Assuming that your accounting is handled by a professional is undoubtedly a wise choice. However, you must master key concepts as an entrepreneur. Indeed, entrusting a professional with the management of your business without having control due to a lack of knowledge can be dangerous for the sustainability of your business. Here are some concepts that will help you stay vigilant, such as the break-even point, working capital, and the need for working capital.
The “break-even point”
If you set up a business plan according to best practices, you must have calculated your break-even point. Until you reach this profitability threshold, your startup will incur startup losses. There is a fairly basic equation that will help you know the status of your cash flow: Cash = Working Capital (WC) — Need for Working Capital (NWC)
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Working Capital
Working capital refers to the company’s capital that does not contribute to financing fixed assets and remains available for the daily operations of the business. Working Capital = (equity + long-term loans) — capital expenditures As this formula shows, if the working capital is not sufficient to properly finance your business, you will face cash flow problems.
Need for Working Capital
The need for working capital (NWC) refers to the cash gap resulting from the daily activities of the business. Indeed, the company must incur certain expenses during its production that will only be covered when sales or service collections occur.To calculate the NWC, the following equation is used:Need for Working Capital = inventory + receivables — payables In this formula, the term “receivables” refers to the money your customers owe you after delivery, in case of payment delays. Your suppliers may also allow a delay for the payment of your invoices. Therefore, the NWC corresponds to the money invested each day in the operation of your business. When you start your business, you likely provided financing—permanent capital and other investments—to cover this need for working capital. Normally, to help build trust, your bank should agree to partially finance your company’s NWC by granting operating credits.
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Two risky scenarios:
One of the most dangerous situations is when your business experiences too rapid an increase in activity, leading to a significant rise in the need for working capital to the point where it exceeds the working capital and plunges your cash flow into the red. • Either your bank covers this liquidity shortfall, • Or your business cannot meet its obligations and may be terminated. In some cases, you may not need working capital.
Limit expenses
When starting and especially when developing a business, it is essential to ensure that costs are kept under control. Expenses should always be subject to profits unless they are truly essential to your startup. So, if you start by yourself, occupying professional premises may be entirely unnecessary. Otherwise, feel free to ask business incubators, which should allow you to obtain premises at a favorable rate.
Monitor “customer” and “supplier” positions
Here are a series of simple tips to follow:
- Make sure to invoice as quickly as possible. It is worth noting that invoicing can sometimes depend on an inefficient internal organization that generates “invisible credits,” a source of liquidity.
- Ensure you use an effective payment tracking calendar to get your most forgotten customers back on track.
- Make payment deadlines available to your customers. There is nothing to prevent granting additional deadlines, but it is necessary to determine the cost and impact on your cash flow. Because the need for working capital depends on the extent of the deadlines granted to customers.
- Depending on the nature of your business, stay attuned to the industry to avoid unpaid disruptions and supply issues by informing yourself about the financial health of your major clients and strategic suppliers.
- Don’t hesitate to monitor supplier delivery times and, for added security, try to diversify your supply sources.
Monitor investments
During growth periods, it is up to you to monitor and control your equipment as well as the NWC. Therefore, do not give in to the sirens of good deals that, too ambitious for a startup, could compromise the sustainability of your business. In the same vein, it is strongly advised against anticipating future investments, which could increase the income statement through fixed charges.
Have a good understanding of your cost prices
There are various dangers that await you if you do not pay attention to all your costs: selling at a loss due to an insufficient fixed price, missing a potential deterioration in the company’s financial health, not trying to reduce these costs, etc. Once this knowledge is acquired, it will then be possible to take measures to reduce them.
Quality control
When it comes to the production of goods or services, as well as products, purchased or subcontracted, that will ultimately be found in your product, quality control is an important part of management that should have been discussed with your potential employees. Indeed, it is the image of your company initially presented to your interlocutors that will mark them throughout your interactions. It is often this image that determines the granting of their trust, and if it were tarnished, it would not be easy to regain that trust.
Monitor inventory
First, you need to define the optimal inventory level. Why? On one hand, it prevents the production of unnecessary stock as well as an unjustified financial burden, and on the other hand, it allows you to sell without stock shortages or delays in delivering to your customers. Therefore, it is up to you to regularly check your inventory. For this purpose, you can use a physical inventory, an annual obligation at the balance sheet date, which requires an on-site verification of quantities. However, you should also conduct inventory monitoring through an accounting inventory established using the inventory file. Often, a new entrepreneur will want to buy more than their needs to obtain a reduced purchase price per unit. Initially welcome, this idea could prove detrimental. This “overstocking” could indeed increase the risks of unusable stock, the NWC, cause space issues…
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