Your track record of sound financial management demonstrates that your company is a good risk to potential lenders. Find out what this means so you can get the business loan you need to grow your organization.
No matter how inspired they are by your business ideas and the mission and vision of your company, prospective lenders want to know that if they approve your business loan, you will be able to repay within a specified time frame. They will make this determination based on a variety of factors, including your business plan, financial reports (cash flow statements, balance sheets and income statements), assessed credit risk and revenue and sales projections; ultimately, they will be looking for reassurances that the money they invest in your business will be well-managed.
Proving that you understand and practice good financial management in your business can increase its attractiveness to lenders and investors of all kinds; but what does this mean? Financial management might be best-described in relationship to its goals. The goals of financial management in a business are to:
Maximize Profits
Maximizing profit isn’t about increasing sales, it’s about increasing the amount of each sale that you get to keep or reinvest in your business, over and above the cost of goods or services sold. There are three types of profit margins to consider:
- Gross profit (sales minus the cost of goods sold)
- Operating profit (earnings before interest and taxes vs. sales)
- Net profit (earnings that remain after all business expenses and taxes have been deducted)
In order to maximize profits, you first need to know which of your goods or services actually produce the most profit compared to all the costs that go into running your business. Then you need a marketing strategy to promote these identified profit centers (sometimes called “cash cows”) so that you focus most of your marketing resources on promoting those goods and services which produce the most profit.
Your ROI (return-on-investment) on individual goods and services should not only drive the way you invest marketing resources, but should also drive other marketing decisions. For instance, a low ROI on a given product or service might indicate the need to raise prices, source lower-cost inventory or remove it from your customer offerings altogether.
Minimize Costs
If lenders perceive that you are not actively managing your business’ expenses and working to reduce costs, they might worry that money invested in your company will not be used to maximum benefit. Some business owners love paying attention to the details and finding ways to cut costs while for others – not so much. However, the more efficiently you spend money in your business, the better return you will have on each dollar spent.
Minimizing costs can be done in nearly every area of your business. For instance, reducing the cost of goods sold by sourcing lower-cost products, inventory, raw materials, vendors or suppliers can help increase profit margins on goods and services. Outsourcing non-core activities such as marketing, bookkeeping, cleaning, etc. may be less expensive than hiring staff when payroll, taxes and benefits are taken into consideration (and vice versa). Using platforms that make data analysis more efficient or allow you to see your company’s data at a glance could minimize the time and resources that must be invested to produce the same results.
Even the cost of financing can be minimized by opting for business loans, micro loans and other working capital financing tools in lieu of maxing out high-interest company and personal credit cards. Every dollar that you don’t have to spend has the potential to be invested in some area of your business that produces a return on investment (like marketing) instead of being written off permanently as an expense.
Minimizing costs and cutting costs are not always the same thing. For instance, you might cut costs by eliminating an essential staff member or program that actually makes your business less efficient or less effective. What’s important is getting the most value from each dollar spent in running your business and eliminating unnecessary expenses whenever possible and practical.
Maximize Market Share
Market share refers to the amount of the market your business has captured compared to the total size of the potential market (geographical and industry) it could have. Maximizing market share often depends on having not only a good business plan, but a good marketing plan that works effectively (and continually) to increase the size of your customer base.
While some business owners see marketing as an expense, it should be viewed as an investment. Marketing is one of the few business expense line items with the potential to produce a return far in excess of the amount expended. Sound financial management requires that you are able to tie results to your marketing efforts in order to increase profit margins, ensure good value for the money spent and increase market share.
The amount of money lenders are willing to extend to your company in the form of a business loan comes down to much more than its credit score or sales history. You can prove the worth of your business to potential investors by demonstrating your understanding and mastery of financial management.
