Did you know that only 50% of small business start-ups survive their fifth year, while just 30% survive their tenth?
And among the top reasons for the failure is the lack of enough capital.
Therefore, if you’re investing in a small business, you’ll need to pay extra attention to the financial health of your entity.
But how can you do this?
Where do you start?
What do you review?
These are some of the few of the questions you may ask yourself, especially if you’re new to the business.
To get you started in the right direction, here are a few tips for improving your financial foundation when investing in small business.
1. Keep Track of Your Finances
Tracking your cashflows will help you understand how much money your business is generating and how much you’re spending. This information will, in turn, be useful in setting up your budget.
You may also set up a bookkeeping system to help you track your business finances.
2. Review Your Financial Ratios Regularly
Financial ratios will help you assess the financial performance of your business. They can help you determine the areas in which your business is struggling and enable you to find suitable solutions.
Some of the key financial ratios you need to monitor include liquidity ratios, profitability ratios, and efficiency ratios.
3. Manage Your Inventory
Poor inventory management can drain your business’ financial resources since it has a significant impact on profitability.
Therefore, invest in an inventory management system to keep track of your stock levels so that you don’t run out or end up keeping items you don’t need.
4. Consider Capital Pooling
Capital pooling is a good option if you’re starting a business with little capital. It works ideally in the real estate segment through syndication where you pool capital from investors and invest in a larger property.
You can find more information about real estate syndication in this new article.
5. Build Strong Relationships with Your Customers
Customer relationships can also affect your financial management. You need to build strong and healthy relationships in order to retain your customers.
You can do this by understanding and anticipating their needs and educating them on how your products and services can help solve their problems.
6. Choose the Right Business Financing Options
Small business investments require the right funding to survive. The ideal financing option for your business will depend on a range of factors such as the size of your business, its performance, and the expected growth in the near future.
Some of the viable ways of financing your business include bank loans, credit card financing, equipment financing, as well as invoice financing.
7. Limit Your Debts
While there’s a range of financing options to consider, limit your debts, especially in the early stages of your start-up. Only take a loan when it’s really needed!
Doing this will enhance your financial flexibility down the line.
8. Develop a Financial Hardship Plan
Small business investments come with a range of financial risks. Identify the potential risks your business is likely to face and develop a mitigation plan.
Want to Learn More About Investing in Small Business?
If you’re thinking of investing in small business, this simple guide will help you manage your finances and strengthen your financial position in the long run.
Check out our insightful small business articles to get more financial advice.