Small Business Tips: From Determining Capital to Monitoring Performance, 10 Tips for Running a Small Business
The business must start with own funds and graduate to seek outside funding. This is a smarter choice. If the idea is good and if the entrepreneur shows promise, there are angel investors who will find it beneficial to finance a business. It is a win-win situation as it guarantees a good return on their money while supporting a new business.
But it is not easy to raise money. We’re not talking about small businesses that have a great idea that makes it worthwhile for the formal finance market. We are talking about a small operation in a small town, a sole proprietorship. So we don’t need a shark tank approach to sell stocks and get the investor interested in the idea.
This does not mean that the business does not generate value or profit. We have millions of businesses that operate at the micro level, and are mostly run through private funds. These companies are routinely deprived of working capital. They are also struggling to find the scale in which they can operate, and any expansion needs money. In this case, the entrepreneur seeks personal assets to finance the expansion of the business. I had to make my list for consideration.
First, estimate your working capital needs. His business is a distribution company where one buys some goods and sells them to another market. Buy orders are placed after the sale is closed with the customer. When the seller needs the money and how quickly the customer will pay to determine their working capital needs. Estimate this for annual turnover. Know this number as the money needed to keep sales going.
Second, negotiate with both seller and buyer to achieve a close match. If the buyer pays within 90 days, and the seller cannot wait after 60 days, the business needs 30 days financing. The credit offered and requested by both parties depends on market conditions and competition. Discover the possibility of negotiating a better deal. Will the seller offer a better credit period for a higher price? Will the buyer pay earlier with a discount? Is the buyer willing to pay a down payment? Is it possible to set up an achievement-based payment structure?
Third, check the buyer’s profile to see if there is enough variety. Large buyers will often get paid payments for invoices that take a certain period of time. Some buyers may take a long time to pay. Except for following up and persuading them, there isn’t much of a choice about speeding up payments. Relying too much on a few big buyers can make matters worse.
Fourth, find housing for working capital. Banks, non-bank financial firms, and other smaller financial firms may be willing to discount the bill and provide a loan. This is one of the most common loan categories available to suppliers of goods. The interest rate is also a measure of how much margins your business should generate. If the money is 14% available and your margin is 20% higher, you can fund your working capital and expand it if you get financing against your bills.
Fifth, make sure that the work logs are there. Even if it’s a small, sole proprietorship business, you have a company bank account. Ensure that all receipts and payments are recorded. Have a billing and tracking system. Pay applicable taxes. Detect all information and return the file. Without knowing your business numbers with history, financing of any kind will be difficult. You cannot raise angel financing or any other long-term capital without audited, verifiable business numbers.
Sixth: Do not borrow from friends and family. It is always tempting to look for funds from easily accessible sources. But this funding does not come with accountability. If you are serious about your business and want it to be a constant source of profit for you, then you have to keep your eyes on price and margin and be willing to pay the cost of the money. This keeps the responsibility for labor options higher. Easy money is a trap for taking unnecessary risks and bypassing the diligence and process required.
Seventh, do not confuse your personal life with your work. Buying your home, assets and jewelry for a business is a huge risk that your family will have to take. Separate business assets from family assets. Do not spoil the family with expensive gifts and spend from business profits. This creates a smooth flow of money in your mind which makes you feel entitled to do it in family assets during times of need.
Eighth, build some assets for the business. Even if it is a trading company that does not need capital investment. Re-plowing profits to create assets in investments in treasury products such as deposits, bonds and liquid funds. It will be easier to borrow against these assets when needed. In extreme emergency situations these assets can be liquidated and rebuilt.
Ninth, expand the business taking into account the financing requirements to start. It can be great to get a big order from a big client. Having that account can seem prestigious and a stable order book might be the leap you need. Make sure you’re prepared to wait for payment delays and get the financing needed to keep them going.
Tenth, build and monitor performance measures for your business. Find out the exact days of aging of your creditors and debtors. Learn about revenue growth rates and their seasonality. Know the margin and costs and calculate them seriously. Set yourself the standards that you will measure and perform. Many companies fail to celebrate revenue without considering the impact of late payments and increased costs on their survival.
Entrepreneurship is a common and widespread trait in India. We celebrate our ability to spot an opportunity and take it out of it, no matter how small. Be careful not to overstate original wisdom and common sense in running a business. Not everyone intuitively knows how to maintain an existing business. Learning hard lessons can be a punishment for you.
(The author is the chair of the Center for Investment Education and Learning.)