The most significant strength of a small to medium business is its size. A small-to-medium enterprise has a reasonable overhead cost. The infrastructure is confined to one location in most cases. There are fewer employees (or perhaps none). The company can tweak its policies to suit its customers or clients, scaling up or down a bit is not a major challenge. And lastly, there is substantial scope to grow because one is starting small.
However, these advantages are countered by one significant disadvantage. Most small-to-medium businesses have limited capital or available cash. A majority of small businesses fail due to a financial crisis. Lack of sales or revenue is the obvious cause of failure in theory and in practice. However, that problem can always be tackled for a longer period of time if there is enough financial backup. Every business needs time to mature and grow, to solidify its clientele or consumer base, and to become a self-sustained enterprise.
Business owners must ask themselves hard financial questions and only rely on actual numbers, not estimates, speculations, expectations, or assumptions. As a business owner, be sure to ask:
How much does it cost to run my business?
A business owner should know every cost or financial liability like the back of their hand. Many people focus on rent, utility bills, wages, personal income, and cost of inventory. These are indeed the quintessential recurring expenses, but there are more. A business will need funds to advertise its products and services or promote itself as a brand. There are costs to maintain and upgrade the infrastructure, even in the short term. Very few businesses launch with an infrastructure that can sustain its short term growth. Using the last penny from the revenue generated to finance minor upgrades or to procure more inventory can risk the sustenance of the business, as the working capital will dry up.
How much profit does my business actually make?
Every business owner should know the fundamental difference between gross profit and net profit. Gross profit is not the difference between the selling price and cost price of a product or service. It is the amount you are left with after paying for every recurring expense and after putting aside whatever amount of money you wish to infuse in your backup fund. Net profit is calculated after business and individual taxes. The difference between revenue and gross profit and subsequently with net profit is substantial in most industries. A wrong calculation of profit can wreck a business.
What is my business credit score?
Most business owners worry about their credit score only when they have to apply for a loan. This is fine if your business credit score is healthy and acceptable to the lenders. If not, there are many ways you can improve your credit score over a period of time so when you have to look for some financing, your rating doesn’t prevent you from getting a loan. Keep a tab on your business credit score and work on improving it. This will save your business when the going gets tough or even when you wish to expand and grow, which requires fresh funding.
What are the financial highs and lows in my business?
Every business owner should have a budget. It is an integral part of any business plan, not just at the inception of an enterprise, but every year and every month for some companies. No business has a uniform or entirely predictable revenue stream throughout the year. What you do with the surplus revenue when “the going is great” and how you manage the revenue deficit when “the tough gets going” will determine the long term fate of your enterprise.
What is the cost and income per unit for my business?
This is a difficult calculation. Even successful companies struggle to boil all its income and expenditure down to a unit. A unit can be a piece of inventory you have or every dollar you spend. The objective is to find out how much your business earns for every penny you spend. This is one of the surest ways to know if your business is financially viable. There will always be some inventory stocked up and some receivables pending. There will be credits granted to you and owed to you. Some incomes and expenses will always be in limbo because of the ongoing cycle of purchases and sales. There will be the need to expand. And lastly, a compulsion to change your products or services.
All such mathematical calculations can become subjective and circumstantial unless you focus on the cost and income per unit. If this correlation is in the green, then your business is financially viable and stable. Else, you need to review the financials of your business.
Guest post: About the Author
Steven Millstein is a professional personal finance writer and contributor to many leading financial publications. His work has been mentioned in and linked to from The Bustle, The Huffington Post, Benzinga, Yahoo Finance and many other publications. He also has his own personal finance blog, Credit Zeal, where you can follow him.