4 Ways Business Loans Support Your Financial Status & Help You Achieve Your Goals

There are a plethora business opportunities in the world today, many of which did not exist decades ago. As technology advances, many digital trends influence the types of businesses that pop up. Even on social media platforms, there are businesses that cover how best to manage social walls and increase followers. One thing is important in all these, whether you are an online merchant or a manufacturer of kitchen wares, whether you render services or sell products, the core of business strength is capital.

The truth is every business needs a solid financial status to be able to thrive. Sometimes, there might be some hitches in the running of a business- like low inventory, the need to hire staff and grow sales, or the need to carry out a profitable marketing campaign. Considering a business loan might be recommended. Although some individuals try to be cautious, there are immense benefits that getting a loan offers.

4 Ways that Business Loans are Beneficial to You

Not every reason is valid enough to seek a loan. However, there are solid reasons that support this. Just like making a purchase comes with costs and benefits, getting a loan can have a positive impact on business when weighed against the cost. Here are 4 ways that this can benefit your business;

Expansion of Business Activities

More customers are coming into your store and you need more staff to cater for the increase in activities, or you need to add a new location to your business, or there are new products and services that your business can provide- if this is the case, you might need to expand your business to accommodate more hands on deck, or have new space for business activities.

It might be very demanding on the finances of your business when it comes to bearing the cost of adding another location or venturing into a new market, even though these moves can boost the profitability of your business.

Getting a loan can ease these processes by providing ready capital for new overhead and upfront costs. In considering this, it is important to have a proper plan and forecast to ensure that the new activity would be profitable enough to cover the repayment of the loan.

Increased Liquidity

For many businesses, inventory is an important component of commercial activities. It is important to keep your inventory replenished and of high quality. With a sales projection, you can forecast the profitability of acquiring more inventory and improvement in cash flow can help you achieve this.

Apart from inventory, day-to-day activities are also crucial to businesses; you might need to train staff, pay salaries or effect repairs on machineries. Loans can improve your liquidity and help you cover these activities smoothly.

Invest in Marketing

Marketing can be the very approach your business needs to pull in more potential customers. However, due to the cost that marketing entails, some businesses tend to put it on hold. This is because successful marketing campaigns require a tangible budget.

Since marketing is needed to spur business growth, investing in a campaign can increase your customer base. Taking up a loan can help you execute a solid marketing strategy, thereby increasing customers and improving the financial status of your business.

You Keep the Profits

Compared to getting investors for your business, one benefit that loans offer is that the profit you make is retained for you and your business. On the other hand, investors require that they have a share in the profits of your business.

With loans, you can venture into new business opportunities, expand your business or get needed equipment, all of which are beneficial to you in the long run even after the loan payments are made.

Every business needs financing no matter the nature. Although some are of the opinion that adding debt counters the growth of your business, with the right approach, debt financing can come in handy and boost your profitability. Not every business needs to take up a loan. There are several things to consider such as the terms of repayment and interest rate. It also requires proper planning and knowledge of the market so as to ensure that the profitability of the business can cover loan repayments and keep you in an excellent financial standing.

Every business envisages steady growth. With the above put in place, loans can improve your financial status and help you achieve goals. Its benefits can still be visible even after the loan has been cleared.

Guest Post: About the Author

Ali Khan is a Search Engine Optimization (SEO) specialist and a content marketer. He works as a search director in a reputable organization. His main area of interest is digital marketing management and SEO outreach. He writes unique and research driven content about SEO analysis, Social media, Physical fitness and more.

Is Now the Best Time for a Business Loan?

We are often asked whether now is a good time to take out a business loan. Our answer is usually, “It depends.” Let’s explain. Two sets of factors figure into the timing of a business loan – macroeconomic and microeconomic. We take a closer look below.

Macroeconomic Factors

In general, it’s a good idea to borrow when interest rates are low, as they are now. As you know, the Federal Reserve has raised rates several times in the last two years, and more rate hikes are imminent. While rates are still low, you don’t want to wait for them to get any higher, so quick action right now is a smart idea. If interest rates were falling from a high level, you’d want to wait till they fell to an affordable level. Other macroeconomic factors that might influence timing is the occurrence of financial or political shocks, or the general tightening of credit, both of which might discourage you from short-term borrowing.

Microeconomic Factors

Loan timing is also a function of why you need the money and how you plan to use it. Some uses are good, some not so much.

Green Light

These are some reasons why now would be a good time to get a business loan:

  • Expansion: You are at a point where you are turning down business because you don’t have the capacity. If expansion is called for, you will need to finance extra space, or new equipment, or new hires, etc. The fact that you will be bringing in more business bodes well for your ability to repay the loan.
  • Cushion: If you have a seasonal business, a short-term loan can create a cash cushion to get you through the lean months. By evening out your cash flows, you can avoid emergency layoffs or panicked price cuts. This helps your business’ long-term prospects. You can repay the loan when the busy season returns.
  • Sunshine: The adage, “make hay when the sun shines,” has application here. When your business is in a good spot and has a high credit rating, getting a loan will be relatively easy. When you wait until you are in desperate shape, you might not qualify for a loan. If you can get an affordable loan during good times, it can add an extra layer of safety against liquidity problems later on.
  • Credit builder: A startup business has no credit history, but a business loan can be the remedy. Taking out a business loan and then repaying it on time will build your credit score and potentially give you access to larger loans in the future.
  • Opportunity knocks: Once in a while, a golden opportunity falls into your lap. A loan can enable you to jump on the opportunity, thereby strengthening your company and making repayment easier.

Red Light

Here are some times when you should avoid taking out a business loan:

  • Maxed-out: If you already have large loans and maxed-out lines of credit, taking on additional debt might drive you into default. Even if you can arrange another loan, the lender will probably demand exorbitant interest rates that will only increase your cash flow problems.
  • Uncertain purchase: If you are considering the purchase of a new business asset but aren’t sure whether you can afford it, reconsider the purchase. A business plan should lay out exactly how you expect a new asset to affect your business and how much it will cost. If you are unsure about how the loan terms will align with the new asset’s cash flows, go back to the drawing board until you are certain you know what you’re doing.
  • Band-aid: If your business mismanaged its financing, taking a loan might just be a band-aid that masks the underlying problem. A better strategy is to bring in a CPA or operations manager to help fix the problem first.

Want to see what alternative lending can do for you? Talk to an IOU Financial Small Business Loan Consultant and learn about the ways IOU Financial can help you get the capital you need.

Nine Things That Separate Good Business Lenders from Bad Ones

If you’ve ever had a bad experience applying for a bank loan, you understand how demeaning it can feel to be turned down. Regulation and low interest rates have made it tougher for banks to lend to small business. The tight-fistedness of the banks after the 2008 mortgage debacle created a vacuum which was filled by online business lending companies of varying quality. The best are a pleasure to work with, the worst are disappointing. Here are nine things to look for to distinguish the good from the bad:

Direct lender:

A direct online lender is a company that actually supplies the money it lends to borrowers. Many business-lending websites are mere matching services that send out your application to a network of lenders. That might sound good, but it’s not, because you end up paying much more for you capital. You see, the matching broker collects a fee from network lenders, who pass that fee onto you in the form of higher loan cost.

Ease of application:

Some lenders want extensive paperwork and documentation. A few operate over the phone, which is tedious. Look for a lender with a streamlined, paperless online application process that can be completed in minutes. And, perhaps it should go without saying, but we’ll say it anyway: Never pay an upfront fee to apply or qualify for a small business loan!

Quick approval:

There are two aspects to this. The first is that you’d like to be approved, so you will want to borrow from a direct lender with a high rate of loan approvals, say 85 percent. Secondly, you want the decision, and the money, quickly. A good lender looks beyond your credit score, makes a decision in minutes and gets you your money the next business day. A good lender will not do a hard pull on your credit. A bad lender may require extensive underwriting, which can waste days and still end up in a denial.

Sufficient amounts:

A business lender with a maximum loan limit of $25K or $50K won’t satisfy many small business borrowers who need more. Look for a direct lender who is willing to lend up to $150K.

Affordable rates:

A lean, efficient online business lender isn’t saddled with large overhead expenses that can drive up the cost of loans. Look for an interest rate well below the cost of a merchant cash advance. Merchant cash advance are not loans and can be very expensive.

Convenient repayment terms:

Hate that big monthly repayment that always seems to leave a gaping hole in your working capital? The best lenders take fixed daily loan payments directly from your bank account. It’s amazing how much more comfortable it is to spread the repayment over 20 daily installments rather than to pay it once a month. Only use lenders who offer fixed pay-back loans, so that you aren’t surprised by suddenly higher repayments.

Renewals:

Cash management is dynamic, and sometimes you need to renew a loan before the old one is paid off. Bad lenders won’t do this, but good ones will approve renewals after a certain portion, say 40 percent, of the original loan is repaid. This gives you the flexibility to take advantage of opportunities as they occur.

No prepayment fees:

Avoid a lender who soaks you with a prepayment fee or who charges you compound interest on your loan. Compound interest means you pay interest on your interest. Ouch! Go with a direct online lender who charges simple interest on your unpaid principal balance, and who never penalizes you for paying off your loan early.

Ratings:

Check a potential lender’s score from the Better Business Bureau and TrustPilot. If the score isn’t great, keep looking.

Not sure which online business lender to call? Try IOU Financial, a leading, publicly-traded small business lender. Contact us today for a no-strings-attached consultation.

Business Credit Basics: 3 Things You Need to Know Before Applying for a Loan

Applying for a business loan is a significant undertaking, and it’s a good idea to get your business operating as efficiently as possible before asking for a loan. The amount of preparation you’ll have to do really depends on whether you borrow from a bank or a commercial lender. A bank is going to grill you and demand a lot of information that a commercial lender will not need. Here are three things you need to get know when you apply for a bank loan, and how each one differs if you choose a commercial lender:

1. Know why you want the loan:

For some reason, banks feel the need to know exactly how you plan to spend every dime of your loan proceeds. We are not quite sure why this is so crucial for the bank to know, but the usual reasons include expansion opportunities, smoothing out working capital, investing in inventory or capital goods, and acquiring another company. Be prepared to show the banks how you will turn the loan money into profits (or how it will cut losses). On the other hand, a commercial lender like IOU Financial doesn’t really care how you plan to spend the loan proceeds. We assume that you know your business best, and we don’t like substituting our judgement for yours.

2. Know your books:

A bank is going to review all your books and records before approving a business loan. This includes all your past income statements, balance sheets, tax filings and all other public information. Be prepared for questions on why certain expenditures were made or why a particular strategy was worth the investment. You really don’t know what the bank loan officer or underwriting committee is going to ask. Sometimes, a line of questioning can lead to new questions in different areas, a process that can drag out for weeks or months. You can be sure the bank will calculate all your financial ratios, and will interrogate you on any that are below industry averages. We are really only looking for two things:

a. Does your business generate at least $100,000 a year in revenue?
b. Have you been in operation for at least one year?
If both are true, you are well on your way to obtaining a loan from us.

3. Know whether your cash flow allows you to repay the loan:

This is a very important question that every lender, including us, is going to ask. Now, a bank is going to want to analyze your sources and uses of funds, your cash management policies, and your projected and actual budgets. The bank may want to know about your collection policies and examine your bank statements. If it sounds like an extensive process, well, it is. We have a different view – we only ask two questions regarding cash flow:

a. Do you generate 10 or more deposits each month into your business bank account?
b. Do you maintain an average daily balance in your business bank account of at least $3,000?
Assuming you own at least 80 percent of your business (or 50 percent if owned with a spouse), you can qualify for a commercial loan from IOU Financial with just a few facts. With a bank, you are more likely to feel like a trial defendant under cross examination. Perhaps that’s why it takes days or months to get a bank loan, while we can lend you up to $150,000 in as little as one day.

Contact IOU Financial today for a free consultation about your small business’ loan needs.

5 Common Misconceptions About Alternative Lending

Alternative, or non-bank, lending got a big boost in 2008 when the mortgage meltdown caused banks to roll up their welcome mats. In that era of recriminations, no bank wanted to go out on a limb and lend to anyone other than the most creditworthy customers. Today, businesses have learned that alternative lending, which includes commercial business loans, factoring, peer-to-peer lending and crowdfunding, can solve many problems quickly and efficiently without a lot of the delay and paperwork associated with bank loans.

Still, some business owners have negative misconceptions about alternative lending, so we’d like to clear them up:

Only bank-rejects apply to alternative lenders:

While it’s true that many businesses find it easier to qualify for a loan from an alternative source than from a bank, many owners prefer dealing with alternative lenders, as they tend to be more flexible, less judgmental and faster to respond. Many alternative lenders do not require collateral, can process an application in a few hours, and fund a loan within a day or two. One feature that IOU Financial borrowers truly appreciate is daily automatic repayment, which means a business doesn’t have to face a large monthly payment that can disrupt the business’ cash position.

You have to be desperate to seek an alternative loan:

That’s just silly. Alternative lenders would soon go out of business if they lent only to companies on their last legs. The real story is that banks turn down loans for all sorts of reasons, many having nothing to do with creditworthiness. Alternative lenders assess the risk of each loan and assign an interest rate that makes sense. Companies with less than stellar credit scores can borrow from alternative lenders when needed, such as when they have to smooth out their working capital cash flows. Any good alternative lender wants to see its borrowers succeed, not fail, and will usually work with business owners to come up with solutions with the right fit.

You can hurt your credit score by borrowing from an alternative lender:

Poppycock! There is no truth to that myth, and in fact the opposite usually applies: If you pay back your loan responsibly, your business’ credit score should increase. Remember, business loans do not affect the individual credit scores of owners, they are strictly for business. The nice thing about getting an alternative loan is that by doing so, owners don’t have to pony up their own personal funds, which could indeed affect their credit scores.

You need high margins to make alternative loans work:

Loans from alternative lenders help all types of businesses, not just ones with high margins. IOU Financial has only four funding requirements, and none have anything to do with margins. We require that you own and operate your own business, have been in business for at least a year, make 10 or more deposits per month and have average daily balance of $3,000 per month. Margins schmargins!

Alternative lending is unregulated:

This is a common misconception stemming from the fact that alternative lenders do not have the same capital requirements as banks. But alternative lenders are not banks, they do not offer time deposit accounts and all the other services available from banks. The business model and cost structure of alternative lenders are much different from those of banks. Nonetheless, alternative lenders must adhere to federal and state lending regulations that require truthfulness and disclosure. There is also the whole area of contract law that governs alternative loans.

The alternative lending industry is strong and vibrant, because it serves the needs of many small businesses that otherwise wouldn’t be met. If you would like to discuss your own borrowing needs, call IOU Financial today for a free consultation.

Small Business Finances 101: How to Profit

We finish this introduction to business finances by discussing the payoff for all your hard work – profit! In particular, we dive into how to use your business’ profits to get paid. Unless you’re independently wealthy, you probably need to extract profit from your company to pay your bills and live your life. Like many of the important things in life, you have options. In this case, you have to decide how to structure your business and how to tap into profit while creating the smallest tax obligation. Your particular circumstances will help determine the best type of business entity to use, and you should, of course, seek formal advice from a trusted accountant or lawyer.

Structuring Your Business

Your choice of the type of business entity to adopt will greatly influence the amount of time and work you’ll have to expend administering the business. A small business set up as a sole proprietorship is certainly easier to run than a limited liability company (LLC) or C-Corporation, but the latter give you all sorts of protections or tax breaks not otherwise available.

The five most popular business structures are:

  1. Sole proprietorship: A simple structure in which you are the sole owner of your small business. You file your taxes on your personal return, as there is no separation between you and your business. That means you have unlimited personal liability for your business’ debts, putting your personal assets are at risk. It’s also harder to get a business loan for a sole proprietorship.
  2. Partnership: This is much like a sole proprietorship, except it involves at least two owners. Once again, you file your taxes on a personal return and you have unlimited personal liability. You share the business’ profits proportionally with your partners, so it’s a good idea to ensure they are trustworthy.
  3. LLC: A separate entity that provides liability protection but not separate tax filings unless you chose to file as a corporation. It is easier to set up and run than is a C-Corp. However, it’s harder to get investors, since you can’t sell shares. Also, you can’t pay yourself a salary, although there are other ways to get money out of the LLC.
  4. S-Corp: Recognized in most states, its similar to an LLC except it can issue shares and can pay wages to shareholders while avoiding corporate taxation. The S-Corp requires more paperwork than does the LLC, and you are limited to 100 shareholders.
  5. C-Corp: A corporation is the most difficult to set up, as it requires its own set of books and separate tax filings. It’s the most professional approach to business, with limited liability and no limits on the number of shareholders. C-Corps provide many tax deductions and benefits not available elsewhere.

Extracting Money

Assuming you are running your business in order to make a profit, the question remains how to extract money from the business to pay yourself for your time and effort. Here are several options:

  1. Salary: You fill out a W-2 and pay yourself a salary, minus any withholding taxes. It’s simple, but not tax-efficient for a corporate entity.
  2. Dividend: A corporation can pay a dividend to shareholders. Any part of the dividend that is a return of capital, rather than profit, is not taxable. The IRS looks dimly on huge dividends.
  3. Shareholder loan: You can borrow money from your company, but if it’s at a below-market interest rate, you might be liable for gift or dividend taxes.
  4. Owner’s draw: Cash available only to sole proprietors or partners, this money is not taxed at the company level. The money must eventually be repaid to the company.

Clearly, the way you structure your business has profound implications for your after-tax wealth. Consult with a professional before deciding the best ways to take advantage of your business profits. If you need tools to grow profits through a maintained budget, check out our Business Budget Smart Sheet. This tool helps you stay on track so you can reach profitability sooner!

Small Business Finances 101: Understanding Income

Income is the life source of your business. All your planning and strategies aren’t going to mean much unless you generate enough income to eventually make a profit. There are two types of income your business needs to track. Gross income is the money you receive from selling your products or services minus the costs of goods or services sold. Net income is your profit after you subtract all your expenses and losses.

As a small business owner, you need to know the most reliable ways to collect the income you owed, and how to properly report the income you receive.

Collecting Payments

  • Extending credit: While it’s nice to extend credit to customers, it can also be a money-losing proposition. People who pay with cash or payment card (debit, credit or gift) are your best customers. The only risk they pose is counterfeited bills or cards, which is a pretty small risk. When you get into checks and merchant accounts, you have to be more careful.
  • Credit cards: Many small businesses (55 percent in 2013) do not accept credit cards because of the steep fees and the possibility of disputes. If you sell online, you have no choice but to accept credit cards and pay the fees. Remember that if you don’t accept chip-embedded (EMV) credit cards, you are liable for the costs of fraud, a source of friction between merchants and card issuers.
  • Merchant accounts are business-to-business (B2B) credit arrangements with clients and suppliers. A 2014 U.S. study of B2B invoices found that a troubling 42.5 percent were paid late and that 5.6 percent were still uncollected after 90 days, which is the usual definition of a default.
  • Checks are not desirable, as too many things can go wrong. This is especially true if you have customers living abroad. It can take forever for a mailed check to reach you. Then there are the problems of stolen or overdrawn checks. Unless you have a long relationship with a customer, it’s best to avoid being paid by check.
  • Direct deposits via automated clearing house, transfers and electronic transfers are quick and safe for domestic payments. International transfers take longer. The only problem is getting your client to agree to make direct deposits.
  • Collections: If you are owed money, you can try to collect it yourself, hand debt collection off to an agency, or write-off the debt. In any event, late payments have a negative effect on your income.

Accounting for Income

Accounting is essential knowledge for your business. Keep your books up to date because delays can cause mistakes that might end up hurting your business and getting you audited by the IRS. You can hire a bookkeeper if you have enough activity to make it worthwhile. Many small businesses use software such as QuickBooks to perform bookkeeping. It’s up to you to evaluate the time you need to spend on using software versus paying a professional to do the work for you.

If you operate on a cash basis, you acknowledge income when it is collected. However, if you use accrual accounting, you report income when it is earned, which is usually before it is collected. Whether you use cash or accrual accounting, you need to keep accurate and timely records. This is especially important for figuring net income, which is the amount you are taxed on. To calculate net income, you must account for all expenses, costs and losses. If you miss some deductions, you’ll pay more tax than necessary.

If you need to stabilize your cash flow, hire a bookkeeper, or expand your inventory to bring in more income, IOU Financial offers convenient, low-interest rate commercial loans to help your business grow. Visit our loan calculator to get started!

Small Business Finances 101: Making Payments

We’ll admit that its more pleasing to collect payments rather than make them, but you can organize your business to optimize how you make payments so that you minimize their impact. There are two ways you can optimize your payments – when you pay them and how you pay them.

Timing Your Payments

A good rule of thumb for timing your payments to minimize impact to your cash flow is this: Delay payments to vendors and suppliers until they are due, unless you can receive a discount for early vendor payment.

Many suppliers offer terms like 2/10 net 30, which means you get a two percent discount if you pay the bill within 10 days, and that in any event you have to cough up the money within 30 days. A two percent discount might not seem like much, but don’t forget that you earn it by accelerating a payment by only 20 days. That works out to a colossal annual percentage rate (APR) of 36.7 percent, which means you can cut your vendor cash outflow by more than one-third simply by taking advantage of this discount. Where else are you going to make a return like that?

Payment Methods – Business Checking Accounts

You set up a business checking account, or at least you should have, when you launched your business. There are three ways to pay from your checking account, and they each work best for different situations:

  1. Paper checks: You can write checks manually if the volume is small, but let’s assume you are running your business using some sort of software support, such as QuickBooks or an accounting system with accounts payable (A/P). In these types of programs, you set up all your payee classes, such as vendors, employees, customer refunds, tax payments and so forth. The system will prompt you to write checks when due, but more importantly, it will print the checks on your local printer. You’re too busy to write checks by hand, so printing them is a must. If you are a larger company, you might use a bookkeeper who will perform this function for you. You can also have the system print and mail checks to your payees from the cloud, so that you never have to physically deal with paper checks. QuickBooks supports regular and one-off auto payments this way.
  2. Debit card: You might use a debit card when making certain types of purchases, such as office supplies, business travel and entertainment, or even tax payments. The card is handy for both online and in-person payments, and there is usually no fee for using it. The only warning is to make sure your checking account doesn’t become overdrawn, causing the debit transaction to fail and even cost you penalty fees. (The same precaution applies to checks you write). Debit cards can be linked to electronic wallets, so that you can make a debit payment from your smartphone without having to whip out the plastic card.
  3. ACH electronic payments: You can authorize automated clearing house (ACH) electronic payments from your checking account, either on an individual basis or by setting up an auto-payment schedule with a payee. The latter is appropriate for monthly expenses such as rent, insurance and so forth. It’s also regularly used to pay employees electronically. On the payment date, the money is wired from your checking account to that of your payee’s. No checks are involved. You can set up ACH payments to push them out at your discretion, or to have recurring payees pull them from your checking account.

Other Payment Methods

Although you’ll handle most of your major business payments with your checking account, you can also optimize your other payment methods to make sure you’re using your money wisely.

  • Cash: Stay away from cash for everything except petty purchases. It’s a hassle to account for and creates problems when doing your taxes since you have to provide evidence for payment of your deductible expenses.
  • Credit card: A business credit card is useful, especially if money is tight and you have to spread out payments. Be aware that interest rates can be high, and that credit cards aren’t appropriate for some types of payees, such as employees.
  • Loans and lines of credit: When you need extra money, a loan or line of credit makes a lot of sense. One advantage of a commercial loan from IOU Financial is that you repay the loan in small daily installments via automatic ACH payments. Not only is this convenient, it means you don’t have to contend with large monthly payments.

If you’d like to learn more about making payments and other basic aspects of running a business, download the e-book “Cold Hard Truth on Small Businesses and Money,” written by Kevin O’Leary, star of ABC’s Shark Tank. There is no one better to answer questions about your small business payments than the small business expert himself!

5 Common Mistakes You are Making with Your Business’ Money

It’s a small business owner’s fear: making bad money decisions as soon as you start your business or turn a profit, losing assets, and ultimately going under. So how do you know where to effectively spend your money, where to cut costs, and how to budget? In other words, how do you know if you are making mistakes with your business’ money? Below are 5 common mistakes you can make early on with your small business’ money and how to fix them.

 

  1. Spending money on unnecessary décor.

Everyone loves to have nice things, but nice couches, computer desks, chairs, pictures, water features and plants all add up. Be simple, and design with a scalable mindset. Depending on your business, provide the necessities to operate and eliminate the over the top showroom look for now. Keep your space simple and functional, not flashy.

 

  1. Paying high advertising costs.

Save the funds you might otherwise spend on a newspaper, magazine or TV advertisement and instead set up social media profiles and a website with a clear message and call to action. With a strong social media presence and encouraging word of mouth, you can do a lot of advertising in-house without having to spend a lot of money. Grow through networking at trade shows and chamber events. Need additional tips on knowing how to invest in marketing with your limited dollars? We have some more tips on how to produce big results with your small marketing budget.

 

  1. Forgetting to negotiate.

Negotiations are vital in business. Always search for the best deal, best quality and an overall good product. Look into at least 3 options before spending your cash, and be your own advocate, just like you would if you were searching for services as a consumer. The business world has a multitude of connections for you to take full advantage of. Don’t forget you can increase your odds of a good deal by partnering with and maintaining a good relationship with your vendors.

 

  1. “Giving away the farm.”

A big misconception is that you need to offer up a deal to get clients. Promotions, coupons or free services often don’t lead to repeat customers. They lead to one timers looking for a bargain. Be cognizant of your offerings to get business. If you discount too steep you may lose money, and you want to focus on attracting clients who are in it for the long term.

 

  1. Expanding too quickly.

Expansion is positive, but you need to plan for added costs, regardless if you are online-based or running out of a brick and mortar store. Grow your local base and cash reserves for a year before taking on any more expenses. When it is time to expand, test the waters and start slow. For new brick and mortar locations, ensure the distance is within a days’ time back and forth from your home base. If you are online, ensure that your website and inventory can hold up to the new traffic in your new target market.

 

The underlying rule is that keeping a budget and sticking to a plan will keep money from going out the back door. When you think of the money you bring in don’t forget about the potential costly mistakes you may be making with your money along the way too!

 

If you need help tracking your spending, get a Business Budget resource to help you track and analyze your spending. Share with us your thoughts on what ways you have found to not make the same spending mistakes.

The Benefits of Good Budgeting for Your Business

If you’ve been managing your budget on the back of an envelope, you are denying yourself a powerful tool that can make the difference between your small business’ success or failure. A proper expense budget not only serves as a roadmap for how you will be disbursing funds, but it also functions as a reality check by tracking your actual cash outflows against your projections. Good budgeting lets you objectively gauge whether your business strategy is working and highlights areas that need improvement.

Budgeting and Tracking Expenses

For the typical small merchandiser or manufacturer, the first step in creating a proper expense budget is to tease apart the costs of goods sold from your other operating expenses:

  • Costs of Goods Sold (COGS): These are the costs that are directly related to the items you sell. They include the payroll costs of direct labor, purchases of raw goods and/or inventory, purchases of directly related non-inventory items (like lubricants and packing materials), outside services used to help produce or sell your product, as well as other direct costs. Most of these costs are fixed, but the inventory purchases will obviously vary from month to month.
  • Operating Expenses: All the expenses that didn’t go into COGs are budgeted and tracked as operating expenses. These include the payroll for administrative and support staff, non-inventory materials not directly related to the production of goods (such as office supplies), outside administrative services, rent, utilities, travel & entertainment, and loan Everything except utilities can be considered a fixed cost.

The difference between your sales revenue and COGS is your gross income, whereas you have to subtract your operating expenses and taxes to figure your net profit.

Benefits of Tracking Expenses

Here are four good reasons to adopt proper budget tracking:

  1. Streamline areas of overspending: By tracking your actual expenses, you know immediately whether you are busting your budget with overspending, and if so, by how much. You then have two options. The first is to revamp your operations so as to streamline your overspending. This might mean changes to the sources and amounts of inventory and non-inventory items you purchase each month, as well as the size of your payroll, your use of outside services, and the amount you spend on travel & entertainment. The second option is to increase your budget for items that can’t be streamlined. Most businesses use both of these strategies to keep spending in check.
  2. See how your cash flow is affected with fixed vs. variable costs: You have immediate control over your variable costs, but fixed costs take time to change. If you see a lot of cash flying out the door due to high fixed costs, you can start planning ways to lower those costs. For example, you might want to find ways to cut your rent or your payroll. When too much money is being spent on variable costs, you can take steps to cut costs right away.
  3. Analyze spending patterns over time: Budget tracking helps you recognize trends. For example, inflation may increase the cost of your raw materials in a steady, predictable way. If that’s the case, you can incorporate this information into your budget going forward. Budgets also help you recognize seasonal spending patterns, which are extremely important in planning how much cash you’ll need on hand for the upcoming period.
  4. Realize areas of new opportunity for investing time and money: You might find that buying inventory in larger batches lowers your price per unit, but that you’ll need to enlarge your storage facilities to take advantage of this cost break. A budget will help you discover and plan for this and many other opportunities to lower your costs and/or increase your revenues. It can also show you when it makes sense to borrow money to finance your business’ growth.

Convinced? IOU Financial is making it easier to create and track your expenses by offering our free Business Budget Smart Sheet. Simply fill out the short form to download the planner, which is extremely adaptable and easy to use. Don’t delay, because the sooner you organize your budget, the sooner your business will reap the many benefits of tracking your spending!