10 Financial Concerns That Can Be Avoided By Proper Planning
Every business needs financial stability. Yes, cash flow is important, but not at the risk of losing control over finances. What are the financial challenges that a business, especially a start-up, is likely to face? Are you prepared to tackle them and survive any financial instability?
Here’s our list of 10 possible financial concerns that a business can encounter. We have also mentioned solutions, should you ever face any of these challenges.
#1 Insufficient working capital
For any business, working capital is the lifeblood that flows through its veins. A responsible entrepreneur must, at any point, have working capital worth at least six months of expenses. Without this money in hand, you won’t have the breathing space required to acquire new customers or build more products.
The easiest way to improve your financial situation is to try and cut your expenses by 20% and put that amount aside every month to build your working capital. If you’re just starting out, ensure that you are adequately financed.
#2 Underestimating startup costs
Most entrepreneurs tend to underestimate how much starting a business will cost them. Higher figures might scare you, and you might be tempted to underestimate your needs, worrying that investors may not be willing to finance your startup. The reality is quite different. Banks look for realistic plans when approving investments. If you borrow less money than required, you could run out too soon and will need to borrow again later.
Factor in all worst-case scenarios and estimate startup costs accordingly. You will only be delighted when half your fears are not realised. By borrowing the amount you know you really need, you are more likely to survive and grow.
Could you be mispricing your products or services? Entrepreneurs sometimes total up costs and then add on their margin. This might not always work, as the resulting price can be very different from the real market value of the product, putting off potential customers.
What is your selling point going to be? Do you wish to offer low-cost, mass-market products, or are you fulfilling a high-end niche? Consider how competitors are pricing similar products and keep your prices in the ballpark to attract customers.
#4 Offering too many sales promotions
It’s fine to offer sales or promotional offers to boost a sagging business. But doing it too often will eat into your profits. Watch out for the attraction of the short-term sales that will threaten the long-term survival of your brand.
If sales are sluggish, revisit your business and revenue model to find an appropriate solution.
#5 Sales are good but profit is low
This could indicate overspending or some hidden costs eating away at your bottom line. Are your expenses out of control? How can you get out of this setback?
Make sure you are buying the right materials at competitive prices from vendors who bring value. If need be, revisit vendor selection and old contracts to renegotiate prices. If you make a lot of online purchases, use free apps and tools, such as HDFC Bank SmartUp, to track your spends and streamline purchases.
#6 Late client payments
A large percentage of small businesses suffer from delayed payments. If it happens too often, it can eventually kill the business. You need to create policies and processes to circumvent this situation.
Avoid offering business credit to new customers. Make sure everyone is clear about payment policies. Incentivise early payments, offer multiple avenues for payment, and enforce late payment penalties. And do all this with a smile.
#7 Late payment of bills
Just as it is important to receive payments on time, it is equally important to pay bills on time. What could be the reasons for late payment? Could you be facing a cash flow problem?
Start by renegotiating your payment terms. Even better, look for customers with better payment terms. You must also make a monthly budget and stick to it. Set a day every week to go through payments and to sign checks.
#8 Bad cash flow management
Unorganised bookkeeping habits are a business’ bane. Managing books of finance is critical to run a successful business. Unfortunately, most small business owners are bad record keepers. Monitoring cash flow regularly can let you know in advance when you might need money. Do you find it difficult staying on top of your cash flow?
There are several free tools, templates, cash flow calculators, and paid apps that you can use to gain better control over your cash flow management. Have you tried HDFC Bank SmartUp yet?
#9 Monthly expenses
You know there will be monthly expenses, but entrepreneurs often forget the many hidden costs of running a business. There are employee wages and bonuses, licences, insurance premiums, equipment purchase/maintenance – and of course, regular utility bills to pay.
The best way to manage monthly expenses is to figure how much it costs to run your business for a month. Ask vendors and suppliers for discounts. Talk to others who run similar businesses and understand from them the possible hidden expenses, monthly spends, and other startup costs.
#10 Forgetting your own salary
You might have decided not to pay yourself a salary at the beginning, but you will need to factor it in later into your financial plan.
Set a date by when you can begin to pay yourself a regular salary, ideally within the first year. By setting this target, you will include it into your financial plan and ensure that all money is accounted for.
Finances are what make a business run. It is thus critical to be financially prudent from the outset and track your cash flows efficiently to stay competitive.
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Read more on how SME businesses can benefit this financial year.
* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.