Achieving financial stability is a key factor in running a successful business, although it involves much more than managing your money. Financial stability starts with generating a steady stream of revenue from customers by building great products that solve consumer problems, offering them at a reasonable price to build value, marketing your products to increase sales, providing superior customer service, and getting products to customers where and when they need them. Those who struggle to regulate a steady cash flow soon find themselves in a difficult financial situation where they can’t meet their financial obligations, let alone generate sufficient profits to fund growth. Therefore, it is crucial that all business owners understand what they can do to maintain financial stability in 2022.
Now, competition between sectors is fiercer than ever as the globe became smaller. Those who have what it takes to increase their profitability are likely to reach further success in the future and grow their business. This article discusses seven things all business owners can do to help ensure financial stability.
Ensuring financial stability
You can’t achieve financial stability without consumers. That’s the only “free” source of money as debt and equity actually erode your business over time as you pay interest to these folks. So, the first task you want to tackle is to make your business a selling machine. Rather than focus on pushing products on consumers, however, focus on building great products that consumers beg to buy. Think about how long the lines are for folks wanting the newest iPhone or a pair of designer sneakers (trainers for those of you across the pond).
I ran across a statement that I love somewhere in my travels.
No one ever shrank to greatness
In essence, this means you can’t cut costs to ensure financial stability and while I would never tell any business to ignore cost-cutting, the focus should always remain on building revenue. Cost-cutting efforts that make it harder to generate revenue are counterproductive. Cutting costs on marketing, new product development, and research, should only make the cut when a firm is in a dire financial situation and only lasts for the shortest time possible to avoid strangling the business.
Hence, I’ll start with marketing’s role in ensuring financial stability.
1. Focus on building a loyal customer base
If you want your business to maintain a steady cash flow, you must retain a loyal customer base. If you build and maintain a loyal customer base, you never have to worry about generating profit. Loyalty begins with producing products that represent value to the consumer and ensuring the availability of those products where and when the consumer needs them. Next, you need an excellent customer service operation to quickly and thoroughly address any problems that arise. Finally, you’re ready to make your first sales by promoting your products to a market that needs your product — called a target market. Your efforts don’t stop with attracting customers, you must keep them happy while still attempting to attract new customers.
There are many steps you need to follow to build customer loyalty. It is undoubtedly not something that happens overnight. Firstly, you need to get to know your target market and continue to offer them the best products to satisfy their needs at the best price possible. Humanize your brand with social media, email marketing, and other tools to help you build relationships with customers rather than constantly pushing a hard sell that is off-putting for the customer and prospects alike.
You can also set up a customer loyalty program. Those who shop with you regularly receive access to rewards such as discounts and freebies. Setting up a program like this takes a lot of time and effort. You need to research what offers will work best with your target market before setting up the reward structure. Use the internet to search for some loyalty program top tips. There are plenty out there that can help steer you in the right direction.
2. Pay off existing debts
Starting a business is certainly not an easy activity. It requires a lot of upfront costs before you start making money. During startup, many business owners take out loans to help them get their business off the ground. However, the interest on these loans can quickly pile up. Therefore, you should prioritize paying off any outstanding debts that your business took on so you can end 2022 on a financially stable note. For some companies, this is a lot easier said than done. If your business is struggling to pay off its debts, try not to give up hope and don’t cut back on your marketing efforts or you’ll likely end up in worse shape than before. There are some things you can do to help your business get debt-free.
If you have multiple debts, list them in order of priority. Those with the highest interest rates are the ones you should aim to pay off first. This helps you avoid costs moving forward. You can also try consolidating your debt. Combine multiple loans in one, so you do not have to scramble around each month to find out what you owe. This gives you more control over your payments and it can make the prospect of paying them off seem a lot more manageable. You can learn more about how to pay off your debts through some online research or by contacting your banker.
Avoid taking on additional debt through careful budgeting and planning to ensure you don’t spend more than you make. In the beginning, ensure you have sufficient funds to carry the business for 3-6 months without revenue (more for manufacturing and certain other businesses). Don’t start the business until you have these funds.
Although this may sound like it goes against the advice I just gave, you might consider an accounts receivable loan to gain access to the proceeds from sales more quickly. Termed factoring, this type of debt is short-term and simply provides access to your revenue more quickly to allow you to grow your business by acquiring more products to sell, developing a new product, or even just paying operating expenses.
3. Have emergency funds on hand
Unfortunately, some businesses face sudden emergencies or unplanned expenses throughout their lifetime. An issue may arise that puts a halt to production, meaning staff is out of work and your facilities are not available for the time being. The pandemic was a great example of such a situation where revenue dropped to $0 for many companies. It is crucial that all business owners have emergency funds on hand to weather this type of storm. Sometimes, even minor maintenance issues can cause a lot of disruption. For example, a burst pipe could flood your headquarters. If you have the funds to fix the problem, your business is less likely to lose out on a lot of profit. The companies that don’t have emergency funds in place are the ones that suffer.
Starting an emergency fund does not mean you have to bank a load of cash. Instead, you can start small and slowly add to your fund as time goes on. You should consider depositing a small percentage of the revenue you make to your fund. You may not even miss this money set aside in the grand scheme of things. With an emergency fund, you do not have to deposit your own money into the account when there’s an emergency. Some business owners may question how much they need to save? The answer to that you likely need 3 months’ worth of expenses. However, don’t get discouraged if it takes you some time to build up this reserve.
4. Improve inventory management
No matter how big or small, every business requires inventory to operate. Whether it’s raw materials, parts, or finished goods optimizing your inventory saves money without compromising your service. To maintain financial stability, you need to assess the stock you have and accurately predict the amount of inventory required to meet future needs between now and your next replenishment, a process called demand forecasting. You don’t want too much inventory, which costs money to store and might become obsolete before being used, and you don’t want too little inventory or you experience opportunity costs in the form of lost sales because you didn’t have products on hand. You also want to optimize discounts by taking advantage of quantity pricing, called the economic order quantity. Effective inventory management is kind of a Goldilocks situation.
Optimizing inventory management is a crucial aspect of any business but is especially important for companies with a broad range of products or manufacturing parts/raw materials. Building on data from prior needs as well as science-based forecasts of future needs, you still need information regarding the economic order quantity, lead time (the time needed to receive a new shipment), and variance — the variation in lead time. To manage variance, companies often maintain a level of safety stock to avoid shortages if a shipment is delayed. The size of the safety stock is a function of the amount of variance. All things equal, a company prefers to purchase from a company with a longer lead time and a large variance to maintain financial stability.
Good inventory management helps you reduce costs. It can also help you identify items that are not selling very well. With this information, you can stop stocking this item, so you are no longer wasting money on it. With excellent inventory management in place, your business will certainly save a lot of money.
5. Negotiate with suppliers
A huge part of maintaining a steady cash flow is understanding how to increase your profitability and save money. One thing that business owners often fail to do is negotiate with their suppliers to get the best price possible. You should never settle for the deals you currently have with suppliers, as you could possibly get a better price from your current supplier if you negotiate one. For instance, you might agree to use a current supplier as your single source with a guarantee of a certain number of units per year. Or, you might switch some purchases from another supplier to your current supplier if you can get a more favorable price by combining purchases.
You might also find another supplier offering a more favorable price and use this in your negotiations or determine that switching is your best bet. This doesn’t mean you have to burn your bridges with your suppliers. Instead, business owners should enhance their communication skills and learn how to negotiate better and keep the relationship alive if they must switch suppliers. You never know when your needs might change and you need to start ordering from them again. Doing this could save your business a lot of money.
If negotiating is something that you are not comfortable with, we recommend you use the internet to your advantage. There are plenty of resources out there that offer great advice. The key is to be confident. Don’t fear asking your suppliers for what you want and stand firm. Don’t let yourself persuade you out of a good deal. Remember, there are plenty of other suppliers out there who may offer you the deal you want.
6. Pay your taxes
Tax season is always daunting for any business owner, although the right organisation and preparation make the whole process less painful. Rather than waiting around to find out how much your business owns, get one step ahead of the game and find out before the season approaches. There are a few ways that you can achieve this. Firstly, you can consult with a financial professional. Depending on the size of your business and what you sell, they can help you understand what taxes you are required to pay and help you find ways to legally reduce your tax bill. It is crucial that you get advice as failure to pay your taxes can result in a hefty fine.
In the US, most businesses must pay their taxes in quarterly installments. Then, at the end of the tax year, you reconcile your account and pay any additional taxes owed or receive a refund if you overpaid.
Some businesses may not have the budget to hire a finance professional. In these instances, we recommend that you use some tools on the internet to your advantage. For example, if you live in the Canadian province of Quebec, you are required to pay a different rate of income tax than other areas. To help you, you can use tools like this tax calculator Quebec provided by Wealthsimple. It enables you to estimate your provincial taxes, so you’re not hit with any surprise expenses when tax season arrives.
7. Keep your records accurately through timely entry
Most businesses keep financial records up-to-date by hiring a bookkeeper or assigning this role to an employee who enters transactions quickly and accurately. This process records all the transactions that your company makes, such as receiving or paying a bill, sending out payroll, or selling products. It then takes these transactions and organizes them so the information is readily available for decision-making. These documents become a vital asset for your business. You use them to identify areas where you need to cut costs, track sales to build forecasts, ensure you pay bills on time, and prepare tax statements. You should think carefully about who you put in charge of your books. We recommend you hire a trained accountant or bookkeeper, as taking on the job with little experience can result in mistakes.
Hiring the right bookkeeper isn’t a difficult task as you’ll get offers from many accountants and bookkeepers based on your registration as a business. Seek inspiration using online resources to help guide you on how to make your choice. Ideally, you want to choose an experienced candidate with the correct certifications. It’s important that your financial advisor share your financial philosophy. Working with small businesses over many years, I encountered one’s where the financial advisor saw their role as a parent refusing funds to the child unless convinced of the value of the expense. That’s not the role of a financial advisor. They’re in the role of offering advice and options, not as a gatekeeper. Ensure they understand your expectations and buy into them. In addition, it helps if your financial advisor has some understanding of your business niche so they can work without asking a lot of questions.
By employing these 7 tactics, you’re in a great position to provide financial stability for your firm over the long run. Good luck.
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