If you ever want to make it far as an SMB owner and eventually scale up, finances are an essential part of your business you need to pay extra care to. At the end of the day, the fundamental reason for business grow or fail has to do with finance, the money, and how the cash flows.
For SMBs, finance is something that can make or break your future.
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And as a small business owner, you can never lose track of the direction your company is going in terms of finance.
Finance for SMBs is a pretty broad topic, of course.
So, in this guide, we’ll be looking at some of the questions you can ask yourself to make sure you’re on the right track as small or a midsized business, how to improve your day-to-day operations and how to get funded.
If you want to grow as a business, you need to start asking the right questions.
More specifically, questions regarding your finances and operational activities.
On the bright side, regardless of your niche and business industry, the finance part usually stays the same. And the internet is always full of resources to help you along your journey.
Today, we’ll be looking at some of the important financial questions you can ask yourself as an SMB owner to make sure you’re on the right track.
1. What’s my value proposition as an SMB?
At the end of the day, it’s all about value.
Before you even talk about finance, it’s important to take a step back and take a good hard look at your business. Make sure you’re not short-sighted and instead, focus on the long-term goals.
Long-term goals stretch across 3-5 years, while short-term goals may include plans you want to accomplish within the year (provided they’re inside your budget).
What value are you offering? What is your core purpose? In what industry?
These are all questions you need to ask yourself to make sure you’re in the right niche.
So, what exactly does this mean?
Essentially, it’s a way to make sure you’re not short-sighted (myopic) as a business.
For example, according to Theodore Levitt, the railroad industry is an example of an industry that was short-sighted. They assumed they were in the railroad business, and not the business of transportation. This is why they fell behind as the need for cars and airplanes increased. People wanted better forms of transportation, meanwhile, they just focused on the railroads.
For companies to grow, they must take a look at the industry they are in from a broader picture and take advantage of growth opportunities within the niche they are.
Once you figure out your industry and what value you’re in, you can move on to the next questions.
2. Am I differentiating efficiency and effectiveness in my operational activities?
As an SMB, you should always be looking for ways to cut costs and improve your day-to-day operations.
This is an essential part of the operational activities in your cash flow statement and has a direct impact on your finances.
Your operational activities (in your cash flow statement) indicate the amount of money coming in from ongoing and regular business activities (e.g. providing service, selling products, etc.)
In each step of the way of your activities, you should be asking yourself: am I saving time (money) in each of my operations? And here’s where efficiency and effectiveness come in.
Being efficient is about doing things the right way.
Being effective is about doing the right things.
Ideally, you should be focusing on both, and not prioritizing one over the other. Try to always look for areas in which you can optimize your business operations.
By focusing on efficiency, you’re focusing on getting to a certain outcome faster. Meanwhile, by focusing on effectiveness you’re focusing on getting a certain task done – period.
As an SMB you should be looking for a crossover between the two. I.e. getting the right things done fast without spending too many resources.
Time is money.
And as an SMB, you should always be looking for operational activities you can automate.
Work smart, not hard.
3. What’s the smartest way to fund my operations?
There are a lot of different ways to gain investments and assets. And a lot depends on what you’re after and what you want to gain from your company.
The following are some of the most common ones for SMBs:
- Bootstrapping – this is the classic approach for most startups and at its core, it’s about getting by with just the minimal investment. Bootstrapping your business means making sacrifices and learning to prioritize in terms of your expenditure. If you’re thinking about bootstrapping your business, also look into using an accounting software to make sure you manage and save your money. If you believe in yourself and your vision, you can try the DIY approach and invest your own money in the business! The downside of operating on a shoe-string budget is having little to no petty cash though.
- The Three Fs – friends, family, and fools. Less than 1% of startups raise venture capital, hence the name. Only friends, family, and fools would be willing to invest in something so early. However, this doesn’t mean it’s impossible. In fact, this is another common approach for startups to raise capital and it can pay off if done well. Those closest to you (friends and family) are more likely to lend you money to chase your goals. On the other hand, though, this might hurt your personal relationship with them if things go south.
- Angel Investors – attracting angel investors can be tricky, but if you do succeed, they can save your business and set you on the right track. Finding the right angel investor is all about networking – it’s all about who you know, and who the ones you know, know. If you have any opportunities and/or leads, chase them. Business leads, startup conventions, everything goes. You have nothing to lose by pitching to them, just be sure to have a thorough business plan ready.
- Loans – finally, the classic approach is taking out a loan or a debt from the bank. Loans come in many different forms and shapes. For SMBs though, small business loans and microloans are a popular way to get traction. Traditionally, banks do make small business loans but still, your mileage may vary, depending on where you’re from and what bank you go to.
One other thing that matters, regardless of which way you choose to finance your business, is to have a strategic finance method and a strong business plan to guide you along the way. A business plan that you know inside out shows you really believe in your company and the sacrifices you’re willing to make.
All in all, getting funded as a startup or an SMB is the quickest way to gain traction. But the journey doesn’t end there.
You need to take into consideration the fact that, before you even get funded in the first place, you need to have a strong record as a business.
This means being prepared. Start with a business plan, make sure it’s throughout and detailed. Then focus on improving your operational day-to-day activities inside your industry. Only then can you focus on getting funded. Finally, from there on, the only thing that’s left is scaling up.