The Beginner’s Guide to Entrepreneurial Finance

the beginner's guide to entrepreneurial finance

Are you excited about starting a business? Or is your mind overflowing with several exciting business ideas?

For any first-time entrepreneur the concept of starting a new business is exhilarating!

Several factors contribute to the success of a business; however, as you start your journey you will discover that the most complicated areas, especially for young entrepreneurs would be financial management.

Regardless of whether you would like to separate your personal finances from your entrepreneurial finance, secure capital, or manage cash-flow, there are several pitfalls that can arise.

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This quick guide to entrepreneurial finance for young entrepreneurs provides you with the basic principles of business finance and educate you on how to manage cash flow correctly.


Getting Started – Laying the Cash Flow Foundation

Cash flow is the term for the money in and out of the business. Before you start any business, you should make sure that you have money in personal savings.

Usually, it does not require hundreds and thousands of dollars to start a business, however, the chances are that you won’t make any profit right away (not to worry) and you should always put cash away for tax, in spite of your margins.

While a budget provides you with the cash flow’s scope, there can still come up many uncontrollable factors that may influence your plan.

Here are a few things that can help build cash reserve for 6 months:

  • Are you still in your day job? Now would be the perfect time to set aside at least 10% of your salary each month and start building your savings.
  • Make a list of all your monthly expenses; this will give you an idea of where your money is really going and where you should start to cut to save more.
  • As an entrepreneur, make sure you set cash aside for tax.
  • Start now. It is essential to create a pattern of saving weekly.


The Capital – Understanding the Inflow

Determine your capital sources ahead of time. If you are depending on your credit cards, cash reserves or savings to start a business, try not to fall into the overinvestment traps that many first-time entrepreneurs get caught in.

Regardless of whether it is a legal fee, inventory overload, office space, computer systems, license fees or stationary.

Once your business is operating, your capital investment will be all you have at that time. Based on your business, the startup costs could include money to land your first contract or funds to buy your first stock.


Avoid borrowing money from a source which will pressure you soon after you launch. Starting an online business or working from home are affordable ways to avoid falling into these pitfalls.

Instead, being a young entrepreneur, put your focus on your product or service and building lasting customer relationships.


Mastering the Outlets

Now that you have taken care of your capital investment, you have yet one more thing to worry about-handling your cash flow.

Although creating a budget can outline the expected cost, the market is changing all the time and therefore it is crucial that you become familiar with the cash outlets.

For instance,

  • Industrial costs: The cost to create and deliver your product, in particular money for obtaining the raw material, labor, storage space and shipping the final product to the marketplace.
  • Mixed and standing charges: Standing charges repeat monthly, in particular premise rental fees as well as employee salaries.


Creating an Accurate Cash Flow Projection

Every entrepreneur should learn how to accurately develop a precise Cash Flow Projection.

  • Cash inflow

When developing your cash inflow estimation, take time to answer these important questions

  • How much profit do you expect to make?
  • Do you have a clear action plan?
  • What problems can have a negative impact on your business?
  • Do you believe that the marketing strategies are linked to your cash inflow assumptions with regards to realism and method of operation?
  • How many days will it take before the money of a sale appears in your bank account?

The cash inflow projection estimates the business performance, it is the first step in planning, investment and hard work. If you master how to accurately determine your cash flow projection, you are on the road to success!

  • Cash outflow

While cash inflow projections play the main role in a business’ success, being familiar with your outflow will allow you to identify any leaks while managing your accumulated profits.

You will need to make sure that you effectively categorize your standing costs with regards to their consistency, account for all standing charges and make sure that each part of your expenses is clear-cut and simple to understand.

Your cash flow projection is not only an effective guide in helping you select the correct startup capital for your business, but in addition, inform you of the estimated expenses per month.

Comparing your cash inflow against the cash outflow can be useful to determine your business’ profit per unit time, therefore providing you with the best illustration of your performance.


Be Aware of Blind Assumptions

Making precise projections, means you will always be in control since everything would go as planned. Do not make any imaginary assumptions. For example, selling your service at $5 without researching what your competitor’s price is.

Deciding that you will spend 5 hours to develop a website concept without seeking advice from an expert web designer and inquiring about their per-hour rate could offset the projection.

Make sure that you do a detailed market research, obtain correct information and take into consideration the real –life obstacles that can influence your projection.

The most typical way to obtain blind assumptions is useless market research or inadequate research.

In addition, making use of old reports, to develop your estimation will result in many variations. A simple illustration is how a modification of cheque processing charges makes a difference in the exact cash obtained from your products or services.


Identifying Potential Cash Flow Management Huddles

Dividing your problem research into different areas will allow you to manage the market dynamics and any new inclusions when you’re in business.

However, executing a detailed pre-launch analysis of your overall business is a good idea for establishing a solid foundation for future analyses.

  • Prelaunch problem analysis

Have a look at your cash flow estimation a few times before starting your business in order to avoid several possible problems that may occur.

If you are the sole owner of the business, look at unexplained assumptions that have no proof or concrete basis quantification. It is advisable that you seek advice from an expert or someone that has been running a business for a while to help you go through your estimations.

Make sure that you have outlined all possible cost and compare them against the current market conditions. This can help you avoid omission and fallacy problems

  • Review your worst case scenarios on cash inflow and cash outflow and incorporate them into your estimations
  • Make sure the account payment and expense times are reasonable. This would avoid problems like being forced to pay large amounts of debts before obtaining payments for services delivered
  • Scheduled problem analysis

For as long as you are in business, you should constantly run a scheduled analysis. This would be the most accurate and practical test for comparing figures to your original projection. For example, if you had estimated on a $500 payment for electricity and used $600 instead, changing your amount upwards would mean that your projection would be more accurate.

While a simple change would fix the problem, any negative difference on your projection suggests a problem. It could be that you are making use of ineffective production strategies or your tools you use for production may use too much electricity.

Maybe your employees leave the machines running, regardless of whether they use it. An in depth analysis of every problem can lead to an accurate cash flow projection as well as improve on your production capabilities.

  • Understanding and classifying scheduled analysis’ variability

Usually, a variance is an indication of some ‘foul play’ in production and marketing. Sometimes, it is as a result of several delays and unpredicted events.

It could be because of:

  • Sales being less than the estimated value
  • Higher inventory expenses
  • Compensation and expenses above the projected value
  • Lagging sales income
  • Unforeseen expenses that are unable to match the miscellaneous budget
  • An inventory buildup that holds the majority of your funds in the form of asset

The objective behind an in depth cash flow analysis is determining the problem that had negatively affected your business. This would provide you with a precise indication as to what you need to edit and what you should change in an effort to optimize on your company’s total income.


How to Improve Your Cash Flow

  • Selling more and faster

If you are lacking progress as a result of fewer sales, why not opt to improve your marketing strategy? Or if you are not making enough profit you can always increase your product selling price.

First, do some research as you do not want to risk losing any customers.

Evaluating your sales process could uncover simple errors like negative buying methods or limited marketing. If you combine this with a suitable marketing strategy will help you to make better and faster sales every month.

  • Improving the cash collection model

Now that you have made a sale, you have one more thing to worry about-getting paid for your service rendered or product you sold.

Putting into action a more professional and firm invoice collection procedure will make it possible for all your customers to pay for goods and services on time, therefore improving the cash flow.

Simple problems in your contract terms and conditions might be the reason why you are lagging collections. Make sure your customer agrees to your payment options and that they pay a fine if they do not honor payment arrangements.

This will ensure that you will benefit every time someone falls behind on their payment.

  • Cutting expenditures

Look at where you can cut on cost. What can you do to make production more successful, while reducing cost-per-unit? Simple things such as making an investment in more productive tools play a main role in cutting down the overall business expenses.

  • Leveraging any possible discounts

Consider fines as negative discounts, and bulk purchase as positive discounts.

You can save money by paying your bills on time. When you purchase in bulk you can negotiate a discount, especially if you are buying on a regular basis from the same supplier.

This can help you minimize your production expenses and increases cash flow.

  • Optimizing your inventory

Taking a look at the inventory and labeling each product pave the way for optimization. The purpose in optimization is phasing off slow moving inventory and paying attention to what sells best.

It is also possible to use drop shipping to delegate your overall inventory management.

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For any young entrepreneur the main purpose of starting a business is to make money- and tons of it!

Regardless of what your niche is, if you understand how to manage your cash flow and how to accurately project it, your business will be a success.

Seeking advice from an expert or someone that has successfully been running a business for a while will ensure that you will have someone to guide you on your road to success!


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