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BUSINESS FINANCE MADE EASY
The key to success in business finance is having sufficient working capital and not having enough is a mistake I see time and time again in business. Normally, there are only three sources of working capital available for owner-managed businesses:
- Owner's Funds. This could be funds initially invested into the business on set-up, or monies subsequently loaned to the business, maybe from undrawn remuneration.
- External Borrowing. This could be from banks, relatives, or finance companies.
- Retained Profits. These are undrawn profits from prior years, the cheapest and best source of working capital.
Here are some pointers:
- Never underestimate the working capital required in a business.
- Always use cash flow forecasts to forewarn of periods of peak demand.
- Make sure you have adequate reserves of working capital, whether cash in the bank or an under-utilised borrowing facility.
- Keep on top of the management of your business at all times. If, for example, you don't collect your debts it will soon run away from you.
- Make sure you use decent accounting software so you can keep track of your working capital.
- Restrict your drawings to a level which allows the accumulation of retained profits.
Your working capital is your lifeblood in business so treat it like a lover, tenderly and with huge respect!
If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice.
Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.