Starting a business? There are still some ways to go before you reach financial freedom. First, you must know the basics by becoming acquainted with what business finance is.
Generally, business finance covers the conservation and acquisition of capital funds to achieve your business' goals. That said, business finance is the lifeblood of your business. For startups, business finance is the source of your capital and other financial needs to make your business idea a reality.
Moreover, business finance can help you with the following:
1. Find Funding
Getting started with your business isn't easy without financial resources. If you're starting from the ground up, then business finance can help you get findings that you can utilize. Depending on your business, its market opportunities, performance, position, and age, you can have many options.
But since you're a startup, you can have the following as funding options:
Angel Investment - One of the most available options for startups is angel investment. Unlike venture capital investors that choose growing businesses, angel investors are individuals who willingly invest their personal money on startups like yours. You can find angel investments from angel investors' sites, investment community areas, business incubators, business development centers, and some government agencies.
Other Financial Lenders - Since banks are unlikely to give loans to startups, you can opt for additional financial lenders. Although the interests are higher than regular bank loans, you can get loan approval quickly. You can find these financing institutions online or offline.
Small Business Administration (SBA) - For SBA loans, you can get one from a local bank when the SBA guarantees that you can safely take commercial bank loans. Most SBAs need you to fund one-third of the startup capital while your personal assets must ensure the rest of the capital you need.
2. Budget Properly
Not only does business finance focus on funding your startup, it also helps you budget your finances as well. A startup doesn't end with establishing your business. Without proper budgeting, you may end up losing your business sooner than expected.
You need to budget so that you can create road maps you can use for future expenses. Budgeting also helps you track variances that measure whether you're overspending or underspending. Thus, business finance will help you determine if your budget is favorable or unfavorable.
Also, when you create a budget, you know when and where to spend your business finances. You can do so by knowing your projected sales, but don't overestimate this. Then, include the costs of making your projected sales happen, like components, materials, and others. You should also cover the fixed expenses that you must pay.
Listing down all the essentials will help you manage your business finances effectively.
3. Create Capital Structure
With business finance, you can also make a capital structure. Establishing your capital structure will help you understand how to raise the long-term funds you need to run your startup.
Capital structure refers to your business' operating money or a capital proportion from equity or debt. Equity includes selling stocks of your business to your investors while debt covers credits or loans that you need to pay. When you know which capital structure may work for your startup, you can have funding to operate your business.
As a result, you can choose a capital structure that can give you returns even when there are risks. Or you can choose the one that'll minimize the cost of capital while maximizing stock prices.
With equity financing, you don't have to repay the money when you struggle with cash flow. Not only can you gain capital, but you may also receive advice from these investors. However, with this type of financing, you'd have to give some control over to your investors. For instance, they can have a say on the daily operations or strategic direction of your business.
As for debt financing, you have the sole ownership and control of your business. You can even use your finances to invest in more profits. Moreover, debt financing is cheaper but becomes more expensive in the short term. The main disadvantage of debt financing is the monthly payments of interest added to the principal. Not only that but, when you're late in paying, you get more penalties or fees. So, for startups, you may need to have a higher cash flow to pay your debts.
4. Measure Performance
With business finance formulas, you can measure the performance of your startup. When you do this, you'll have benchmarks to evaluate whether your business complies with industry standards or is performing better than in previous months or years.
You can even use business finance as an indicator to define your startup's operating objectives. Also, you can compare your business' operating objectives with other industries or markets via business finance. That way, you can use financial indicators as a neutral tool to evaluate performance.
The return on assets and net profit are financial indicators of your business' profitability. For measuring your business’ efficiency, you can use asset turnover. If you have low turnover, your business performance is not okay. You can even measure your business' liquidity by using business finance. Thus, you can monitor whether you still have money to pay for your expenses.
5. Survive Business Cycles
Most importantly, business finance can help your business prepare for the future—and survive it as well. Because a business also has life cycles that may include challenges and difficulties. When financially prepared, your startup can endure hardships during these phases. That's why business finance keeps you operating despite an economic downturn.
When you're well-prepared, it means you did the following:
Examine Your Cash Flow - As mentioned, business finance keeps your business liquidity in its good state. If you have good liquidity, you can easily stretch your budget and cash to obtain supplies that'll last during a downturn.
Assess Your Credit Situation - Since business finance keeps you updated on your capital structure, you'd make wiser decisions on how to finance your capital.
Plan Cuts - If an economic downturn doesn't allow your business to stretch its finances, you'll know when to make cuts. However, business finance teaches you how to make cuts without paralyzing your business operations.
Even if your startup starts growing and expanding, business finance will always be vital throughout these phases. From finding funding sources, business finance helps you get investments from the right institution. Then, business finance also shows you how to budget appropriately by knowing projected sales, fixed expenses, and other expenditures.
With business finance, you can choose the best capital structure when you're starting and after you've gone so far. You can even use business finance to measure the performance of your business. By using financial indicators and formulas, you can quickly assess whether you're financially gaining or not. Lastly, business finance helps you prepare for future cycles of your business.