Building a successful financial strategy for a small business is no small task. Every company is different, as is every owner, which means that each company has different goals and demands that must be met. While every small business owner or manager needs to consider their own individual circumstances and those of their business when constructing a financial plan, there are some rules that need to be followed by the vast majority of small businesses, even if only when they’re first starting out.
- Be conservative and pragmatic. Recognize early on that there will be delays or gaps in revenue. There will be some customers who don’t pay, along with sales lulls and unanticipated expenses that will need to be covered. To maximize the sustainability of your small business, be as cautious and conservative as possible in thinking about your finances. Don’t expect your business to immediately take-off or be able to support you and a large staff in a matter of weeks. It could be months before there is enough money coming in for you even to pay yourself. There may also be periods where you need to incur strategic expenses on new equipment or employees and forgo paying yourself.
- Keep it simple. There’s no need to make things too complex in your business – not only will it makes things convoluted, but it can hurt your finances. Naturally, you’ll want to keep your overheads as low as possible. This could mean delaying new hires as long as you can without hurting your business, using freelancers or independent consultants whenever possible, and holding off on major purchases like expensive equipment or office space until it’s absolutely necessary. However, it is important to look for ways to invest in your business with the purchase of cost-efficient tools (software, second-hand equipment, and so on) that can give your business a boost or generate efficiencies. Keeping a business operating efficiently requires constant oversight and investment. When you buy a car, you have to pay to keep it running properly; the same thing applies to a business.
- Invest in yourself. The knowledge and skills of a company’s people are among its most critical assets. Skills and knowledge may be intangible items on your company balance sheet, but you still need to look for ways to invest in yourself and your staff. Are there seminars or classes at a local community college that can help you or a critical employee develop your skills? Is there a new skill you could learn that would improve your ability to run your business effectively? To make your company as effective as possible, you need to make yourself as effective an operator as possible, and you need to make sure you have the most skilled people working for you.
- Keep dry powder on hand. In finance, capital reserves that aren’t already committed to other obligations (like payroll or taxes) are called dry powder, in reference to dry and usable gunpowder that can be used should you decide “to pull the trigger.” In building your financial strategy, make sure that you’ll have some reserves available so you can take advantage of important opportunities when they come along. One of the biggest advantages small businesses have is their agility, so it’s important that you allow yourself to stay nimble. Don’t give away your prime advantage by failing to build or conserve capital reserves. Understand that at some point a strategic pivot may be necessary for your business. While these changes can represent huge opportunities to unlock new profits, they almost inevitably require some amount of investment.
There is a lot that goes into a comprehensive financial strategy for any business. And while your strategy may fit your circumstances early on, in business things can change very quickly. It’s in your best interest to periodically review the financial performance of your company, as well as the near and long-term outlooks for any important changes that may be on the horizon. It is critical that you can adjust as things change, using your financial strategy as one of many tools to execute your business strategy while unlocking profits in the process. As time goes on, you will learn how and when to make necessary changes, but in the meantime, use the tips above as guideposts for building a superior financial strategy for your small business.
Steven McMeechan is a strategic marketing and communications specialist with over twenty years’ experience in senior marketing management roles across a range of industries including Information Technology and Financial Services. He works for Capstone Financial Planning and lives in Melbourne Australia.