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business finance 101, business finance definition, basics, and best practices - YouTube
Channel: selfLearn-en
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you have a great idea you have a product
or service for which the war
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has been waiting you've scraped together
enough cash to get your ID off the
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ground you have a location you've done
your advertising you just know this is
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going to work and six months later
you're out of business statistics from
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the Small Business Administration
indicate that about half of new
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businesses fail in the first five years
many new businesses fail and the reasons
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are many and varied in this course we're
going to address some of the primary
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financial reasons that new businesses
don't make it there are of course many
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non-financial reasons that new
businesses struggle poor marketing
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poor location poor product quality we're
going to limit this course to the
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financial reasons for business failure
if you get everything right but the
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financial side of things your business
is going to struggle of course if you
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get the financial side of things right
and drop the ball with the non financial
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aspects of the new business you'll
struggle as well with this course we'll
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stick with the financial aspects of
struggling new businesses because that's
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what we know a little something about we
have identified five common reasons that
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new businesses that struggle seem to
face of course this is not an exhaustive
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list but these five reasons seem to
consistently pop up when it comes to new
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businesses that struggle those five
reasons are insufficient capital poor
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cash management poor record-keeping and
controls improper product pricing and
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uncontrolled growth before we get
started let me first say that several of
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these reasons for struggling are
interrelated uncontrolled growth can
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relate to poor cash management poor cash
management can relate to poor
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record-keeping and so on while these
topics can be interrelated we will
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address each one separately and then
comment on the interrelationships when
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they are apparent so let's get started
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you
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let's begin with the money needed to
start a business too many new businesses
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start their business without enough
capital they just don't have enough
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money in the bank to support them while
their cash flows get up to speed it
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turns out that the rent has to be paid
the utilities have to be paid equipment
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may need to be purchased or rented the
employees have to be paid the inventory
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has to be purchased all of your expenses
have to be paid but you're waiting for
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potential customers first to find you
and then second to pay you there's often
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a lag between when you get paid for
providing a good or service and when you
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have to pay your vendors and generally
that lag is not in your favor
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also when starting a business it takes
time for your customers to find you and
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for you to get your sales and marketing
efforts up to full speed during that
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time your expenses will continue to need
to be paid it would be nice if all
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customers would pay immediately it would
also be nice if vendors would wait to be
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paid until you are paid yeah that would
be nice
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many businesses are forced to close
before they are able to find out if
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their business model has a chance to
demonstrate that its sound they just run
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out of money when starting a business
realize that it will take time for cash
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inflows to start flowing but the cash
outflow start flowing immediately make
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sure that you have access to sufficient
capital to allow your new business
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venture enough time to succeed so how
much cash is enough cash the answer to
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that question can only come through a
careful budgeting of cash inflows and
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cash outflows it is critical that is
part of your business plan you sit down
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and carefully and realistically map out
your expected cash inflows and outflows
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for at least the first six months of
your new business
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this exercise will allow you to
determine any forecasted cash shortage
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and will allow you enough time to
arrange for needed financing either from
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partners or from creditors knowing well
ahead of time that you will need cash
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allowed you to make necessary
arrangements for financing finding out
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today that you need cash tomorrow
puts you in an unnecessary bind we will
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talk a little later in the course about
the specifics of cash management but it
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is critical upfront that you have an
understanding that not having enough
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money to get started can result in a
good idea meeting and early demise
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make sure you have sufficient capital or
access to sufficient capital before you
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open the doors to your new business
again many new businesses with great
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business ideas don't make it through the
critical first few months a great ideas
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not sufficient you need to ensure that
you have access to enough capital to get
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you through those first few months by
the way if you plan on going to a bank
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to ask for financing for your new
business one of the first things they
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will ask about is your cash forecast
they will want to know what capital you
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currently have available to you if you
plan on asking friends and family to
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invest if they are smart they will ask
about your cash forecast to obtain
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capital from others you need a cash
forecast you might as well prepare one
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for yourself the cash forecast will
allow you to determine how much capital
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you will need to get you through those
critical first few months
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you
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we know you'll need sufficient capital
get your new business through the
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critical first few months let's assume
you've made it through those first few
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months you will still need to track your
cash inflows and outflows to ensure that
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you have sufficient cash to pay the
bills that are surely coming whether you
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are at the start of your business or
well into the lifecycle of your business
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managing cash is critical for the
well-being of your business and cash
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management does not happen by chance it
is up to you to ensure that your cash is
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managed we will do this by preparing a
cash forecast or budget let's start our
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discussion of cash management by
distinguishing between two types of
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costs fixed costs and variable costs
fixed costs are exactly that they're
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fixed budgeting for fixed costs is
relatively straightforward the amount is
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fixed at least over the short-term
variable costs are costs that vary
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relative to some activity or cost driver
for a restaurant for example costs might
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vary based on the number of customers
first shop at the mall costs may vary
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based on the number of hours that the
shop is opened labor costs utility costs
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and so forth now there can be a number
of cost drivers or in other words costs
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can vary for a number of reasons it just
depends on how complicated you want to
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get adding more drivers makes the
arithmetic a little more complex but the
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concept is still the same now step one
in cash management is to identify all of
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your fixed and all of your variable
costs all of those costs it's easy to
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forget an expense here or an expense
there and before you know it your cash
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forecasts are useless the cash forecast
is only as good as the inputs next we'll
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talk about variable costs
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answering the question how many
customers can we expect is the hard part
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please don't gloss over this question
your business will fail or succeed based
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on the answer to this question how many
customers can you realistically expect
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many costs will vary based on
anticipated customer demand answering
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this big question is beyond the scope of
this video but it would involve such
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things as scoping out your competitors
volume of business
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assessing expected population growth in
your area surveying potential customers
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a whole host of things your forecast of
sales will be critical in helping to
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prepare your forecast of cash inflows
and outflows we will do some sensitivity
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analysis with these numbers to determine
what might happen to our profits if more
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or fewer customers show up now that we
have a reliable forecast of our cost
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driver at least as reliable as possible
we can now compute our variable costs
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please note that as our business grows
and matures we will be able to determine
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a much more reliable estimate on the
number of customers we can expect
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let's now turn our attention to the next
area where new business owners tend to
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drop the ball that is the area of poor
record-keeping most new business owners
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hate to worry about the record-keeping
they would rather worry about customers
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and sales and evasion and growth and
everything other than record-keeping
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proper record-keeping and internal
controls are the blocking and tackling
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of new businesses not very glamorous and
not very interesting but it needs to be
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done and it's safe to say that it needs
to be done well you can liken proper
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record-keeping and adequate internal
controls to the keeping of statistics in
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a football game the person tracking the
statistics is not on the field playing
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the game but those statistics are very
helpful to those who are on the field
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playing the game as we discussed in the
previous video on cash management you
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need to track your inflows and outflows
of cash so that you can forecast future
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cash flows all we're talking about here
is developing a system of tracking your
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inflows and outflows your obligations to
others and others obligations to you it
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can be as simple as that depending on
the size of your business you can
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purchase accounting software
off-the-shelf there are a number of
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great products that will do the job with
minimal training but it is critical that
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someone take responsibility for keeping
the books why is it critical well three
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reasons off the top of my head first
more accurate information about your
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business will assist you in running your
business better you will need
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information about cash inflows and
outflows and about who you owe and who
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owes you second if you ever need
external financing bankers or investors
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will insist on accurate financial
information they will need that
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information to assess business risk you
need that same information for that same
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reason and third taxes payroll taxes
property taxes income taxes the list
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goes on and on you need a system that
tracks your tax obligations to ensure
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that you pay the right amounts at the
right times if the government has to
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come in and do your taxes for you via an
audit remember they don't work for you
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they work for the taxing authorities
they will not be looking out for your
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best interest that will not be their job
so get yourself a system for tracking
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your inflows and outflows get a system
that will keep track of who you owe and
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who owes you get yourself a system that
will provide you with the information
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that you will need to better run your
business
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now about controls what are they
controls our procedures that should be
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in place to ensure that one the
information that is being collected in
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your accounting system is accurate and
reliable thereby helping you to run your
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business better and to to safeguard your
assets and your records now what sort of
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control should I have on information
that I will collect you will need to
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answer questions like how will you
document that your cash outflows our
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legitimate business expenses
you better have proper documentation if
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I'm in a business that has inventory for
resale how will I know how much I have
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on hand how do I know how many hours my
employees have worked
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you better have a system for tracking
this information and of course you will
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need a system that collects information
about your cash inflows and your cash
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outflows and you also need to know who
you owe and who owes you we've talked
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about that what else well you'll have
information that's confidential about
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employees pay rates Social Security
numbers etc that all has to be
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safeguarded what about customer lists
what about pricing information as you
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can imagine there's a lot of top-secret
information relating to the inner
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workings of your business that you don't
want getting out you need to ensure that
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you have systems that protect your
information and ensures that the system
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producing your information is accurate
and reliable one last thing to mention
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that is often taken for granted you will
need to safeguard your cash
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you will need procedures in place to
make sure that cash and checks are
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quickly and correctly deposited in the
bank and that only authorized
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expenditures are made this is no fun to
talk about but we tend to assume that
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those with whom we work are looking out
for the best interests of the company
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now that is often the case but is also
often not the case many individuals are
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looking out for them you need to make
sure that those individuals are never
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given the opportunity to be exposed to a
situation where they might compromise
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their integrity that is done by
developing a set of controls within your
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business to ensure that information is
collected quickly and correctly and that
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procedures are in place to ensure that
assets especially cash are handled
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properly now remember we said at the
outset that this topic is the
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no fun part of business no one likes to
talk about paperwork if you don't talk
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about and establish a system that
collects accurate information in a
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timely fashion and safeguard your assets
you will have plenty time to talk about
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that topic later when your business
folds up a good system of record-keeping
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and controls is what the scientists
would call a necessary but not
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sufficient condition a good information
system will not ensure the success of
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your business
but a bad information system will
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certainly contribute to your lack of
success
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you
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so what can be so hard about pricing a
product don't you just figure out what
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your costs are and then add some sort of
markup for profit oh that it were that
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easy if your price is too high
regardless of your cost someone in the
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market will enter price you assuming
that the quality of product or service
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is similar in many cases you will be a
price taker and you will have to manage
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your costs so that you can earn a profit
given a certain price is determined by
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the market now let me say that again in
most instances you don't price your
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product to cover your cost instead you
determine if given a certain market
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price your cost structure is such that
you can earn a profit the biggest
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mistake new business owners make in
product pricing is not considering and
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covering all of their costs when
entering a market now it is true that
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when you are initially trying to
penetrate a market you may be willing to
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lose a little money to gain market share
but that strategy is not sustainable
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over time over the long term you must
cover all of your costs all of your
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costs
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you
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now to our last topic uncontrolled
growth growth is awesome increased
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market share is good sales trending
upward is the dream and unmanaged growth
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has killed a lot of companies growth
must be carefully done or it could be
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fatal to your business the reason being
is that growth often requires cash and
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cash is often the one thing that new
businesses do not have a lot of in fact
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a lot of new business owners when faced
with the cash flow issues associated
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with starting a new business they
mistakenly think that the solution to
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their cash flow problems is to grow
faster not realizing that the fast
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growth is causing the cash flow problem
in the first place in other words they
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hit the gas when they should hit the
brake so how does growth cause cash flow
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problems well think about it in a
typical business that is selling a
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product to a customer on credit that is
the customer will pay and say 30 days
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you as the business owner need to pay
your rent pay your insurance pay your
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employees pay for the inventory that
sell that inventory and wait for 30 days
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to collect the cash to grow faster means
you need to buy and pay for more
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inventory and then sell that inventory
and wait for 30 days to collect the cash
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the more inventory you have to buy the
more inventory you have to pay for and
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then still wait 30 days to collect the
cash well let's just have our suppliers
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wait longer to collect from us until we
collect from our customers remember this
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your suppliers are having the same cash
flow issues that you are facing they
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would like to receive their cash sooner
rather than later
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so what should you do next that depends
on what you identify is your particular
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small business problem are you having
trouble with poor records are you
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finding your financial reports to be
uninformative or too often non-existent
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and like it or not you need to learn
something about accounting why are you
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having trouble managing your cash flow
are you always feeling cash squeezed
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with not enough financial capital to
invest in the assets information of
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people that you need and you need to
learn a little more about the field of
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Finance maybe you feel like you are
operating your business blind your
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profitability seems low but you can't
figure out why and you need some
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exposure to some simple techniques of
financial analysis finally remember that
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there are lots of qualified business
advisors out there sometimes it makes
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some sense to spend a little money to
meet with an experienced business
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adviser describe your business your
plans and your frustrations to the south
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side advisor she or he can then help you
sort through the weaknesses of your
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business to identify the things that you
need to work on first small businesses
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are the source of creativity in an
economy a small business is a precious
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thing the embodiment of a person's ideas
energies and ambitions I salute those of
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you who have the entrepreneurial spirit
and have started or thinking of starting
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your own small business I wish you great
joy and success
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you
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