If you are new to the business world, you might have some trouble with tackling certain base subjects. Namely, while business finance seems like a straightforward concept, a lot of business owners struggle with handling it. It might be that they don’t have a full understanding of it. Or, they might lack certain finance strategies in order to manage it in the long run. Well, to help combat both of those, we are going to first answer the question “What is business finance?”
Then, we are going to give you some helpful tips on how to set yours up and manage it properly.
What is business finance?
In short, business finance is the money you use to run your business. In fact, once you think closely about it, it is the basis of your business.
You will use it to purchase assets, pay salaries and provide utilities.
Overall, it is the core capital that helps your business run.
Now, there two different types of capital used for business: working and fixed capital.
Fixed capital is the money you need to start your business. That is before your business starts bringing money in.
The amount of money needed for fixed capital can range wildly.
If you plan on getting a small load in order to start a small business from your home, you only need to get a modest amount.
Just make sure that you have a full grasp of what business finance is before you get your loan.
But, if you plan on starting a large company, you might need millions in order to make it operational.
The important thing to keep in mind about fixed capital is that it cannot be easily changed.
Once you gather the required sum to start up your business, you won’t be able to increase it easily or withdraw your investment.
So, you need to do your best to first calculate the amount you’ll need.
And then to spend it wisely.
Working capital, on the other hand, can be a bit harder to understand.
To put it simply, working capital is the difference between your current assets and your current liabilities.
This capital represents the money that you have available to you to spend freely.
To make this a bit clearer, let’s first define current assets.
They are the assets that you can easily transform into fluid currency, in an accounting year.
Some of them can be:
- Bank balances.
- Short term investments.
- The stock of your inventory.
- Bills receivable.
On the other hand, you have your current liabilities.
These are the expenses you need to manage in order to keep your business operational, within the accounting year.
Among them usually are:
- Bills payable.
- Short term loans.
- Bank overdrafts.
- Payable dividends.
- Payable taxes.
Once you subtract your current liabilities from your current assets, you get your working capital.
This will be the money you will be able to spend on further developing your business.
You can even use it to hire professional movers and relocate your business to a new space.
The ways in which you can use this money are theoretically endless.
Tips to optimize your business finance
So, now that we’ve answered “What is business finance?” we can start tackling it.
But, before we do, it is important to note that properly managing the finances of an operational business is not easy.
No single article can fully go over all there is regarding salaries, taxes, loans, investments, etc.
People usually spend years in business school in order to fully comprehend all the aspects of running a business.
So, what we advise you to do is to further educate yourself and consult a business specialist.
With their help, you should be able to properly manage your finances.
What we’ll do instead is give you a couple of tips that should make finance management a bit easier.
Add 30% to your fixed capital
Once you decide that you want to start a business and you learn what is business finance, you will have to determine your fixed capital.
Now, if you are well-informed and careful, you should come up with a number that should sustain you for at least the first couple of months.
Nevertheless, we still advise you to add another 30%, at least.
New business owners simply cannot predict all the expenses they are going to have.
Furthermore, you need to take into account that mishaps and unexpected problems will occur.
And, once they do, you will need to have enough money to deal with them.
So, do yourself a favour and add 30% to your original estimate.
Keep track of your finance and inventory
Even if a business owner is not familiar with the term ‘business finance’, there is still no excuse for him/her not keeping track of it and their inventory.
Modern technologies allow keeping a close eye on what we have, which is why every business owner needs to use them.
If you need to use storage facilities, we suggest that you keep an online inventory where you update your stock regularly.
You need to know your current financial situation in order to make a sound investment.
Furthermore, when it comes to your finances, you should have a way to check them on short notice.
Set up a system with your bookkeeper so that you can know at all times how much working capital you have.
Are you spending enough on marketing?
If you are running your business properly, you should have a fair amount of working capital to invest.
Depending on your business, there might be obvious areas where a financial injection would be needed.
But, if you are not sure where to implement your money, we suggest that you invest in your marketing.
If there is one thing we can learn from modern business practices it’s that marketing investments pay off, be it by improving your online presence with SEO management or by developing new offline marketing strategies.
There is always something you can do to better promote your business.