If management is the veins and the arteries of a business, its finances are the heart. Without it, your business can’t expand or even run. It is the main purpose of every business. However, during the start-up of every business, setting up its financials can be quite challenging.
Liquidation and Solvency
The very first thing you should understand when it comes to starting a business is the principles of liquidation and solvency. Many businesses fail because they don’t understand these two principles, but you won’t make that mistake here. So what is liquidation?
Technically, liquidation is the ability of your business to create a healthy cash flow. This means converting assets into cash. You then use this cash to pay debts or increase your revenue. If your company isn’t liquid, your ability to pay creditors becomes worrisome. This is why you always need to have liquid assets in your company.
Liquid assets come in the form of produced products, investments, company assets, and so on. These assets can be sold in the market and can be used to sustain your company.
Solvency means that you have enough assets to cover the expenses of your liabilities. This means that your business is solvent, which is why you hire an accountant.
Every start-up business’ goal is to gain solvency because this is your main road to net profits. This will then become expansion and eventually turn into success in the future. Always keep your company above the solvency line, and you should survive a couple of years until you can gain a net profit from your business. Now that you know these two principles, we discuss the essential parts of starting a business.
A business loan is going to be your first step into starting your business. Many business owners started from this path, and by keeping an eye out on their liquidation and solvency, they can pay off their business loans in the future.
You can apply for a business loan almost anywhere. Currently, the Small Business Administration (SBA) is giving cheap business loans (0% interest) during this pandemic, and you should take advantage of that. However, what if you can’t apply for a business loan yet?
Can’t Apply for Business Loan?
If you can’t apply for a business loan in your country simply because you don’t have a credit score yet, you should consider other options, one of which is alternative credit scoring. Now you might ask yourself, what is alternative credit scoring? Most people, especially starting entrepreneurs, aren’t aware of this term. Alternative credit scoring is a way to assess your credit through other means such as your payment for utilities, subscription services, and employment history.
Ideally, a business owner should have a credit score or a loan history, but this can be hard to set up if you’re a pretty young entrepreneur. So this is why you should consider giving loaners your alternate credit score.
Next up on the line is calculating your starter business’ overhead cost. You can calculate your overhead cost by adding your utility fees over your estimated monthly expenses. This is the money you require monthly to keep operating your business. It’s estimated that the starting business’ overhead cost is around $100,000 above, which means that you should have at least that amount in the bank. However, depending on your business model, you might not even need that much money.
For example, a famous business model during this pandemic is dropshipping. However, since dropshipping doesn’t require you to pay rent or even employees, you only need about $20,000 to start your business. This is just an example of how varied overhead costs can be, and it all depends on your calculations.
Keeping Your Head Above Water
Right now, as a starting business, your goal is to survive. But, by putting the principles of liquidation and solvency at heart and choosing a business loan that you can pay off in the future, you can start a business that can be successful in the future.
Practically, setting up your finances like this will keep your business’ head above water. This means that you’re always solvent. However, one aggressive way to survive is to take risks. This is why many experienced business owners make risky investments because they know that investments are liquid assets by the end of the day, which they can use to pay their creditors in the future. So keep this tactic in mind if you find yourself at a loss when starting your business finances.