The 5 Most Important Financial Decisions for Entrepreneurs

Starting and running a business requires not just an entrepreneurial spirit and a solid business plan but also a sound financial strategy. Financial strategy. It certainly feels like a fix-it-all solution ... a sound ‘financial strategy.’ But in real life, it is not that simple with pressures from so many business fronts. Entrepreneurs are often faced with numerous managerial, planning, and strategic decisions that can have long-term implications for their business’s success. Many times, owners neglect financial matters and relegate them to the back burner. Getting absorbed in the day-to-day operations of the business is a wonderful thing indeed, yet the financial engine keeps a business running. Regardless of the innovative approaches to running a business, regardless of a flawless product that can change the world, regardless of the marketing magic, the cash flow of a business is its lifeblood. In this article, we shall try to understand the most critical financial choices that can help entrepreneurs navigate the complexities of business ownership and set a course for sustainable growth.

Five Most Important Financial Decisions

Here are the five most important financial decisions that entrepreneurs will have to face, when their business takes its first baby steps, to avoid falling into financial uncertainty.

Is Now the Right Time to Start a Business?

It remains not just a question of doing business and making money; it is also a question of timing. But of course, we focus here on money matters. The matters of an individual’s self are another matter beyond our scope here. The most important aspect of this first major financial decision any entrepreneur must make is timing. ‘Is the timing right to start a business now or isn’t it’ is a constant question in a prospective entrepreneur’s mind and heart. With respect to the mind, this involves carefully considering the economic conditions, personal financial situation, and whether you, as an entrepreneur, have the necessary resources and stability to launch a new venture. It’s a crucial question because owning and running a business is a life-changing matter, not a matter of doing business out of desperation for quick money. It can take years for a new business to become profitable. Many entrepreneurs maintain their regular jobs while building their start-ups on the side until the timing is right to take the leap. Many entrepreneurs put things on hold that they could’ve had: a child, a marriage, that cruise vacation in the Bahamas, that new home, etc. The heart of the matter is of a personal nature and certainly is the biggest factor in deciding the course and foundation of a business to come.

Do You Have a Big Enough Emergency Fund?

‘How big is big enough?’ should be the subsequent question to this query. Establishing a robust emergency fund is essential for entrepreneurs to weather unexpected challenges and slow periods. It’s not just about scraping money together for emergencies; it’s also about creating an investment pool. Still, it’s generally recommended to have 3-6 months’ cash for personal and business expenses set aside in an easily accessible account. This financial cushion can provide peace of mind and ensure the business can continue operating through difficult times. But then, the question can also overlap with personal finances vs business finances. For small businesses, the difference between both may seem like a trifling matter, but when it comes to emergencies, it can be a deal-breaker when personal money is used for business expenses that can create personal problems. Therefore, it is critical to draw a line separating the personal and business bank accounts!

How Much Revenue Will Be Reinvested into the Business?

Deciding how much revenue to reinvest back into the business is a critical financial decision. This is because, while it may seem very wise and progressive to see how adding more money to the business can result in better returns, often, this doesn’t pan out in real life. For example, is it feasible to add extra equipment or billboard ads for a business where there’s hardly a market for its product or service anyway? Growth is key to long-term success, so entrepreneurs must balance taking profits versus reinvesting in areas like technology, marketing, employee development, and the emergency fund. Careful analysis is required to determine the optimal reinvestment rate. It is also important for an entrepreneur to have an overview of the market forces in operation, to know if it makes more sense to divest to stakeholders rather than to invest in a troubled business model. Sometimes, when a business is unworkable, it makes sense to take dollars out.

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How Will You Fund the Business?

Securing adequate funding is obviously a major challenge for entrepreneurs. Options include venture capital, private equity, SBA (US Small Business Administration) loans, bank loans, friends/family, personal savings, and business lines of credit. It may seem there are many choices, but the deception of many choices can be dispelled when Entrepreneurs carefully evaluate the tradeoffs of each funding source in terms of company control, cost, and long-term implications. Money from family/friends is a much safer bet, especially when it concerns a small business, but if the business goes downhill, it can ruin personal relationships and negatively affect mental well-being. For certain situations when money may be needed for short-term expenses, borrowing from social relations makes more sense than from banks which charge interest. But this depends on the Fed Rate, which at the moment is around 5%. It is not conducive to start a business that doesn’t guarantee returns for a year. SBA loans are the best bet, especially when federal state laws give generous terms for small businesses as they employ the highest number of workers in the economy. If, however, your business has grown into a medium-large size company, it makes sense to have bank loans or equity sales to shore up finances on a long-term basis. It makes perfect sense to get a grasp on bankruptcy laws as a backup plan, which can help your business in times when it suffers from unpaid loans.

How Will You Manage Cash Flow?

Maintaining positive cash flow is essential for business survival. There are many strategies to tackle problems with cash flow, including tightening the cash flow cycle by collecting receivables faster and stretching payables, as well as arranging for financing options like lines of credit before they are urgently needed. However, the important thing is to forecast cash flows and plan accordingly. Proper cash management and forecasting are vital skills for entrepreneurs, who need to have a keen grasp on the business’s cash flow. This forecasting is possible when an annual cash-flow summary is created for the express purpose of going through the data and finding patterns. The real skill, however, lies in seeing where risks hide from complacent eyes. It is then that the real skill of an entrepreneur can be judged based on his keen grasp of finances. But, of course, a financial expert can make the task a lot easier for an entrepreneur like you, who must look at the overall picture of your business, the market, the customers, and the product in a four-fold view.

Conclusion

There’s no proper way to conclude an article dealing not just with the financial aspects but also with the strategic aspects of business. Finance is not just about a numbers game; it is a means of business prosperity and survival and an indicator of the health of an entrepreneur’s start-up business. As compared to established businesses, entrepreneurs face many risks, and rewards remain in a state of limbo for months on end with no relief in sight. Only when such a critical situation is experienced does that creativity in finance come into being, determining the success and failure of the start-up business. We hope our article will help you in making the right choice.

We would also advise you not to ignore the role of insurance in helping you decide what works best for you. With insurance policies, you can also secure an alternative source of money when your business suffers an insurable loss. To learn more, just give us a call or drop us an email. Our keen and experienced insurance agents will guide you with advice on what kind of insurance policies your business needs when it faces events and accidents beyond your control.