As an entrepreneur, your primary focus should be on building your business and ensuring its financial stability. You can do this by setting specific financial goals and creating a detailed plan for managing your cash flow.
What are some strategies you are developing to establish a strong roadmap for your professional and personal financial goals?
"Any business, whether just starting up or running, needs a financial roadmap," says Jim Averill, VP and Business Banking Relationship Manager with First Horizon Bank. "This roadmap defines what the business is going to focus on and should be the foundation for any organization. Entrepreneurs should understand who their clients are, how they are going to get paid, and the cashflow cycle of the business."
A business's success is directly tied to their ability to optimize their cash flow and put surplus funds to work for them. The same is true for building personal wealth.
Averill explains that one of the main focuses for the business owner should be planning for their own personal wealth in the beginning phase of starting the business. They should ask themselves, 'why am I starting this business, and how do I reach my goals?' Bring in a trusted advisor or financial planner that can provide guidance on how to reach those goals over a specific period, and plan for the inevitable exit.
Averill shares money-management tips that entrepreneurs and their businesses cannot live without.
You should become very familiar with your business's cash conversion cycle. This will help you to make better decisions about how to allocate your resources.
The cash conversion cycle is the amount of time it takes a company to convert funds invested in production and sales into cash or working capital. The cycle will differ depending on the type of business and industry.
Averill explains that some industries like restaurants and retail have an immediate cash conversion cycle, while other industries like manufacturing and real estate have a longer period. To determine an organization's cash conversion cycle, an entrepreneur would calculate its days of inventory outstanding, plus days of sales outstanding, minus days of payables outstanding.
Averill says that understanding this equation allows the owner to know, on average, how many days it will take the corporation to recognize cash on hand.
Make sure you are familiar with how and when your business gets paid.
" businesses usually have 30 to 120 days of payment terms, depending on the industry," says Averill. "Payroll is usually due every two weeks, and other bills are usually due within 30 days. This can create a cash flow problem or even a surplus, depending on how the organization is paid. Entrepreneurs should look at the cash conversion cycle to determine when and how long terms can be provided and how quickly payments need to be received."
"The organization may decide to provide 30-45 day terms to earn business from their clients during the startup phase," he says. "However, this may extend the cash conversion cycle due to the delay in payment processing for check or credit payments."
As the company grows, entrepreneurs may have the option and relationship with customers to adjust the payment cycle to 15 to 30 days with a discount provided for immediate payment. "To receive payments faster, the organization may determine to be paid via ACH, wire, or merchant processing at an additional cost," Averill says.
It is important to know when to use cash instead of obtaining credit. Using cash instead of credit can help you stay within your budget and avoid debt. Credit can be helpful when you need to make a large purchase or when you need to finance a project, but it is important to use it wisely.
Carrying a line of credit is often seen as a last resort for desperate business owners, but it can actually be a powerful tool for building a business or dealing with unexpected circumstances.
"Don't wait until an emergency arises to seek credit," Averill recommends. "Instead, proactively work with a financial advisor like First Horizon Bank to help determine strategies for investing capital into the business and themselves, while also knowing when it's appropriate to use credit. Using credit wisely for the operation of the business can open opportunities for the business owner to set aside the cash surplus for their personal growth and retirement strategy."
You should always protect your assets. This includes your home, your car, your savings, and your investments. There are many ways to protect your assets, and you should discuss this with your financial advisor.
BOP insurance provides protection from liability claims and lawsuits, as well as company assets such as buildings, equipment, and inventory. If the business must shut down due to a covered loss, BOP policies can also provide financial protection.
Key person insurance is a form of life insurance that protects against financial loss if an important person in the company, such as an owner, partner, top executive, or essential employee, becomes sick or needs to leave the business.
"Averill says that these programs are extremely useful to protecting what an entrepreneur has worked so hard to achieve."
Stick to a schedule of meeting with advisors.
Businesses that are financially sound prepare profit and loss statements along with balance sheets quarterly and discuss them with their financial advisors. This provides the leadership team with insight into whether the company met or exceeded its financial goals.
Averill says that these meetings are also a perfect time for owners to discuss short- and long-term goals regarding their personal wealth.
"Meeting with advisors quarterly allows the business owner to adjust personal financial goals and strategies as the company generates interim financials," he says. "The best time to reflect on personal strategies is when the owner has a clear picture of what the company has accomplished year to date. This way, the advisors can guide the business owner on how to allocate any cash surpluses of the business."
Averill advises developing a relationship with a local banker and CPA and to regularly get on their calendar. "Make sure that they understand what is to be discussed and have a plan in place to review," he says.
Working with your advisors to develop a plan at the beginning that defines milestones and strategies to achieve them can put you on a path to find professional success and personal wealth.