business finance 101, business finance definition, basics, and best practices - YouTube

Channel: selfLearn-en

[7]
you have a great idea you have a product or service for which the war
[12]
has been waiting you've scraped together enough cash to get your ID off the
[16]
ground you have a location you've done your advertising you just know this is
[21]
going to work and six months later you're out of business statistics from
[26]
the Small Business Administration indicate that about half of new
[30]
businesses fail in the first five years many new businesses fail and the reasons
[35]
are many and varied in this course we're going to address some of the primary
[39]
financial reasons that new businesses don't make it there are of course many
[44]
non-financial reasons that new businesses struggle poor marketing
[47]
poor location poor product quality we're going to limit this course to the
[52]
financial reasons for business failure if you get everything right but the
[56]
financial side of things your business is going to struggle of course if you
[61]
get the financial side of things right and drop the ball with the non financial
[65]
aspects of the new business you'll struggle as well with this course we'll
[70]
stick with the financial aspects of struggling new businesses because that's
[73]
what we know a little something about we have identified five common reasons that
[78]
new businesses that struggle seem to face of course this is not an exhaustive
[83]
list but these five reasons seem to consistently pop up when it comes to new
[88]
businesses that struggle those five reasons are insufficient capital poor
[94]
cash management poor record-keeping and controls improper product pricing and
[101]
uncontrolled growth before we get started let me first say that several of
[106]
these reasons for struggling are interrelated uncontrolled growth can
[110]
relate to poor cash management poor cash management can relate to poor
[115]
record-keeping and so on while these topics can be interrelated we will
[120]
address each one separately and then comment on the interrelationships when
[124]
they are apparent so let's get started
[135]
you
[137]
let's begin with the money needed to start a business too many new businesses
[142]
start their business without enough capital they just don't have enough
[146]
money in the bank to support them while their cash flows get up to speed it
[151]
turns out that the rent has to be paid the utilities have to be paid equipment
[156]
may need to be purchased or rented the employees have to be paid the inventory
[161]
has to be purchased all of your expenses have to be paid but you're waiting for
[165]
potential customers first to find you and then second to pay you there's often
[171]
a lag between when you get paid for providing a good or service and when you
[175]
have to pay your vendors and generally that lag is not in your favor
[179]
also when starting a business it takes time for your customers to find you and
[185]
for you to get your sales and marketing efforts up to full speed during that
[189]
time your expenses will continue to need to be paid it would be nice if all
[195]
customers would pay immediately it would also be nice if vendors would wait to be
[199]
paid until you are paid yeah that would be nice
[202]
many businesses are forced to close before they are able to find out if
[208]
their business model has a chance to demonstrate that its sound they just run
[212]
out of money when starting a business realize that it will take time for cash
[217]
inflows to start flowing but the cash outflow start flowing immediately make
[223]
sure that you have access to sufficient capital to allow your new business
[227]
venture enough time to succeed so how much cash is enough cash the answer to
[232]
that question can only come through a careful budgeting of cash inflows and
[236]
cash outflows it is critical that is part of your business plan you sit down
[242]
and carefully and realistically map out your expected cash inflows and outflows
[247]
for at least the first six months of your new business
[250]
this exercise will allow you to determine any forecasted cash shortage
[255]
and will allow you enough time to arrange for needed financing either from
[260]
partners or from creditors knowing well ahead of time that you will need cash
[264]
allowed you to make necessary arrangements for financing finding out
[268]
today that you need cash tomorrow puts you in an unnecessary bind we will
[273]
talk a little later in the course about the specifics of cash management but it
[278]
is critical upfront that you have an understanding that not having enough
[282]
money to get started can result in a good idea meeting and early demise
[287]
make sure you have sufficient capital or access to sufficient capital before you
[293]
open the doors to your new business again many new businesses with great
[298]
business ideas don't make it through the critical first few months a great ideas
[303]
not sufficient you need to ensure that you have access to enough capital to get
[308]
you through those first few months by the way if you plan on going to a bank
[313]
to ask for financing for your new business one of the first things they
[316]
will ask about is your cash forecast they will want to know what capital you
[320]
currently have available to you if you plan on asking friends and family to
[325]
invest if they are smart they will ask about your cash forecast to obtain
[330]
capital from others you need a cash forecast you might as well prepare one
[334]
for yourself the cash forecast will allow you to determine how much capital
[339]
you will need to get you through those critical first few months
[352]
you
[354]
we know you'll need sufficient capital get your new business through the
[358]
critical first few months let's assume you've made it through those first few
[361]
months you will still need to track your cash inflows and outflows to ensure that
[366]
you have sufficient cash to pay the bills that are surely coming whether you
[370]
are at the start of your business or well into the lifecycle of your business
[374]
managing cash is critical for the well-being of your business and cash
[379]
management does not happen by chance it is up to you to ensure that your cash is
[384]
managed we will do this by preparing a cash forecast or budget let's start our
[390]
discussion of cash management by distinguishing between two types of
[393]
costs fixed costs and variable costs fixed costs are exactly that they're
[399]
fixed budgeting for fixed costs is relatively straightforward the amount is
[403]
fixed at least over the short-term variable costs are costs that vary
[407]
relative to some activity or cost driver for a restaurant for example costs might
[413]
vary based on the number of customers first shop at the mall costs may vary
[418]
based on the number of hours that the shop is opened labor costs utility costs
[423]
and so forth now there can be a number of cost drivers or in other words costs
[428]
can vary for a number of reasons it just depends on how complicated you want to
[432]
get adding more drivers makes the arithmetic a little more complex but the
[436]
concept is still the same now step one in cash management is to identify all of
[440]
your fixed and all of your variable costs all of those costs it's easy to
[445]
forget an expense here or an expense there and before you know it your cash
[449]
forecasts are useless the cash forecast is only as good as the inputs next we'll
[454]
talk about variable costs
[460]
answering the question how many customers can we expect is the hard part
[464]
please don't gloss over this question your business will fail or succeed based
[470]
on the answer to this question how many customers can you realistically expect
[474]
many costs will vary based on anticipated customer demand answering
[480]
this big question is beyond the scope of this video but it would involve such
[485]
things as scoping out your competitors volume of business
[487]
assessing expected population growth in your area surveying potential customers
[492]
a whole host of things your forecast of sales will be critical in helping to
[497]
prepare your forecast of cash inflows and outflows we will do some sensitivity
[502]
analysis with these numbers to determine what might happen to our profits if more
[506]
or fewer customers show up now that we have a reliable forecast of our cost
[511]
driver at least as reliable as possible we can now compute our variable costs
[516]
please note that as our business grows and matures we will be able to determine
[521]
a much more reliable estimate on the number of customers we can expect
[533]
let's now turn our attention to the next area where new business owners tend to
[538]
drop the ball that is the area of poor record-keeping most new business owners
[543]
hate to worry about the record-keeping they would rather worry about customers
[547]
and sales and evasion and growth and everything other than record-keeping
[553]
proper record-keeping and internal controls are the blocking and tackling
[556]
of new businesses not very glamorous and not very interesting but it needs to be
[561]
done and it's safe to say that it needs to be done well you can liken proper
[567]
record-keeping and adequate internal controls to the keeping of statistics in
[571]
a football game the person tracking the statistics is not on the field playing
[575]
the game but those statistics are very helpful to those who are on the field
[580]
playing the game as we discussed in the previous video on cash management you
[586]
need to track your inflows and outflows of cash so that you can forecast future
[589]
cash flows all we're talking about here is developing a system of tracking your
[594]
inflows and outflows your obligations to others and others obligations to you it
[599]
can be as simple as that depending on the size of your business you can
[603]
purchase accounting software off-the-shelf there are a number of
[607]
great products that will do the job with minimal training but it is critical that
[611]
someone take responsibility for keeping the books why is it critical well three
[616]
reasons off the top of my head first more accurate information about your
[621]
business will assist you in running your business better you will need
[625]
information about cash inflows and outflows and about who you owe and who
[628]
owes you second if you ever need external financing bankers or investors
[634]
will insist on accurate financial information they will need that
[638]
information to assess business risk you need that same information for that same
[643]
reason and third taxes payroll taxes property taxes income taxes the list
[650]
goes on and on you need a system that tracks your tax obligations to ensure
[655]
that you pay the right amounts at the right times if the government has to
[659]
come in and do your taxes for you via an audit remember they don't work for you
[663]
they work for the taxing authorities they will not be looking out for your
[668]
best interest that will not be their job so get yourself a system for tracking
[673]
your inflows and outflows get a system that will keep track of who you owe and
[677]
who owes you get yourself a system that will provide you with the information
[681]
that you will need to better run your business
[689]
now about controls what are they controls our procedures that should be
[694]
in place to ensure that one the information that is being collected in
[698]
your accounting system is accurate and reliable thereby helping you to run your
[701]
business better and to to safeguard your assets and your records now what sort of
[707]
control should I have on information that I will collect you will need to
[710]
answer questions like how will you document that your cash outflows our
[715]
legitimate business expenses you better have proper documentation if
[719]
I'm in a business that has inventory for resale how will I know how much I have
[723]
on hand how do I know how many hours my employees have worked
[727]
you better have a system for tracking this information and of course you will
[731]
need a system that collects information about your cash inflows and your cash
[734]
outflows and you also need to know who you owe and who owes you we've talked
[739]
about that what else well you'll have information that's confidential about
[743]
employees pay rates Social Security numbers etc that all has to be
[748]
safeguarded what about customer lists what about pricing information as you
[753]
can imagine there's a lot of top-secret information relating to the inner
[756]
workings of your business that you don't want getting out you need to ensure that
[761]
you have systems that protect your information and ensures that the system
[764]
producing your information is accurate and reliable one last thing to mention
[770]
that is often taken for granted you will need to safeguard your cash
[774]
you will need procedures in place to make sure that cash and checks are
[778]
quickly and correctly deposited in the bank and that only authorized
[782]
expenditures are made this is no fun to talk about but we tend to assume that
[787]
those with whom we work are looking out for the best interests of the company
[791]
now that is often the case but is also often not the case many individuals are
[797]
looking out for them you need to make sure that those individuals are never
[802]
given the opportunity to be exposed to a situation where they might compromise
[806]
their integrity that is done by developing a set of controls within your
[810]
business to ensure that information is collected quickly and correctly and that
[814]
procedures are in place to ensure that assets especially cash are handled
[819]
properly now remember we said at the outset that this topic is the
[823]
no fun part of business no one likes to talk about paperwork if you don't talk
[828]
about and establish a system that collects accurate information in a
[832]
timely fashion and safeguard your assets you will have plenty time to talk about
[837]
that topic later when your business folds up a good system of record-keeping
[842]
and controls is what the scientists would call a necessary but not
[846]
sufficient condition a good information system will not ensure the success of
[852]
your business but a bad information system will
[855]
certainly contribute to your lack of success
[866]
you
[869]
so what can be so hard about pricing a product don't you just figure out what
[873]
your costs are and then add some sort of markup for profit oh that it were that
[877]
easy if your price is too high regardless of your cost someone in the
[881]
market will enter price you assuming that the quality of product or service
[884]
is similar in many cases you will be a price taker and you will have to manage
[889]
your costs so that you can earn a profit given a certain price is determined by
[893]
the market now let me say that again in most instances you don't price your
[898]
product to cover your cost instead you determine if given a certain market
[902]
price your cost structure is such that you can earn a profit the biggest
[906]
mistake new business owners make in product pricing is not considering and
[911]
covering all of their costs when entering a market now it is true that
[915]
when you are initially trying to penetrate a market you may be willing to
[918]
lose a little money to gain market share but that strategy is not sustainable
[922]
over time over the long term you must cover all of your costs all of your
[928]
costs
[936]
you
[938]
now to our last topic uncontrolled growth growth is awesome increased
[943]
market share is good sales trending upward is the dream and unmanaged growth
[948]
has killed a lot of companies growth must be carefully done or it could be
[952]
fatal to your business the reason being is that growth often requires cash and
[957]
cash is often the one thing that new businesses do not have a lot of in fact
[962]
a lot of new business owners when faced with the cash flow issues associated
[967]
with starting a new business they mistakenly think that the solution to
[971]
their cash flow problems is to grow faster not realizing that the fast
[975]
growth is causing the cash flow problem in the first place in other words they
[980]
hit the gas when they should hit the brake so how does growth cause cash flow
[984]
problems well think about it in a typical business that is selling a
[988]
product to a customer on credit that is the customer will pay and say 30 days
[993]
you as the business owner need to pay your rent pay your insurance pay your
[997]
employees pay for the inventory that sell that inventory and wait for 30 days
[1002]
to collect the cash to grow faster means you need to buy and pay for more
[1007]
inventory and then sell that inventory and wait for 30 days to collect the cash
[1012]
the more inventory you have to buy the more inventory you have to pay for and
[1016]
then still wait 30 days to collect the cash well let's just have our suppliers
[1021]
wait longer to collect from us until we collect from our customers remember this
[1025]
your suppliers are having the same cash flow issues that you are facing they
[1030]
would like to receive their cash sooner rather than later
[1036]
so what should you do next that depends on what you identify is your particular
[1041]
small business problem are you having trouble with poor records are you
[1045]
finding your financial reports to be uninformative or too often non-existent
[1049]
and like it or not you need to learn something about accounting why are you
[1053]
having trouble managing your cash flow are you always feeling cash squeezed
[1057]
with not enough financial capital to invest in the assets information of
[1061]
people that you need and you need to learn a little more about the field of
[1064]
Finance maybe you feel like you are operating your business blind your
[1069]
profitability seems low but you can't figure out why and you need some
[1073]
exposure to some simple techniques of financial analysis finally remember that
[1077]
there are lots of qualified business advisors out there sometimes it makes
[1081]
some sense to spend a little money to meet with an experienced business
[1084]
adviser describe your business your plans and your frustrations to the south
[1088]
side advisor she or he can then help you sort through the weaknesses of your
[1092]
business to identify the things that you need to work on first small businesses
[1097]
are the source of creativity in an economy a small business is a precious
[1101]
thing the embodiment of a person's ideas energies and ambitions I salute those of
[1107]
you who have the entrepreneurial spirit and have started or thinking of starting
[1111]
your own small business I wish you great joy and success
[1123]
you