A business cannot run on ideas and passion alone, it needs money to fuel it’s operations and power its growth. And an excellent understanding of business finance is an integral element for business success.
To help you get more understanding of your finances, I will be sharing 6 facts on finance that i believe every entrepreneur needs to understand if they must succeed:
- Planning Your Finance helps you set realistic Goals for your Business: Your financial plan helps you stay in the loop of your financial reality. It gives an overview of your business’s financial health and potentials for growth. By planning your finance you’re better able to prepare for investment, manage a crisis or plan for growth. This is why you need to take some time to plan your finances, forecast future inflows and outflows, and tweak your forecasts based on changes in the market
- Using Personal Assets as Collateral is Risky: One of the first financial lesson every entrepreneur is taught is that s/he should always separate themselves from their business. And offering your personal asset as collateral to collect business loan is clearly against that lesson. The implication of such a decision is that if the business goes bankrupt or defaults on the loan, that asset will be seized, rendering the business owner huge personal blows. This is not to say this practice cannot be helpful, but you must be aware of the risks of such actions and be ready to substitute your personal assets with business assets as quickly as is possible.
- Net income is not cash flow: The focus for many business owners is to focus on their net income, but that can often be misleading. As an entrepreneur you must know that your net income is the same as your cash flow. Cash flow is a more important metric to focus as it is what determines whether you will be able to pay your suppliers or employees.
- Debt Can be A Tool: Debt often gets a bad reputation, for many business owners it is something to avoid like a virus but it can also be a really valuable tool too. Yes, debt when it becomes too high can kill your business but it is not something you can avoid as a business so make effective use of it. With proper planning (consult your financial advisor) it can be a stepping stone for your business growth.
- Every sum spent on inventory is that sum less in cash: You can be profitable in your profit and loss account but run out of cash. If you don’t plan your inventory properly it can be clog in your cash flow. It is always important to remember that whatever is in inventory isn’t in your bank account.
- Cash flow management is key: Don’t run out of money, thousands of businesses have failed because they failed to effectively mange their cash flow. You must know where every single naira is coming from and where it is going.