4 Smart budgeting tips for new business owners

0
831

Business debt managing tips

If you have a business debt, read on. Here are some tips you can use to dig your business out from under

It can NOT be stressed quite enough.  Budgeting is the key to the financial success of “small business.”  Every business needs to manage its capital well.  When there is a realistic budget, and you stick to it, there will be enough money to grow your business.  Even though every business is different and there is no universal formula to create a budget for any business, sound budgeting consists of following certain financial principles that every entrepreneur can use. If you have a small business debt, click here to know more about budgeting for small businesses.

Save for a rainy day

This time-tested adage has saved many small business owners from going down.  However, the potential for surprise costs depends on how well you know your business market and industry. Half of all businesses will fail within the first five years of their startup date, according to the Small Business Administration.  The reason? Lack of financial planning, for starters. Hidden costs can show up in legal fees, tax compliance costs, insurance premiums, employee turnover, and competitor’s on the rise.  Researching all of the aspects of a small business will help prevent these unpleasant unexpected capital depletion costs.

An Emergency Exit Fund

Just like there are emergency exits in every public building, there are back up plans in place for every successful business.  A second chance is always welcome when it comes to a comeback.  Refrain from wanting to scale small businesses until and unless there is an emergency fund.

The rule of thumb for small businesses as well as for personal finances is to keep at least three months of living or operating expenses stashed away in a trunk.  Small business reserves should always be there.  Some analysts today advise even six months of reserves.  The more, the better. In case of natural disasters, market crashes, competitor scaling, or another unexpected occurrence in the market, even new technologies, can affect small businesses, and recovering will take some creative thinking and restructuring. Whether the company can wade through the storm without going under depends on how deep its reserves are.

Even when bankruptcy is the only way out for a doomed business, exit funds can be used to settle debts and protect the credit and loan interest rates of the small business owners.  Once banks see how well you manage debt, they will lend you more money and take greater risks with you.

Always keep your debts going down

Debt can be beneficial when starting out a business; almost every small business will take on a loan. Considering how much easier it is to secure a business loan than to find angel donors or venture capitalists willing to collaborate financially with a startup.  Small business loans are typically the avenues by which small businesses make their appearance into the marketplace.  Business credit cards are also one of the most frequently used financing schemes used by many a new company.

If you are a business owner and your business is in debt click here. Anyone can tell you it is best to pay off a loan as quickly as possible.  However, many business owners make the minimum payment on credit card debt and end up paying much higher rates with future creditors, running the risk of compounding the amount of the debt in a short amount of time.

You are your own employee

If you were working for somebody else, you would earn a salary, take out taxes, and hopefully receive benefits, right?  Why is it that many business owners don’t budget their own wages into the picture?  Employees make up a big chunk of a small business budget if your salary is not in the mix and counted as part of the operations cost and expenses, then the budget is not very realistic, and chances are, your business will fail.

A word of advice

It takes more than the above-mentioned tips to plan and maintain a stable budget.  All business owners should be trained in managing and analyzing their small business budget.  Delegating the budget to others will result in losing the ability to see loose ends.  Until your business is well off the ground and has proven to stay afloat, regroup when necessary, and grow, it is not a good idea to delegate the budgeting responsibilities.

When the economy is stagnant, and sales go down, businesses may end up getting into financial trouble by taking on too much debt.  Even when there is a booming economy, too much debt can have catastrophic consequences if an unexpected crash happens, such as the one in 2007.  Far too many small businesses are ending up in bankruptcy because they have been unable to manage their debt.  Determining your debt to equity ratio may be a way of knowing the relationship between how much you owe and how much equity you own.  To make this computation, add up all your debt, first.  Then you will need the equity figure which can be found at the end of the balance sheet.  The formula you need to use is: debt-to-equity-ratio = total debt/total equity.  If you owe $400,000 and your equity is $200,000 the ratio is 2.

What that means is that for every dollar you own in the business, you owe $2 to your debtors.  Consider debt consolidation and debt management programs to keep your debt-to-equity ratio optimal.  If you have a business debt, click here to find out what your debt to equity ratio should be.