As an entrepreneur, your energy should be squarely set on building your business and strengthening it financially. To do so, you’ll need to determine specific financial milestones and have a strict plan for managing cash flow.
What strategies are you developing to establish a strong roadmap for professional and personal financial goals?
“Starting or running a business without a financial roadmap is like driving a car without tires – you might get started, but you won’t make it very far,” says Jim Averill, VP and Business Banking Relationship Manager with First Horizon Bank. “A roadmap to define what the business is going to focus on should be the foundation for any organization. Entrepreneurs should understand who their clients are, how they are going to get paid, and the cashflow cycle of the business.”
A business owner’s success is directly tied to his or her ability to optimize their cash flow and put surplus funds to work for them. The same is true for building personal wealth.
“Planning for their own personal wealth should be one of the main focuses for the business owner in the beginning phase of starting the business,” Averill explains. “The entrepreneur should ask themselves, ‘Why am I starting this business, and how do I reach my goals?’ Bring in a trusted advisor or financial planner that can provide guidance on how to reach those goals over a specific period, and plan for the inevitable exit.”
Here, Averill shares money-management tips that entrepreneurs and their businesses cannot survive without.
Become very familiar with your business’s cash conversion cycle.
The cash conversion cycle is the amount of time a company takes to convert funds invested in production and sales into cash or working capital. The cycle will differ depending on the type of business and industry.
“Some industries like restaurants and retail have an immediate cash conversion cycle, while other industries like manufacturing and real estate have a longer period,” Averill explains. To determine an organization’s cash conversion cycle, an entrepreneur would calculate its days of inventory outstanding, plus days of sales outstanding, minus days of payables outstanding.
“Understanding this equation allows for the owner to know how many days on average it will take the corporation to recognize cash on hand,” Averill says.
Familiarize yourself with how and when your business gets paid.
Businesses typically have payment terms anywhere from 30 to 120 days, depending on the industry. Payroll is typically due every two weeks, with other bills typically due within 30 days. This can create a cashflow concern or even surplus depending upon how the organization is paid, Averill says. Entrepreneurs should look at the cash conversion cycle and determine when and how long terms can be provided and how quickly the payments need to be received.
“In the startup phase, the organization may decide to provide 30- to 45-day terms to earn business from their clients while accepting check or credit payments that may extend the cash conversion cycle due to the delay in payment processing,” he says.
As the company grows, entrepreneurs may have the option and relationship with customers to adjust the payment cycle to 15 to 30 days with a discount provided for immediate payment. “To receive payments faster, the organization may determine to be paid via ACH, wire or merchant processing at an additional cost,” Averill says.
Know when to use cash vs. obtaining credit.
Many business owners incorrectly believe that taking on credit should only be a last resort during desperate times. But carrying a line of credit can be a powerful tool when building a business and/or for unexpected circumstances.
Averill recommends that owners don’t wait until an emergency arises to seek credit. Instead, proactively work with a financial advisor like First Horizon Bank to help determine strategies for investing capital into the business and themselves, while also knowing when it’s appropriate to use credit. “Using credit wisely for the operation of the business can open opportunities for the business owner to set aside the cash surplus for their personal growth and retirement strategy,” Averill says.
Protect your assets.
Business Ownership Policies (BOP insurance) provide protection from liability claims and lawsuits, along with company assets such as buildings, equipment and inventory. BOP policies can also provide financial protection if the business must shut down due to a covered loss.
Meanwhile, key person insurance is a form of life insurance that provides protection against financial loss if someone such as an owner, partner, top executive or essential employee were to get sick or need to leave the business.
“These programs are extremely useful to protecting what an entrepreneur has worked so hard to achieve,” Averill says.
Set a schedule to meet with advisors – and stick to it.
Financially sound businesses prepare profit and loss statements along with balance sheets quarterly and discuss them with their financial advisors. This provides the leadership team with insight into whether the company met or exceeded its financial goals.
These meetings are also a perfect time for owners to discuss short- and long-term goals regarding their personal wealth, Averill says.
“Meeting advisors quarterly allows for the business owner to adjust personal financial goals and strategies as the company generates interim financials,” he says. “The best time to reflect on personal strategies is when the owner has a clear picture of what the company has accomplished year to date. This way, the advisors can best guide the business owner on how to allocate any cash surpluses of the business.”
Averill advises developing a relationship with a local banker and CPA and to regularly get on their calendar. “Make sure that they understand what is to be discussed and have a plan in place to review,” he says.
Working with your advisors from the beginning to develop a plan that defines milestones and strategies to achieve them can put you on a path to find professional success and personal wealth.
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