Many entrepreneurs that venture into their own businesses for the first time often have a rude awakening. They find out too late that their biggest problem is not in managing the business itself, but in managing their business finances. Poor financial management has been the cause of many a new business tanking within a few months, no matter how great the business idea.
When you start a business, you want it to be a success in the long term, and that means financial literacy even if you hate math. Below are three important skills for managing your business finances.
- People skills
Before you can manage your business finances, you need to have money. When you first start a business, you might be able to get away with what you have in your savings account and small loans from family and friends. However, long-term success in business often means finding bigger sources of money such as banks, investors and/or venture capitalists.
If you are lucky, you know someone who is willing to back you based solely on your word that your business is a good investment. In most cases, you need to prepare a good business plan and projections for growth to present to them for approval.
That said, they are not always enough to carry the day. You also need people skills and an attractive personality.
It may sound a bit weird, but personality has a lot to do with successful fund raising. Loan officers, investors, and venture capitalists are people, so they are not completely objective. If the outcome of your pitch is uncertain, you can sway the balance in your favor if they like you provided your business is viable.
If you are a shy person or simply feel nervous about asking people for money, you need to practice your presentation skills. Write down what you want to say and practice in front of the mirror. When you feel more confident, present it to a family member or a friend, and ask for their feedback.
It is important to make a connection when you are asking for money, and while you are not exactly passing the hat around like Amanda Palmer, you are essentially doing the same thing.
- Accounting skills
Before you panic, understand that no one expects you to do your own bookkeeping and accounting if you do not know how. You can delegate accounting duties to professionals, just as you can hire professional essay services to write your content if you do not have the skills to do it yourself. In fact, it is more practical to do so because it frees you for core business tasks. You also avoid making any costly mistakes when tax season comes around.
However, you do need to know enough about accounting to understand what the numbers mean. You should know about terms used in financial statements so you have a general idea of your financial standing. A basic understanding of accounting will also help you see how your decisions affect your business and what you can do to improve the “bottom line.”
Accounting literacy also gives you enough knowledge to discuss important financial issues, potential growth, and plans with investors as well as other stakeholders. People tend to feel reassured with well-crunched numbers, and showing them that you have a good grasp of finances increases their confidence in your ability to look after their best interests.
- Budget skills
A big part of effective financial management is the ability to make a budget and stick to it. A budget is your most basic tool in tracking your money and controlling your cash flow in the short term, which in turn affects your financial health in the long term.
The most obvious benefit of having a monthly budget is showing if your business is profitable. If you budget X amount in expenses for one month, and you have Y amount left, you know you made a profit for that month. Your accounting books should also reflect this.
Of course, your business should not run on a month-to-month basis, which is why you also need an annual budget. Again, your accounting books can help you make a realistic budget for the year based on expenses and income over time.
On the other hand, if you are reading this article, chances are you are just starting out in your business with no financial records to guide you in making your budget. If that is the case, take heart. It is relatively easy to make a budget when you first start a business because you have fewer factors to take into account. You may not make a very good one at first, but if you stick to it, you will quickly realize what you need to adjust based on results.
Resist the temptation to cheat on your budget to cover up deficiencies in your planning. Running a business is often trial-and-error at first, so do not get discouraged. Keep plugging away at it. You should get the hang of your cash flow after a few months, so your budget plan should become spot on.
These three skills are by no means the only financial management skills you need. However, they are the most basic ones you need with which to start your business on the right foot. Cultivate these skills as early as possible, and you will be well on your way to financial success.