Experienced business owners know that skill and passion aren’t enough to guarantee success. As an aspiring entrepreneur in the fashion industry, you’re sure to have both of these attributes in spades, but – although they are essential to attract customers – what’s even more vital is financial savvy.
To keep your start-up afloat, you need to know exactly what your financial position is every day. No matter how talented you are in other areas or how relevant your offering is, getting to your ‘next’ involves a lot of regular admin.
Below are suggestions of financial management tips that even owners of established SMEs should consider to increase their chances of success:
1. Keep track of your cash flow:
This involves knowing how much money is coming into the business, and how much is flowing out. But, you also need to consider when this is happening.
Pay attention to timing. You need to keep things running smoothly and understand when it’s necessary to use stopgap measures, such as lines of credit. To do this, you need a “working” budget.
2. Create a working budget:
To make this vital management tool work for you:
● Be realistic. The basis of every budget is an estimate of the business’ income; the more accurate that estimate, the more useful the budget. However, entrepreneurs often overestimate their income, leading to a false belief that expenses will be covered. To prevent this, base your income estimates on historical sales data.
● Keep it simple. Budgeting can be a simple exercise done using a spreadsheet with only three columns: budget, actual and variance.
● Do it regularly. SMEs need to rethink their budgets more often than large corporations, because their resources might not always cover sudden external or internal disturbances.
● Budget for extra cash. A budget is a great tool to help start-up owners plan what to do with any extra money. Sensible budgets include plans to invest extra cash into short-term money market accounts, for example, or long-term investments, such as buying the premises from where the business operates.
3. Realise that credit can smooth rough patches:
The following financial tools can help your business meet all financial obligations, even in rough times:
● Invoice factoring: This is when a business sells a portion of their debtors to a financial institution at a discount. It’s a valuable tool for emergency situations, because it can improve cash flow.
● Overdrafts: One of the most popular methods to finance daily expenses, overdrafts are linked to a business’s current account. This tool allows you to spend more money than you have in your account, but the amount by which your account can be overdrawn is agreed on in advance and interest will be charged on it.
● Credit cards: In business, a credit card allows you to pay for and track expenses, and access short-term credit. However, your outstanding balance needs to be cleared each month. If not, interest will be charged.
● Invoice discounting: Many start-ups often have a lot of money tied up in unpaying debtors, which negatively impacts cash flow. Invoice discounting can solve this by allowing start-ups to draw money against sales invoices before the customer has actually paid: the business borrows a percentage of the value of its sales ledger from a bank, using the unpaid sales invoices as collateral for the borrowed money.
4. Manage debtors
For SMEs that rely on just one or two key clients, late payments can be disastrous, so effectively managing and tracking debtors is essential.
For the sake of your business’s health, invoice your customers accurately and quickly. Take advantage of e-invoices, which can be electronically submitted to customers in a number of ways directly from your accounting platform. Not only is this fast, but you’ll always have a record on hand in case you need to track clients.
5. Build a cash reserve
All entrepreneurs have to deal with unpredictable income. This means you’ll need to set money aside for financial emergencies. Standard Bank suggests that business owners put away at least 5% of their salaries each month to cover surprise costs.
Remember to keep these funds in an account where they will be immediately accessible. The ones most suited are money market and savings accounts.
Getting to your “next” requires access to helpful information. Check out Standard Bank’s website dedicated to helping entrepreneurs start, manage and grow their start-ups, whatever the industry.