MANAGING SMALL BUSINESS CAPITAL

In business, the ability to manage small business capital carefully is the sign of a successful business person. Why? Because new businesses eat up money, often faster than you can make it. So learn to manage your money or suffer the consequences.

In many cases the money that is so called “needed” in business is in fact not really needed at all, it is only wanted and if you spend on what you want your business will soon be your ex-business.

Wanted for what you might ask? Wanted for the many things that would be nice to have, but are not really needed.

Curbing your wants and managing any small business capital that is available, as well as your needs at start-up, can mean the difference between having enough money to get by or failing because of undercapitalization.

Finance is always, or should be, the main concern of all new business. You have planned your start-up, spent time and care on researching and drawing up your business plans and raised your start-up capital. Now in business you notice that the money is disappearing faster than anticipated. Major problems lie ahead if you cannot stop the bleeding.

In most cases, the core of the problem is in not understanding the uses of money in the business.

How to spend business capital wisely.

As soon as you start a business, you need to start spending, so you purchase items. This then is the core of the problem, simple, stop buying and you don’t spend any money.

As we all know, this is impossible, in business you have to buy and so spend money. What should be done? Managing your small business capital is the answer. Realize that all businesses expenditure can be divided into three spending categories and then manage those categories.

Spending Categories.

Business capital, set aside for start-up, has to last for many months or even years, depending on the business, until such time the business begins to turn a profit. So spend as little as possible and spend all of it based on the end result of the expenditure.

Everything you buy must be bought based on whether it is:-

1. Revenue or income generating.
2. Non-revenue or income generating
3. An impression or necessity need
.

Straight away you will have spotted the obvious,

• spend on one,
• don’t spend on two,
• only spend on three if it is essential.

Managing your small business capital based on these criteria will conserve capital for essential purchases only.

Let us take a look at these items in a bit more depth.

Revenue and Income Generating Purchases.

In general such items will enable greater revenue to be generated.

These can vary from machinery assets to spending money on advertising.

You will find that items that are needed to run your business more profitably tend to be capital purchases. Managing your small business capital by spending on such items will led to a growth in sales and so profits.

Be careful here however, you can always find essential items to buy, essential in your mind that is, but are in fact very seldom used. Don’t buy anything that is bought specifically for one small job and then sits unused. Either turn down the job or go out and find extra work to keep the item busy.

Always ask yourself before buying “Will buying this increase my revenues/profits?”

If you answer no, then it is pretty safe to say that you don’t need it.

Non-Revenue or Income Generating Purchases.

All businesses need some non-revenue purchases, but you need to keep them as low as possible.

Here is where you spend money on your office furniture, locker room furniture and the many other utility items that a business might need.

Most of these items need not be new and often are not needed at all, so think carefully before buying.

Impression or Necessity Items.

Certain items in a business are not strictly revenue or non-revenue generating, but are often needed to improve the business impression.

Here you will need to use your common sense. If for example you need a showroom, you need to create a good impression by having it well appointed and so you will have to spend money here.

If your office looks like a tip and you meet customers there, you are not going to get too many good quality orders. Managing your small business capital expenditure does not mean never spending however.

Impressions can be critical to customers and future orders, so you have to spend on purchases to create the right impression where necessary.

Good office equipment, such as computers, printers, scanners, phone answering machines, etc. are needed, but don’t directly make money.

Office stationary, forms, etc. are all essential and cannot be done without, but good quality, to create the right impression, does not mean gold plated!

New Versus Used?

Time for new when your business is making good profits and you can afford the best. Until then, small business capital management will mean that you can buy used, in most cases, if you remember a few things.

• Furniture can be bought used and in good working order.

  In many cases you can acquire furniture and other items free, simply by collecting them. Check out the newspapers or local bulletin boards.

• Used machinery and equipment is another story.

  If you are going to buy these items used, you will need to be aware of the risk.

  Used machinery, if bought from someone you know or from a dealer who gives a warranty, can be a lot cheaper than new and will do the job perfectly.

  Be careful here however, a bad used buy and then a new buy together are a lot more expensive than just the new buy alone.

Depending on the type of business, a combination of used and new is probably best, as well as being kinder on the start-up capital that you have available. Small business capital, managed wisely, can save you the early stress of running out of money.

Keeping a close watch on your purchases from day one of your new business not only improves the chances of your long term success, but will also instill financial discipline that will last a lifetime.

Using your small business capital sensibly, to increase revenues, will lead to growth and business success.

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