Those who undertake generally tend to mix their personal finances with those of their company and that is a mistake to correct. It is necessary to make a Viability Plan, being very important the Economic and Financial Plan. Here, a monthly economic allowance must be considered, by way of salary or personnel expenses, which could be assimilated to the minimum interprofessional salary that is established in the country.
The financial expenses inherent to the constitution of a loan destined to the investment and start-up of the business (opening commissions, notarial expenses, monthly interest on the debt) are reflected in the income statement also as a company expense.
It is a frequent mistake on the part of the self-employed not to allocate the expenses of their salary to the income statement of the company, because, especially at the beginning there is not enough money for it. The correct formula is to assign this salary in the MUST of the income statement, and also reflect in the BALANCE the item "Salaries pending payment" for salaries earned by the employer not collected.
In this way, the entrepreneur is not deceived regarding the profitability of his company when considering real expenses. A company can be profitable, but suffer from liquidity gaps that must be addressed.
What are the basic knowledge that an entrepreneur must have to manage successfully or achieve not to merge his business with regard to finances.
The first knowledge for an entrepreneur is that the company must generate treasury or cash from the first moment to meet current expenses. This is achieved when short rotation processes are foreseen in the sale of merchandise, products or services, which are the ones that produce money income.
A bakery, for example, being a company that sells bread and sweets for daily consumption, knows that it has to adjust its production to what it is going to serve the next day. Its collection period is very short, and that allows it to adjust purchases to demand, better managing the treasury.
When companies differ greatly in the payment period for products or services, because there is an implicit complex research development and set-up for sale, then greater investments are required that can jeopardize the liquidity of the company.
So the second knowledge is that the financing of the company must be suitable for short-term investments (necessary treasury or working capital fund) to medium (investments with amortization between 3 and 5 years) and long-term (investments in machinery, real estate and others with amortization over 5, 10 or more years) Who for now only has an idea and is about to undertake, which I would recommend evaluating before launching your business.
The creative ideas are much more important than money. Many real success stories have started from ingenious ideas that brought benefits to society, without prior money, without major studies, without having the "ideal" conditions for entrepreneurship.
To keep in mind: the money is in selling excellent products or services that the market demands. It is the market that gives the definitive answer to a product or service. For this, the entrepreneur cannot fall in love with his idea without knowing how the consumer demand could be, who is the one who pays. You have to study the competition, know your market niche based on the VALUE it brings to the potential customer, assess the distribution channels and know the trends to anticipate, as far as possible, changes.
In addition, the company must be visible, having a good corporate image and developing appropriate Marketing strategies. You also have to earn trust through excellent after-sales service. The testimonials and recommendations of your clients are invaluable.
Can I start a business financing the entire investment?
I do not advise it. In the first place, if an entrepreneur needs financing and goes to a bank, in addition to the viability plan, the Bank will assess the ability to repay the loan and the degree of self - financing. How to claim one hundred percent external financing without risking any of your own capital?
In addition, the higher the external financing, the more the financial expenses will be, so, in this case, the company is born with a financial imbalance, which will be even stronger at the beginning, in which there is a period between the start in progress and the generation of income and cash via sales.
Every month I have liquidity problems to cover fixed costs. How can you get cash without applying for a loan?
I have several ideas:
- A very sensible way that large companies are taking is to minimize fixed costs via outsourcing services. Services are subcontracted to other companies as production demand moves.
- Taking into account that the money or treasury comes from the difference between sales income, and expenses for purchases and payments, a cheap way to improve cash flow is by negotiating with suppliers for longer payment terms. Of course, we must strictly comply with what was promised, because bad paying companies end up being penalized with very short payment terms for their purchases.
- In case sales are very seasonal, for example, toy manufacturing companies, which in a very high percentage are concentrated in Christmas and Kings, it is convenient to have a credit account that covers liquidity gaps and payments for fixed monthly expenses.
How can I end the short-term debts that are suffocating my business?
The key question here is simple: Is my business profitable, or is it not? If the business is not profitable, you have to study the causes and remedy them if you can. It may be an inadequate financial plan, expenses may be excessive, sales are not being boosted, competition is very strong, etc. etc.
If the business is profitable even though it is the treasury that fails, it will be necessary to study whether the working capital is being financed (purchases, warehouse, customer debts, etc.) properly. A credit account is adequate to finance working capital. A term loan of 6 or 10 years is suitable to finance investments in fixed assets.
And if the company is profitable, it will also be necessary to consider an increase in own capital or with capitalist partners. Let's not forget that companies are born to generate resources and be profitable, because there are many ways to generate profitability with our money, with less risk.
To cope with the growth of the business I have to resort to external financing. Is it advisable to support the future of the company in excess debt?
The recommended percentages for external financing is a minimum of 30% from own resources and a maximum of 70% from external financing.
What advice would you give to a person who is thinking of starting a new business?
To finish, I make a reflection to you, entrepreneur who is reading this article:
Even if you are in love with your idea, be realistic: starting a business idea requires resources. The most important resource is yourself, your ideas, your knowledge, your time, your relationships, your experience. Also your money.
Do you have any money to use for your business? Limit the amount that you are going to allocate to business activity. Do a market research, ask, check, contrast, know the competition, look for that gap where you can develop professionally without having to compromise all your savings, or those of your family. Start small, with little financial need. And little by little, it grows. Did you know that more than 50% of sole proprietorships or family businesses close in the first year? Did you know that 80% of SMEs fail before 5 years and that 90% do not reach 10 years?
What are the causes of failure of entrepreneurs?
The analysts clearly indicate this: The deficient management capacity of the owners of SMEs.
The keys are in the training of entrepreneurs in the management of their company: knowledge, management systems, appropriate approaches to marketing and advertising and efficient operating models are required.
The lack of foresight regarding payment commitments for purchases and investments and the difficulty in accessing external financing is a constant for entrepreneurs.
If so, ask yourself the following question: How much can I put into my business without fatally compromising my personal balance and financial ability, or that of my family, should my business fail?
Define in advance the amount of money you are willing to lose, because the profits will come to you over time, if your business idea works.
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