Becoming an entrepreneur is a dream come true for many people and if you have a great business idea, you may be keen to get started. You can concentrate on all the aspects of the business that you are good at and hire staff to cover your areas of weakness, right? This sounds wonderful in practise but if you don’t have a good understanding of how business finance works you may stumble at the first hurdle. Many businesses fail within the first five years, and the reason for this is largely connected to money. Every entrepreneur needs a good understanding of business finance to run a successful company, here are the reasons why:
To Make a Profit
Primarily an entrepreneur is in business to make a profit. Many business owners make the mistake of thinking that this relates solely to how much money is being brought into the company. They pay themselves a salary accordingly and soon run into difficulties.
Profit is actually the money that is being brought into the company minus the cost of running the company and producing the goods or services your company is built on. The bit in the middle is your profit. You need to factor in the cost of bills that don’t occur frequently as well as making allowances for unexpected costs.
You can bring an accountant in to manage this for you, but as an entrepreneur you should at least know enough about business finance to understand what your accountant is telling you. This may sound like a daunting prospect, but it is something that you can learn. An MSC finance and management from Aston University can teach you about business management online. This means that you can study while you are running your business and you don’t need to take time out for it.
To Pay Tax
Unfortunately, entrepreneurs need to pay taxes. You may not have thought too much about this in the past if you were working as an employee as it is usually done for you; however, as an entrepreneur, this is your responsibility.
Taxation is more complicated as an entrepreneur as there are various taxes to pay. As well as paying tax on your income and profits you may also need to pay tax on your building, the goods you buy to do your job, your company car, and a lot of other things besides. It makes sense to pay this in the most cost-effective way possible and there is usually more than one way to arrange your taxes. Working out the best way of paying tax may be tricky at first but if you understand this, you can save yourself the cost of an accountant, which may be important when you are starting up your business. It also means that you are less likely to be faced with a huge tax bill you weren’t expecting. Many companies have folded after receiving a tax demand.
To Manage Spending
There will hopefully come a time when you want to expand the company and you will need money to be able to do this. If you have been sensible from day one you may have some funds set aside to cover your expansion plans. If not, you may need to borrow some.
If you want to borrow from the bank, they will need to do checks on you to make sure they are not taking too big a risk in lending your money. They will need to see how you have been managing your money and check your credit score. The less of a risk they perceive the better the interest rate they will give you on your loan. Having a good understanding of business finance means that you are less likely to cause yourself financial difficulties. Therefore, it should be easier, and cheaper to borrow money from the bank when you want to expand.
To Make Smart Investments
If you make smart investments, you should increase your profits and the value of your company. However, you have to know where to invest your money for the greatest rewards. For example, if you want to expand your business, you need to work out what parts to expand. This may be based on where you receive the most profit, but it could also relate to the potential for future profits if you change your working systems or even the potential rewards for introducing a new line. If you have an understanding of business finance, it is easier to work out what parts of the business to invest in.
To Spot Discrepancies
Discrepancies can occur through accounting or human error; these cost businesses a lot of money every year and it can even put entrepreneurs out of business. Mistakes happen and if your payroll or accounts department has typed the wrong number into a column, this can cause your finances to be incorrect. The problem can become compounded if it is not spotted for a while and this could leave you with financial problems. It can also affect your tax bill which could leave you with a nasty shock when you are presented with a bill you haven’t budgeted for. Being able to understand your business finances and staying in the finance loop at your company means that you are more likely to spot these errors quickly and then you can deal with them.
To Prevent Theft
Unfortunately, not everyone is as honest as each other and if you have a thief in your midst, it could cost you thousands or even put you out of business. Understanding business finance means that you also have an understanding of how theft is most likely to occur in your business. If you know what you are looking for, you are less likely to become a victim of theft.
Understanding business finance is fundamental to being a great entrepreneur. It underpins everything you do in business and helps to ensure that your business remains solvent and successful.