In today’s economy, it is increasingly important for small and medium-sized businesses to develop financial strategies that will help them succeed.
Starting and growing your own business can be an extremely rewarding and challenging experience, but it is important to know that you do not have to navigate the world of business alone, even if you are not only the Chief Executive Officer and Chief Financial Officer for your small business, but also the Chief Risk Officer and Chief Legal Officer (to name a few!).
You must wear many hats, so you must have financial strategies in place.
Several financial techniques may help small businesses prosper, which can make or break the bottom line.
Small and medium-sized enterprises (SMEs) play a critical role in most economies, particularly in developing countries. As more than 90% of businesses and as many as 50% of all jobs are generated through small and medium enterprises, SMEs are important contributors to job creation and global economic development.
According to estimates, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which means SME development is a high priority for governments around the world. Access to finance is a major constraint to business growth in emerging markets, where SMEs generate 7 out of 10 jobs.
But SMEs are less likely to be able to obtain traditional loans; instead, they rely on friends and family, or their funds, to launch and initially run their enterprises. According to the International Finance Corporation (IFC), 65 million formal small businesses have an annual unmet financing need of $5.2 trillion, which is 1.4 times the current level of global small business lending. About half of small businesses don’t have access to formal credit. When informal enterprises are considered, the financing gap grows even larger.
Financial strategies to help SMEs
Here are 10 of the most common financial strategies that small and medium-sized businesses use. Consider these strategies whether you’re a startup looking to get your business off the ground or an established business looking to expand.
1. Rent instead of buying.
If you have a small business, it can be difficult to commit a lot of money upfront. By leasing office equipment or vehicles rather than buying them outright, you get many benefits without coughing up all that cash. It’s especially useful if your business is just getting started and you don’t know what kind of growth or stability to expect in upcoming years.
Leasing is a great option if you’re operating on a tight budget, or if you don’t know how long you’ll need certain pieces of equipment. For example, many startups lease their business equipment—everything from computers to machinery—rather than purchasing it outright. Leasing office furniture, machines, and other large-ticket items instead of purchasing them outright can save small businesses millions of naira. So, consider a lease before shelling out big bucks for new equipment. Be sure to read the fine print in your contract—you might find that some leases have short-term buyout options. If so, opt for that option since it will allow you to purchase expensive equipment at a deep discount over time rather than immediately paying full price upfront.
While it might seem like an extra step (especially when you’re in a hurry), spending some time comparing various lease terms—not just interest rates—can save your small business thousands, if not millions, over time.
2. Be smart with financing options
You will have to consider using your own money or other people’s money to run the business.
Friends, family members, and even total strangers might be willing to lend you funds because they believe in what you’re doing. With crowdfunding platforms such as Kickstarter, entrepreneurs can often raise money simply by sharing their story with many people who are willing to open their wallets—if it is a story worth telling. In addition to crowd-funding services, there are also lending programs for startups in which individuals take part-ownership in exchange for funding.
Small business loans can seem like an appealing option, but they can also be detrimental to your company if you don’t weigh all your options. When you’re evaluating funding options, make sure you do a thorough analysis of how new debt will affect your bottom line. If it looks like a loan will cost more than it earns in return, there may be another way to get what you need without having to resort to borrowing. In other words, borrow only when necessary.
The bottom line is that the business must not run out of cash. Weigh the terms carefully.
3. Have a Solid Risk Management Plan
A good risk management plan will help identify, quantify, and assess various business risks. There are a lot of potential risks in business, from losing key staff to being sued by customers or suppliers. As such, you must create a comprehensive management plan to address them before any considerable damage is done. From financial issues (liability, cash flow problems) to legal concerns (contract disputes), there are several types of business risks you need to prepare for when starting a small or medium-sized enterprise.
Your business is not too small to be immune from these risks.
4. Promote Yourself
When starting a new business, money can be tight. Making small business strategies part of your long-term plan will help you weather uncertain times. Promote yourself: Utilize social media to get your company in front of people. Building relationships takes time, but it’s much more effective than paying to advertise (which can be expensive). Because social media is free, you don’t have to worry about immediate results; just make it a habit to spend 20 minutes each day posting on Facebook, Twitter, or LinkedIn—or whatever network is best suited for your target customers. Over time, quality content like photos or videos will grab their attention—and word-of-mouth advertising will spread naturally through their networks.
You benefit from both cost savings and increased sales.
5. Embrace Digitalization and Automation
Whether you run a small business or manage several departments within a larger corporation, your job is to do more with less. While this may appear difficult, embracing digitalization and automation can assist. Automation tools—such as an accounting software package—can help you centralize processes (and record-keeping), freeing up time that you can spend on other tasks. Likewise, digital tools (like intranets) can help make collaboration between colleagues easier, thereby improving communication and streamlining routine tasks like project management. In other words, these technology tools save time so that you can focus on doing more with less by growing revenue through increased efficiency or expanded offerings.
The bottom line is that making efficient use of time has enormous benefits in terms of meeting goals quickly and reducing waste.
6. Collaborate with Others
As a small business owner, you may not have to answer to investors or a board of directors. You may have complete autonomy when it comes to making major decisions about your business. But don’t let that power go to your head. Although you are in charge, you must also consider any other people who own stock in your company, or who depend on your business for their livelihood.
Collaboration with others is key to making sure your entire team—and everyone affected by it—is working toward common goals. Be sure that everyone on staff feels as though they are an integral part of every decision you make. This can keep people from getting angry with each other later and help employees at all levels of an organization build trusting relationships based on mutual respect and understanding.
While this might not feel like a financial strategy tip, it has huge implications for managing finances. Accountability is the watchword here.
7. Think Outside the Box
Startups must be adaptable and agile to thrive in changing environments. Thinking outside of traditional business frameworks will help you adapt and respond. Being in a small, dynamic company is a lot like having entrepreneurial energy: everything happens so fast! You’re constantly confronted with problems that must be solved right away.
8. Go Green
If you’re running a small business, you know that sometimes it feels like your overhead never ends. But one way to help reduce costs is to make sure you are as eco-friendly as possible. Going green doesn’t just have an impact on our environment, but also on your bottom line. Many companies offer green products with impressive savings over conventional products. There are many ways you can save money by going green:
A classic example is getting rid of the printer (and paper) and going completely digital. If paper cannot be eliminated, use eco-friendly printers.
Another example is using energy-saving lamps and devices, which brings down utility costs by a lot.
9. Advertise Properly
Online advertising is a terrific way to promote your business online. It’s also important to make sure that you don’t overspend on ads. Paying for many clicks may seem like a clever idea, but if those clicks are from people who have no interest in your product or service, it may be better to pay less money and get more targeted viewers. Spending too much on ads could cost you a lot eventually—which is why it’s so important to create ad campaigns that are geared toward specific goals.
10. Get Professional Help When Necessary
You don’t have to be a financial expert to manage your business’s finances. On top of that, most accountants who specialize in working with small businesses won’t charge you a lot either.
The key is to find someone who has experience working with small companies like yours—and make sure they understand your industry as well as your organization’s needs. That way, you can get sound financial advice without having to break open your wallet.
11. Embrace Agile Ways of Working
Small businesses might feel like they don’t have time for Agile methodologies. But these methodologies can do a lot to help them keep up with their larger competitors. Agile methods work best when implemented early in a company’s growth because they can have a long-term impact on productivity and reduce wasted time and resources. For example, studies have shown that one of Agile’s most famous philosophies—the 3 amigos meeting—can eliminate 30% of project costs by ensuring close communication between three departments (marketing, sales, and development). When done right, agile can be just as effective for small businesses as it is for large corporations.
As a business owner, you know that managing finances is one of the most crucial tasks you have. With so many competing demands on your time and resources, it’s hard to find the time and money to invest in long-term growth. Small businesses are constantly faced with a myriad of financial challenges. Without the right financial strategy in place, they can quickly find themselves in trouble.
However, by following one or more of the strategies outlined in this blog, you can start taking steps in the right direction and boost your business gradually over time.
If you are interested in learning more about these strategies, be sure to contact our firm! We would be happy to answer any questions you may have about financial planning for businesses of all sizes, and we would be happy to assist you in finding the best solution for your unique situation.