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credit management tips

The early stages of business ownership feature some difficult financial decisions. You have to acquire funding, ensure revenue, and establish a sustainable business model. To help you navigate all that, here are five essential money management tips.

1. Manage your cash flow

Improper cash flow is one of the top reasons a new business fails in its early phases. You need to accurately track your initial capital, further revenue, and all of your spending, big and small. It’s the most universal entrepreneur advice no matter where your starting funds come from.

Balance your spending against your income to make sure that all of the costs are covered. If the available funds are overtaken by the expenses, your business could face an untimely end. Maintaining this balance requires two things: ensuring sufficient funding for all business operations and any additional expenses, and having firm control of your spending.

Photo by Joshua Mayo on Unsplash

2. Choose your funding carefully

Most entrepreneurs opt for some kind of debt to obtain or increase their starting capital. Small business loans are the most common choice. Compare repayment terms, interest rates, and timelines. Give yourself some wiggle room, just in case you can’t reach the revenue you planned for in that span of time. Alternatively, try to recruit investors or ask for some resources from moneylenders. 

A moneylender might have more capital to offer you than a bank, but they might also have stricter repayment terms. If your investors are corporate, you’ll need to prove that your business will benefit theirs. If they’re private, they should have some skills that can support your business long-term.

3. Eliminate junk insurance

If you take out a loan to help your venture, you may notice some additional clauses. They cover scenarios that aren’t likely, or which are already encompassed by the insurance policy. So, you can’t claim on them, but you still have to pay. The most common ones are “consumer credit insurance” (CCI), “guaranteed asset protection” (GAP), and “mechanical breakdown insurance” (MBI). There are several other sorts too, which might be harder to recognize. 

Examples include vague things like “loan protection” or “contents insurance”. The best way to reclaim CC and other junk insurance is to enlist professional help. These junk clauses are usually hidden behind specific jargon. An expert can recognize the unethical fees that were slipped into your contract and help you get your money back. If you suspect that your credit comes with junk, look for the phrase “add-on insurance”.

Photo by Towfiqu barbhuiya on Unsplash

4. Reduce your fixed expenses

Take every chance to reduce your spending when your company is young. This is especially important if you’re bootstrapping your business venture. You want to be sure you have the funds to cover any operational costs before you commit to them. Be especially wary of those that will become fixed expenses.

Common forms of fixed business expenses include:

  • Renting office space
  • Renting and/ or maintaining office equipment
  • Maintaining an office internet setup
  • Employee payroll
  • Procuring raw materials or other manufacturing resources

Each new fixed expense increases the minimum revenue you need to stay afloat. Consider alternatives like coworking spaces, running the business from home, sharing the cost of office software packages with friends, and opting for contractors over full-time employees.

5. Separate your finances

On a final note, immediately separate your business finances from any other accounts. Don’t wait until your venture starts “actually making money”. It can be tempting to mix personal and business spending, especially in the beginning when things are difficult. However, that is a fast track to debt and ruin on one or both sides. If your business account isn’t separate, you don’t have clear insight. You’ll quickly lose track of how much money your new company actually has. 

This makes it easy to overspend. Then you’ll need to compensate with your personal funds, and you step onto a dangerous slippery slope. Avoid all that unnecessary risk by creating a dedicated checking account for business purposes only. Use that for all company expenses, no matter how small. Keeping them all on one account makes it easier to keep track of your business’ financial condition. This ties back into cash flow and expenses management.

Summing up

To recap – stay on top of your cash flow. Take your time to choose the best long-term option for your initial capital. Make sure that any loans you take out don’t saddle you with junk insurance. Reduce fixed expenses, and keep your business account separate from your personal finances.

Featured image credits: Photo by Towfiqu barbhuiya on Unsplash

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