Money Management in a New Business

Abstract

This document discusses the biggest challenge to managing money in a new business. It then gives ways for the business owner to overcome these financial challenges. Describing how proper financial planning and setting realistic projections and budgets are critical to any business and the basics of financial planning. Proper money management is critical to a businesses success and the basics are described here.

Money Management in a New Business

One of the biggest challenges that new businesses face is running out of money. In fact, many good companies fail because the business owner did not adequately plan and manage their money carefully. Proper management techniques and keeping healthy cash flows is something that cannot be overlooked. Being able to project where your new business is heading financially can help you to prepare for cash shortfalls which can lead you into bankruptcy quickly.

Planning financially, understanding and implementing basic accounting principals, and preparing financial projections and budgets are critical components in any new business. It is basic knowledge that a new business needs capital and some kind of funding to run the business, but it goes further than this, and sometimes things do not go as smoothly as planned, so being prepared for financial hardships is crucial. Jumping into your new business without some level of financial knowledge and planning is only going to cause you headaches, financial problems, and possibly cause your new business to soon run out of money and ultimately lead to failure.

There are some basic accounting principals that help a company to analyze their financial position and plan for possible short falls. These include creating and analyzing balance sheets, income statements, statement of cash flows, preparing financial and budget projections and a cash flow forecast. These all help business owners see where they stand financially and where they are heading in the future. All decision making in the business should be based on a sound analysis of these financial documents.

The balance sheet is basically a financial snapshot of the companies financial position. It includes all of the companies assets, liabilities, and total owners equity. Ratios can be used to analyze the balances sheet and address the companies financial position. The current ratio indicates how well your company will be able to meet its financial obligations in throughout the next year (Kaplan, J. & Warren, A. 2010). A low ratio may indicate potential problems, so keeping track of your current ratio is a good money management tool for any business. The quick ratio is another helpful ratio that is close in nature to the current ratio except it shows the companies ability to meet current liabilities in a crunch situation Kaplan, J. & Warren, A. 2010). There are also debt ratios which help the business owner evaluate the extent of their liabilities. Being that high debt is associated with high risk, knowing where you stand in debt is also another important aspect of financial planning. In addiction, a low debt ratio gives the company more borrowing power which can be helpful if needed in the near future.

Keeping your finances in order is critically