5 Financial Questions to Answer Before Starting a Business
Opening a new business can bring uncertainty, and there may be situations where you won’t have enough cash flow and will need to consider alternative plans. That’s why you should determine if you can answer these five finance-related questions before embarking on a new business venture.
1. What will you do if you need additional working capital?
Many business owners find themselves in need of financing to bring their goals to fruition. You should research your choices now, so that you’ll be prepared if you find yourself in need of capital. Here are two options to consider:
Loan financing – You can obtain both short and long term loans from banks and alternative lenders. Short term loans are usually for a year or less. Long term loans can vary from five years and more and you can make gradual payments along with interest rate on the loans.
If you’re considering loan financing, it is important to work with a lender that gives you an amount and term that is realistic for your business. Before you apply, you should do research on the lender’s application process, requirements, amount ranges and terms.
Equipment financing – It is easier to take out secured loans, and the equipment that you buy act as collateral for the loan. Thus, you could even get a low-interest rate on these loans. This may be a less risky option, as the inability to pay the loan won’t put your entire business or your personal credit in jeopardy. Instead, you can surrender the equipment as collateral.
2. How long you can live off your savings?
While starting your own business, it is pivotal that you find out how long you will be able to live off your savings if you had to. Of course, you should monitor your expenses and try to live within your means. Still, you should determine, if you had a financial emergency, would you be able to live off your savings until you could generate more cash?
In addition, we suggest that you find out which personal expenses you can reduce for the time being. It is better to be frugal with your personal budget at first, so you can make better investments in your business’s future. This, in turn, will enable you to stay out of financial trouble.
3. Do you understand the importance of business debt management?
The importance of business debt management can help you retain the status of your business. If you can’t responsibly manage your business debts, it could result bankruptcy, or force you to close your business. Once you file bankruptcy, it will hurt your credit. So, it becomes tough for you to get any new credit after the bankruptcy discharge. This can also make it difficult for you to be able to re-establish your business. To avoid this, try not to rack up debt, so that you don’t have to worry about these problems.
4. Know what amount of debt is necessary for the business
Debt may be necessary for establishing a business. This is because other than equity financing, you can obtain debt financing to establish your business. But, this does not necessarily mean that any form of debt and any amount is a good decision. Just as it can play havoc with your personal finance, too much debt financing could put your business in jeopardy if you have trouble paying it back.
5. Can you responsibly manage your cash flow?
From the start, you should have a business plan that helps you navigate how to manage your cash flow. Without a budget, many business owners find themselves overspending, which can eventually put them in debt. Prior to starting your business, create a realistic budget that details everything you’ll need to run your business. Once your business is up-and-running, you can adjust this budget based on the amount of sales your business is generating.
Hopefully, you can answer these five questions prior to starting your business. By being financially responsible from the beginning, your business will have a better chance of succeeding.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.