Interest in starting a business has grown after the pandemic. More people have taken the initiative and gotten into business instead of doing a day (or night) job. These people have lost their jobs as the virus spread, having to stay at home and being unable to earn, which motivates them into starting up a business.
With the larger number of startups, it has been seen that many businesses have also failed. Part of it is because competition is running some people out of business while some businesses cannot survive because the owners do not have the right skillset for running a successful business, such as digital marketing or financial planning.
Many others fail because of a lack of funds.
We would like to encourage more people to venture into working for themselves, and therefore, we do have some suggestions which can help you to improve your finances, either by raising more money or by being more aware of how to save it.
We have put together a list of 10 things or ways that will improve your finances and let you start or run your business with more success.
Have A Clear Business Plan
Before you start anything, it is of the utmost importance to have a comprehensive business plan. Whether you are going to be self-funding your business or going to an outside source, a business plan is critical. Writing a business plan is one of the trickiest parts of starting a business and often the biggest difference between a successful and a failed venture.
There are many parts to a business plan. As Judah Karkowsky puts it, it begins with an executive summary that describes the business, the goals of the business, and the methods used to achieve them.
Company description is the next part which covers the problems solved by your company and what makes it the best choice for executing the solution.
Market analysis is written to compare the competitors and analyze the market you will target. Multiple analysis tools are used to make a detailed assessment, including market size, growth rate, and trends, etc.
The marketing plan mentions the methods of promoting your business you will employ, the duration, and the budget for it.
The financial plan is the most important part of the business plan. No business can run without money; this part includes all the aspects of money, such as sources of funding, allocation of expenses, and sources of income once the business is running.
Many other parts should be included in a business plan, which can be found in detail here.
Determine Your Required Funding
This step is very important, as it will decide how much you need to meet the costs to establish your business. Before raising funds, you need to know exactly how much you need.
This part may require taking the help of a finance professional to help you calculate the costs of materials, personnel, taxes, and the inflow of cash. We advise you to have a minimum surplus of 35% investment from your required calculated funding after considering inflation.
Personal savings should be the first source of funding for any business, regardless of the size, structure, and plan of the business. This is because before you can go to any other source to get funding, you have to do some groundwork, which will require money.
This is risky because most businesses fail in the initial phases during the planning and research, and you can lose your savings if you invest more than you can risk. Therefore, it is necessary to only invest an amount you can risk losing, and if it is not enough, you should be prepared with other sources to fund your business.
Family And Friends
Family and friends can also provide support during the initial days to raise some capital for your venture. This can be risky as well, as not only does it involve the savings of other people, losing this investment can end up in strained personal relationships.
Loans can be offered as personal, or business loans, based on which stage your business is at. There are also 2 types of loans, which are secured or unsecured. Secured loans are against personal or business assets you own and have a lower interest rate, but they risk losing the asset in case the loan cannot be paid back. A commercial equipment loan is an example of a secured business term loan.
Unsecured loans are harder to get, as they require a guarantee and often come with higher interest rates. The guarantor will be the one who has to pay in case the loan cannot be returned in time. Many banks and government organizations offer these loans, and there are organizations that will act as a guarantor.
Crowdfunding is a popular option to increase funding without losing significant control of the business. It can be either reward-based or equity-based.
Reward-based crowdfunding allows the business to offer rewards and services in return for investment. These rewards can be the product, meeting the business owner, an event, or even participation in a talk or interview. The risk is low, and the options to pay back are easy in this case.
Equity-based crowdfunding offers shares of the company in return for investment. This form of funding often targets an everyday investor to be a part of the company alongside venture capital firms and angel investors, which lowers the risk for the investor. These investors exchange their investment for greater returns in multiple forms.
Venture capital firms provide investment in returns for shares in the business based on your business plan. The business plan is most important in this case, as the competition to secure capital from these firms is high. The biggest benefit of this investment is the number of funds it can raise, as well as expert advice to run the business can be found from the firm.
There are many VC-backed businesses currently running, such as Skype and Deliveroo. Securing a VC backing makes it easier to get bank loans, and it ensures the success of the business, validating your business plan and providing expertise and funds to run the business.
Angel investors are individuals with high net worth, and they can offer significant amounts in return for equity. While the investment may not be as large as venture capital firms, there is lower competition for securing this capital. Some individuals can even invest based on personal relations, while others prefer only guidance from their professional advisors.
In either case, there are more angel investors as compared to venture capital firms, and they have fewer ideas being pitched to them. Uber has held angel investments in the past and shown the success and significance of this particular source.
Many grants are available for businesses from the government and other organizations. There are schemes in Europe such as COSME (Competitiveness of Enterprises and SME), which can be found on the European Commission website. Some competitions can also provide funding to the winners, similar to grants.
The benefit to getting grants is that there is no acquired debt or loss of equity. Your business remains your business, and you still get more funds to run your business successfully.
Keep Up-To-Date Accounting Records
One of the most important things to do is learning basic accounting and keeping a detailed record of expenses, debts, and credits. This is essential so you can avoid any shortage of cash flow. You will be prepared to make your clients pay on time, get more funding, save costs on accountants, save money on taxes, and become more efficient overall.
Here is How You Can Improve Your Finances before Starting a Business
The most significant part of any business is the money involved in it. Before starting, you must have the amount for all the basic requirements of setting up the business, which is often difficult to find for most aspiring entrepreneurs.
While it may seem impossible, you can manage your finances to fund your business. There are many sources of funding that can be used, starting from using your own savings and ending at money from the public or corporations.
Since money is the most common cause of business failure, especially for small to medium enterprises (SMEs), government organizations and private associations are providing more guidance on the starting stages of business, as well as on its growth once it starts running.
You may take guidance from your local SME counsel for more tips on how to manage business finances.