Financial Issues for Small Business Roundup

Financial Issues for Small Business Roundup

financial issues for small business

Having a firm understanding of the various financial issues your business faces can be the difference between thriving and just surviving.

This roundup #2 of Financial Issues briefs will answer many of your questions. Our previous post can be read here.

Key Financial Ratios

Financial ratios are designed to measure aspects of financial performance. These ratios can be meaningful used alone, but are generally more useful when compared to other companies in the same or similar industries. These comparisons will identify variations from the norm which may then warrant management attention. See RESOURCES, below, for more ratios and sources of industry data.

In addition, as with other measures, how these ratios change over time can be important to identifying trends, either problem areas or areas that have shown improvement. It is common for banks and other lenders to include some of these ratios in loan documents, which usually allows the bank to take action if the ratios fall below specified thresholds.

This brief has some of the more commonly used ratios…

Breakeven Analysis

It’s important, particularly for start-up companies, to understand the level of sales volume that they need to achieve in order to be financially viable. That level is the breakeven sales level. A breakeven sales level occurs when sales are exactly equal to total costs – no profit and no loss.

Obviously, your objective is to make a profit, not just break even. However, determining your breakeven sales level is often an important step to understanding the potential of your business.

The key to determining the breakeven sales level is determining, as accurately as possible, which of your expenses are fixed and which are variable. All expenses must be classified as one or the other, or allocated if they are semi-variable.

Business Feasibility Analysis

In order to complete a BFA for a business, a rough-cut simplified business plan needs to be formulated. Refer to SCORE Brief #03.00 on business plans.

The object of the BFA is to establish whether or not the venture is worth (1) putting the time, effort and expense into proceeding with all the steps necessary to start a new business, and (2) taking on the risks associated with business start-ups. It comes down to whether the risk is worth the reward.

First, in your BFA, make sales projections for the business by year for the first three years.

Granting Credit to a Customer

The small business operator must realize that granting credit will be, and should be, one of their major concerns. Poor credit and collection policies have resulted in the failure of many companies, so it is very important to establish credit policies at startup. These policies will have an influence on the financial, marketing, and sales/service planning, and will help to determine whether to deal in cash, credit or a combination of both.

There is no set credit procedure which will fit every business. The choice will depend upon a host of situations: the particular industry you are in; the customer and the likelihood that you will be paid in a timely manner; your competition; national and local economical conditions; your own financial status; and finally, the affordable risks you can and are willing to take.

Download a Sample Credit Application

Successful Accounts Receivable Collections

This brief presents three principles for successful Accounts Receivable (AR) collection and the simple steps for implementation. It is intended to provide direction to both the business owner and the collections staff.

Successful collection of money owed (AR) to the business is obtained by following three basic principles :

  1. Preparation
  2. Process
  3. Persistence

These are the summaries of our second roundup of briefs on Financial Issues you can access them here.

And if you would like to request a free SCORE mentor to work with on your marketing or any other business area you can do so here.

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