The foundation of any successful small business is selling a product or service for a profit. However, that level of financial acumen is not enough to make a business successful. There are many additional ways to make money if you have the financial knowledge to do so. By expanding your awareness of how money works in business, you can increase the odds by being successful.
For your business to grow, you have to have the ability to borrow money. You can finance expansions, launch new products and contribute funds to joint ventures. If you understand how lending works, when you approach a banker with a solid proposal that addresses her financial concerns, you stand a better chance of getting financing. Make sure you understand the value of sales projections, collateral, your business credit rating and market research before you approach anyone for a loan. You’ll be able to speak their language.
Managing Accounts Receivable
One of the areas of financial knowledge that can help you is understanding the time value of money. This is particularly important in the area of accounts receivable. When you have customers who owe you money for long periods of time, you are missing out on the opportunities that cash could’ve provided for you. In addition, you may fall behind on bills, because the people you owe understand the importance of collecting money on time and may not give you as much time as you’re giving your customers. Examine the kinds of terms businesses commonly give customers. For example, if your customers currently have 90 days to pay, you might consider shortening that to 30 days. You can offer discounts for paying early and charge penalties for paying late. Applying these financial concepts can make your business much more successful by making sure you have cash on hand.
Every dollar you save on taxes is a dollar you can put back into your business. Even if you don’t do your own taxes, you need to understand the financial concepts of depreciation, deductions and tax credits so that you can run your operation in such a way that you pay the lowest taxes. This is not just a matter of a CPA finding write-offs at the end of the year. It’s a matter of looking ahead and realizing the tax savings from your decisions. For example, if you have to replace windows, it might be more cost effective for you to make them energy efficient, because you can receive tax credits for this type of improvement. Also, if you know you’re going to owe a lot of taxes in any given year, it might be a good idea to go ahead and make that big expenditure you’ve been contemplating. The write-off can reduce the amount of tax you owe.
Reviewing Financial Statements
If you nod and pretend to understand your accountant’s explanation of your financial statements, you are doing yourself a disservice. It’s up to you to be aware of your profit margins, sales growth, debt burden and asset values, to give a few examples. These are all important areas of financial knowledge that can help you make decisions that will make your business more prosperous.
Many businesses make money by investing their available cash when they’re not using it. Your financial knowledge should include understanding the variety of investment vehicles available to you. From certificates of deposit to stocks, bonds and real estate exchange-traded funds, you can put your excess money to work and greatly increase your profits.