and public relations (P.R.) - are a question of budgeting based on available remaining funds after the definitive costs have been allowed for.
Cash flow, however, is more of a ‘wet finger in the air’ calculation. You may find your accountant (or solicitor) helpful again but likely as not this will be a question of you making your best ‘guestimates’. To understand how you can manage cashflow effectively I recommend that you talk to other people. The best bet being people who are in the same line as you are planning to be in but are located elsewhere (away from any possibility of you being their competition). You will be amazed at how helpful others can be.
When estimating specific areas, such as stock purchasing and control, then treat this as a costing/purchasing exercise. Speak to real suppliers and don’t forget to negotiate. After all you are dealing with businessmen. Shop around just as you would in your personal life. Don’t be frightened to ask for a credit facility. Chances are that you’ll get turned down flat initially but if you don’t ask, you don’t get, as they say. Besides a seed will be sown that you will be looking for credit facilities in future and you will have opened the door for revisiting this issue in due course – once you have established a rapport with your suppliers. In this regard make certain you pay all your suppliers in a timely fashion. Your reputation will precede you, mark my words.
Look at your margins and BE REALISTIC whilst remaining COMPETITIVE. Elsewhere we have mentioned U.S.P’s (unique selling points) and pricing may be one of yours.
Small business economics are driven by more than you calculating turnover minus total costs. Cost Price minus Selling Price doesn’t tell the whole story. Your costs include operational overheads, VAT and other possible taxes.
If your sums don’t add up and you can’t be competitive because, for example, you cannot get premises at a ‘do-able’ price, or buy that piece of equipment at a steal on e-bay or remain competitive whilst making sufficient profit then forget it.
Another aspect to small business economics you'll learn is that a good credit history is extremely essential. Also have a contingency fund because that ‘rainy day’ will come sooner than you think. An emergency will arise or your takings will not be as you have budgeted for. An injection of readily available cash that you have set aside might be all that’s needed to get you over a temporary hump. And you’ll be thanking yourself for having had this foresight. Having an open line of credit or a business credit card in place can also serve you well when times are a little tight.
Whether we're talking large or small business economics remember that ‘a fool and his money are easily parted’. Money left in the bank or invested elsewhere might be a safer bet. Don’t let it burn a hole in your pocket.
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