The finances behind a business, especially a small business, is something that every industry, every field, and every business has to manage. Depending on the type of business you’re in, the level of revenue you’re able to produce, and the types of expenses you have, will determine the flow of finances behind a business. Every business owner has to deal with the finances of their company in some capacity. Whether it’s the financial assets it has, the type of income it generates, or the financial outlook for a company, the finances behind a business is one of the essential elements of its operations.
Depending on the market you’re in, the current forces at hand, the competition you have, and the stream of income you’re able to produce, will determine the way you’ll be able to handle and run the finances of your company. Companies who have are in a strong financial position, whether it means having lots of assets on hand, or a steady and stable revenue stream, are able to do a lot more when it comes to investing, research and development, and taking risks. By knowing you have that support, and dependability in your business and company, it enables you to be more aggressive, and pursue more risky ventures that can be very profitable in the future.
Pace of Growth
One of the things to keep in mind when your growing and building a business, is the pace of growth. The pace of growth you have is a tough thing, as many companies and businesses are looking to build their businesses fast, capture as much market share as they can, and expand to new clients or areas quickly. As a small business, it’s something you have to keep in mind. If you’re resources are limited, and you’re trying to build your business, it’s a good idea to keep a long-term perspective. Rather than try to continue growing or expanding at a certain rate or percentage a month, think about how long you hope to operate for, and run your business. What if the new expansion, the new marketing campaign, or the new investment doesn’t pay off the way you think it will? As a business owner who believes in their company and their vision it’s sometimes difficult to think anything, but the best-case scenario might happen. Learning from our mistakes, we tried to grow a bit too quickly in the beginning, were a bit aggressive when it came to our growth. We were seeing results which is great, but it handicapped us in the time after. The extra growth we saw early on, had a bit of a price to pay, as it made us be patient, and changed the ability we had to operate and grow in the time after it.
Capital Needed for Operations
Operating a business, or running a company often requires a certain amount of capital, or money to be used on a day to day basis. Whether it’s for rent, utilities, supplies, or inventory, there are lots of expenses that come with running a business. It’s important for a small business especially, to have the necessary funds or capital available to maintain its operations. It’s difficult when you need a certain amount of capital to continue operating and it’s tied up, or unavailable. A lot of the times it means holding back your company and hampering its growth or successes. Seeing opportunities arise, or income on the horizon, and not having the ability to capitalize is difficult for a business owner, who’s always fighting and clawing to make ends meet. That’s why it’s important to keep a close eye on your expenses, your capital, and monitor them closely. Making sure you have enough money to continue operating is an essential task for businesses in order to keep the business going, and in a forward direction.
Revenue Producing Activities vs. Non-Revenue Producing Activities
Certain tasks or expenses within a business are considered revenue producing activities, while some aren’t. The ones that directly produce revenue, whether it be marketing, advertising, or a website, are often considered revenue producing activities. Whether they are the source of your customers, the gateway for your customers to purchase, or the way your customers are able to connect with you, they play a direct role in the way a company or business generates their revenue. On the other hand, the expenses or costs that aren’t revenue producing, like branding and research and development, don’t have a direct effect on the company’s revenue in the short term, and often take a long time to see results.
The choices between these two types of activities and expenses have a lot to do with the current state your business is in, or the current financial standing of your business. The more capital you have available, the more you can experiment, the more capital you can afford to spend, and the more items you can allocate capital to. If you’re strapped for cash and are trying to find ways to build up your resources, or to keep the business running, you’re going to want to use the limited amount of capital you do have, on revenue producing activities. These activities are what keep the lights on, they bring in the income you need to operate, and they allow you to keep the business going.
It’s difficult when you’re in a position where you have to choose between which expenses are critical and necessary as running a business is incredibly competitive and complex. You’re trying to figure out what can the business live without, or what does the business need to run. Most of the time, the companies or businesses choosing between these expenses are trying to figure out ways to keep the business going or to reduce the amount of overhead or expenses they have. A lot of the bigger companies, who have strong balance sheets and lots of assets, have the liberties and the ability to take on expenses and expenditures that smaller shops do not. They can experiment with new goods, new offerings, or new services much faster than smaller, more capital restrained companies can.
At the end of the day, each business owner chooses to run their business however they see fit, and whatever they decide to do. The expenses or activities you choose to utilize or keep are up to the business owner, and in the way, they choose to operate the business. Each company has a different style, a different strategy, and a different viewpoint on what’s the best way to move forward. It all depends on the company, the personnel and it’s leaders.
Another important aspect of running a small businesses finances, is budgeting. Budgeting is the skill used to keep a guideline or a framework on the expenses a company plans to incur during a specific time period. Sticking to the budget and maintain the type of operations the budget set out to contain is a difficult struggle. Many things, unforeseen and foreseen arise causing the business to go out of budget, or under budget. It’s difficult to predict and project the types of expenses, the income level, and the type of growth a company is able to secure, but the budget is there to act as a baseline. It’s not the end all be all, odds are it’s going to look a lot different when it said and done, from the beginning. Things change, companies pivot, and the circumstances evolve. The main objective with budgeting is to keep it as a framework or as a guideline for the business. To use it as a point of reference, and something to measure the performance and success of the company, relative to where the assumptions and predictions were prior to the time spent operating.
Managing the finances behind a business is a complicated, yet complex task. Often times, it takes lots of time, practice, mistakes, and learning to become skilled at it. Whether it’s the marketing budget, the costs of goods sold, the return on an investment, or the payroll expenses, there are lots of factors that play a role in the finances of a company. Keeping the expenses and finances organized requires a level of constant attention, active monitoring, and persistence to continuing to figure things out.
The pace of growth a business experiences can have a major impact on the performance and financial standing of a company. If a company grows too fast, and it doesn’t have the resources or capital to support it, it can mean holding the business back after. It can mean having to make sacrifices, reductions, or changes to the way the business operates. Each business requires a different level of capital. There are different expenditures, costs, and expenses. Having the amount of capital, a business needs is critical to the performance of the business, and its continuation. Deciding between revenue producing activities, and non-revenue producing activities is essential for small businesses who have limited amounts of capital and resources. With all the spending, earning, and projecting, usually comes with dealing with a budget. The budget a company has acts as a framework, or a guideline for their performance. Measuring the type of success, a company has, the budget gives the company a baseline to measure its performance off of. You’re able to see how the company performed relative to where they believed it would and see how the results stack up against it.
Over the course of running and handling the finances, you’re essentially able to learn how to become a financial analyst of your own. Handling all the finances, making the important financial decisions, and seeing which investments work versus which ones don’t, you perform lots of the task’s analysts do on behalf of companies. All in all, managing the finances behind a small business is something that requires you to wear lots of hats, gain lots of skills, and pick up lots of knowledge learning how to do it along the way. We hope you enjoyed our article and wish you the best of luck and success in running your businesses finances!