Many businesses miscalculate the necessary funds required for their business to be successful. Some businesses have unrealistic calculations when evaluating key milestones. The three following rules will assist you with maintaining and securing funds for your business.
1: Use outside funds before self-funding
The key to this rule is understanding Working Capital also referred to as Net Working Capital. Which measures the financial health of your business by measuring operational efficiency, financial obligations, liquidity, and any short-term responsibilities. Insufficient working capital can impact your business, and this leads to many businesses obtaining outside funding. The source of these outside funds varies, but the funds can be obtained through crowdfunding, donations, investors, or loans. So, depending on the type of business you have, dictates the amount of funds your business needs to secure. Self-funding can be detrimental and, depending on the type of business and its size, should be used as a last option. If your self-funding and your money runs dry, this could result in the collapse of your business. In the movie industry, many movie makers use the studios to fund the production and marketing of their movies. If the movie does badly, the studios take the financial loss and not the movie makers.
2: Buy used rather than new.
Think of this like purchasing a new car; once you drive off the lot, the value of that car automatically depreciates. So, when it comes to equipment, technology, or any type of supplies for your business, never buy at full retail price. You should only purchase the most critical things necessary for your business that you are incapable of buying used or discounted. Some of these items may have tax benefits, but it’s important to understand which items will give you the most tax benefits and how those items will depreciate over time.
3: The 80/20 Rule
What is the 80/20 rule? It is also known as the Pareto Principle, and it identifies sparsity. If you spend 80% of your time trying to sell or locate buyers and are unsuccessful, then you have wasted potential time that you can never get back. Instead, spend more time analyzing prospective buyers or clients and less time trying to force a sale or service, which can result in a 20% success rate. Wasted time results in wasted money and could put your business into the negative. The Chief Editor of artisttake.com, Dismoc Le Ma, once said, "Working smarter earns more money, while working harder makes you obsolete."
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Vincent Lancaster M.B.A. CPA – Guest Writer
Vincent Lancaster is a business manager and analytics expert.