Empower Your Business

Accounting is Just the Beginning

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Working Capital: The Key to New Business Survival

In 31 years of advising new business owners the biggest single mistake that
I keep seeing is to start a new business without having enough working
capital to see them through to when the business is better established. The
best form of working capital is cash in the bank. Borrowings can be OK
(especially from family) but these are best kept in reserve. Five other
mistakes are also often fatal.

2.    Break-Even Point. Unfortunately very few business owners know what
their break-even point is. So simple to calculate – yet absolutely vital to
business success. If you know what your break-even point is you can tell on
a daily, weekly or monthly basis whether you’ve sold or earned enough to
survive. If you haven’t you at least know you have to do better or cut your
cloth accordingly, whether that’s reducing your outgoings or cutting your
drawings. Do you know yours?

3.    Budgeting. Again, so many business owners don’t bother with a budget
yet tracking your income and expenditure against your budget or what you
expected to sell or spend is a simple and cheap, extremely effective,
business tool. If you know you’re not on track you can then at least
investigate, find out why and then take corrective action. Even if your
sales are uncertain, budgeting for your costs should be easy and then you
can work back up to the required level of sales by using your Gross Profit
Margin and use the figure generated as your budgeted sales. If the figure is
unrealistic at least you know you’ve got to do something drastic.

4.    Effective Marketing. Marketing is greatly misunderstood by many in
business, especially those new to business, who confuse marketing with
advertising. Advertising is just one type of marketing, whereas marketing is
the process by which companies create customer interest in products or
services and can encompass a huge range of activities – anything from making
sure your business continues to focus on delivering its core products or
services in the way the customers want, to networking, referral strategies
or Blogs or giving away things for free. As a business owner you cannot
delegate marketing and you should be spending at least one-third of your
time on marketing.

5.    Working Business Plan. Most small business owners spend more time
planning their annual holidays than they do in their business, yet
international research reveals that on average, businesses with a working
business plan achieve 63% higher revenue growth and 58% higher profit
growth. Planning is about taking prudent, calculated risks rather than
blindly reacting to events, making the best use of available resources and
setting a path to achieve the lifestyle you want. As the business gurus say,
if you aim for nothing you’ll hit your target every time with remarkable
accuracy!

6.    Systems. If there no systems in a business everything takes longer,
things are done differently every time and mistakes can be made. When you
are not that busy i.e. in the early stages of a business, that’s a great
opportunity to develop your systems so that when things pick up, you don’t
waste valuable time and things run like clockwork. A systemised or well
organised business has more value to potential buyers, investors, and
business partners and will help you attract better employees and customers.
It’s also easier to work in!

If you need help in your new business contact Nick on 0800 ASK NICK or email
us on nick@abac.co.nz. We are business start-up specialists with a wealth of
experience in every aspect of starting a business.

2 Responses to Working Capital: The Key to New Business Survival

  1. Thank you! We’ll try to do as well next time.

  2. John Smith says:

    Great article, really enjoyed it!