This is a guest post for Skills You Need.
Want to contribute? Find out how.
Money Management Skills Every Entrepreneur Needs
Owning and operating your own business can be a dream come true, but you’ll have to stay firmly grounded in reality if you want to make a success of it.
After all, businesses need to make money, which means entrepreneurs need to know how to manage their finances effectively. No matter what kind of company you run, control of your finances will help you avoid losses and grow your business faster.
This brief guide will teach you a few of the most essential skills needed by entrepreneurs who wish to manage their money effectively. Use it to reduce unnecessary spending, invest money more efficiently, and borrow effectively when the time is right.
Check Your Credit Rating
Starting a business normally requires more startup capital than most people have in savings. In most cases, you will need to secure the money necessary to start your business from other parties—usually either lenders or investors. In either case, you may be asked to undergo a credit check so that the other party can have confidence in your fiscal responsibility.
Before you start any business venture, you should always check your credit rating, and do your best to improve the rating if required.
There are several ways to improve your credit score. The first is to simply hire a credit repair service, but that is not always necessary. You could also review your own credit reports and document any items that have been incorrectly (or ambiguously) reported. While you are doing this, be sure to keep paying your bills on time. The best way to remain consistent in this regard is to set up automatic payments for any recurring bills, and to avoid ventures that will accrue significant interest.
It is also worth noting that there are certain ways to acquire capital where your credit rating may not be an issue. While investors are often picky about things like credit rating, certain lending organizations may provide you with capital even without a perfect credit score.
Every successful business makes a plan for how to spend their money. That plan is your budget and, the more closely you can follow it, the fewer financial challenges you will face.
When putting together your budget, make sure you keep receipts for all your start-up costs as this will help you estimate future expenses more accurately. You will also need to set aside money in the budget for taxes.
When setting up your budget, it is also highly recommended that you keep your personal and business finances separate. Doing so will help you understand which expenses are yours alone and which belong to the business. In cases where you have incorporated as a business, you will be required to keep your business finances separate because the business is classified as a separate legal entity from yourself. However, you should still separate your personal and business finances even if you are set up as a sole proprietor or trader. Doing so will protect you if you are ever subject to an audit by the tax authorities.
Make Smart Investments
Making money is only one part of running a successful business. You also have to know how to grow the money you make.
A portion of your annual budget should be set aside for investing, and you should choose your investments carefully. Many people recommend lower-risk investments such as gold and real estate.
However, it may also be worthwhile for your business to consider investing in startups—including your own. Diversifying your portfolio will be critical to your success here, since 50% of all companies fail in the first five years. Then again, successful startups often experience very fast initial growth, and so as long as you pick even one single winner it can be quite lucrative. However, most authorities recommend that you do not invest in competing companies since this can be seen as a betrayal of shareholder values.
Once you decide to keep your personal and business finances separate, you might find that you don’t have a lot of money to work with. If that’s the case, you have a couple of options.
You can try to sell equity in your company for working capital, but that’s inadvisable unless you feel strongly that you need a partner this early in the game. If you’re like most entrepreneurs and want control over your vision, you probably don’t want to go down that road.
The other option is to take out a working capital loan. Loans can help you purchase inventory, create strong marketing campaigns, or simply keep your company running until it begins to turn a substantial profit. Few companies are profitable right away; in fact it can take years for a business to start generating more money than it costs to run.
When looking for loan options, don’t feel pressure to cast the widest possible net. In fact, it often pays to be discerning and seek out the opportunities for which you are most qualified. Some organizations are set up specifically to help certain types of people connect with borrowing options. If you are a woman entrepreneur, make sure you are aware of the resources available to you.
Of course, it is critically important to make sure you choose the right loan and the right lender for your purposes. Many long-term loans will create prohibitive amounts of interest during a company’s first crucial years, and certain lenders will require collateral or perfect credit before they will approve a loan. Still, it is possible to find lenders who provide short-term working capital loans, even when your financial history as a business is short. These lenders will often approve you in as little as 48 hours, even if you have damaged credit or limited supporting documentation.
Further Reading from Skills You Need
If you are thinking about running your own business, or already do so, but feel that you need some guidance, then this eBook is for you. It takes you through self-employment in easy steps, helping you to ensure that your business has more chance of success.
The Skills You Need Guide to Self-Employment and Running Your Own Business is the guide no new or aspiring entrepreneur can afford to be without!
Based on our popular self-employment and entrepreneurship content.
Learning how to budget, choosing sensible investments, and borrowing responsibly are three of the most valuable money management skills any entrepreneur can have.
Use the resources we’ve linked to in each section to improve your knowledge and business in these key areas, and enjoy smoother, more seamless business development.
About the Author
Nick Rojas combines 20 years of experience working with, and consulting for, small to medium sized businesses and a passion for journalism. He writes about technology, marketing and social media for the aspiring entrepreneur. When Nick is not sharing his expertise, he can be found spending time at the beach with his dog Presto.