Article by www.entrepreneur.com
A report from the U.S. Bureau of Labor Statistics cites two primary reasons why businesses fail — lack of proper planning and poor leadership. In a way, both these factors are tied to the decisions made by the business owner. Poor decisions, like too much debt or unviable investments, can dramatically alter your company’s fortunes. In this article, we’ll take a look at some ways business owners can keep their financial books in the black through smart planning and earnest leadership.
1. Equity vs. debt.
One of the perennial dilemmas that business owners face while raising funds for their business is the choice between equity and debt. Raising funds by giving up equity might seem attractive to a risk-averse startup businessman. However, giving up too much equity dilutes your own stake in the company and can be a bad choice over the long term. Debt, on the other hand, can be repaid and lets you retain your control over the business. In other words, although raising debt can be painful in the short term, it protects your stake in the long term and can thus reap larger dividends.
2. When to choose debt over equity.
A number of startups in the web and tech space today do not have a clear monetization policy during the launch phase. Companies like Twitter went through several rounds of fundraising before they started making money. It is a good idea to give up equity in such instances since these businesses do not have a clear revenue stream in place to start repaying their debt. However, if you are a startup or a small business with an established revenue stream and a steady cash flow, there is no reason why you should choose equity over debt.
3. How much debt is too much?
There is a limit to how much debt a business can take. It is worthwhile to note that business income is not always going to be consistent. Market forces outside your control can grow or dent the demand in your product or service. It is hence a good idea to only take debt that can be paid back even if you stop making money for a month or two. A good business owner knows to maintain a fair balance between money raised through debt and cash infused through the sale of equity.
4. Keep low working capital.
Working capital is the cash necessary to simply keep the business operating. It is essentially the value of your current assets minus your current liabilities. Building your product requires capital infusion and without a paying customer, your product is a liability waiting to be liquidated. Businesses that offer lengthy credit periods to their customers require high working capital. On the other hand, if you demand upfront payment for your product or service, then the liquid assets in your system are higher than liabilities. You would hence require low working capital. Tweak your business processes, including credit periods, to bring down the working capital required to run your business.
5. Insist on recurring invoices.
Modern invoicing software applications let customers set up automatic invoicing on their purchases. There are two big pros with using recurring invoices for your clients. Firstly, it brings down the accounts receivables of your organization. Although it is customary to mark accounts receivables as an asset in your accounting books, it can be a liability for small businesses that do not have the resources and the means to get paid on time for their rendered services. Secondly, automated payments establish a level of consistency in your income statements. This helps your business plan with better demand planning and logistics management.
The tips provided above can help your organization bring down the owed debt without compromising too much on your business ownership. Also, by tweaking your credit practices, it is possible to set up a healthy business process that is better suited to take on the vagaries and fickleness in the market and ensure survival for the long term.
Article by www.entrepreneur.com