Part of your small business success involves how well you grasp the concepts of business finance. The world of business finance involves more than just knowing how to read a balance sheet or how to determine if your business is turning a profit. By gaining an understanding of some broader concepts, you can manage your operation more efficiently and also make wiser decisions throughout the course of your business venture.
The Power of Cash Flow
Cash flow is simply the amount of cash coming into a business via revenue versus the amount that is leaving in the form of payments. The higher the amount of revenue that is entering as opposed to the amount of cash being paid out, the healthier a company’s financial picture. One common method of improving cash flow is to wait to pay bills until their final due date.
Risk vs. Reward
The greatest gains in business often are made by those who are willing to take a calculated financial risk. A common example involves the decision to expand a business. While your present business location may be doing well, it may have reached its saturation point. In order for your business to grow, you may have to undertake the risk involved with taking on the expense of expanding your current location or building a larger facility.
Just as waiting to pay your bills can improve your cash flow, receiving money sooner can also aid in business finance. The more quickly you receive a payment, the sooner you can use the money for your company’s benefit. You should also implement an aggressive collection policy to avoid the expenses associated with delinquent accounts.
Equity vs. Debt Financing
If you need to obtain financing for your business, you’ll need to decide whether debt financing or equity financing is right for you. With debt financing, you borrow money that you’ll need to repay, such as a bank loan. With equity financing, you take on investors who supply the necessary capital. However, you may also need to relinquish partial control of your operation to the investors.
Opportunity cost is the cost associated with taking one action over another. Using the example of a business expansion, the business owner has to evaluate the costs associated with funding the expansion and eventually generating increased revenues, as opposed to continuing her current method of operation.