Find the quickest way to break even
You need to keep your company financially sound to be able to grow. What does that mean and how do you know whether your business is in a financially sound position?
Operate at at least a break-even level
Developing a healthy company requires you to at least operate at a break-even level. In other words, your total revenues must be at least as high as the sum of all the costs.
As long as you haven't achieved that point, you’re making a loss. That’s why you have to make every effort to reach break-even level as soon as possible. Some businesses achieve that after six weeks, others after six months and some take even longer. A financial plan can come in useful for helping you estimate when the break-even point can be reached.
How to draw up a financial plan
Follow these five steps:
- Ascertain the investments that are required to get you up and running
- Identify the resources you need to pay for those investments
- Add up all the costs you incur over a year
- Use those figures to calculate the turnover you require to be profitable (i.e. your break-even analysis)
- Calculate whether there’s enough cash during the year to cover current expenses like rent and interest payments
If you’re just starting up a business, you may well find that after drawing up your financial plan, your ambitious marketing plan costs too much. In that case, it’s best to adjust your business plan.
Good debt-to-own funds ratio
Having a good balance between own funds and debt is essential. When you have sufficient own funds, you are in a stronger position and have more financial scope to deal with difficult situations. Moreover, it’s an important condition for borrowing money.
Own funds are the resources you invest in your own business, such as when you plough your profits back into your venture. Usually, those funds are not enough to pay for everything, especially in the start-up phase of your business.
That’s when you’ll need raise debt or additional capital from third parties in the form of loans, grants or maybe even capital put up by investors.
1. Long-term investments
It’s advisable to finance large, long-term investments with permanent resources, i.e. a mix of own funds and long-term debt. A couple of examples of long-term lending are:
- Investment credit: Often used to purchase fixed assets such as property, company cars and business equipment, enabling you to either fund the start-up of your business or to further grow it.
- Leasing and renting: These options enable you to use movable assets (such as vehicles) without owning them and give you the option of purchasing them at the end of the contract.
2. Short-term investments
Short-term investments are best financed with short-term loans. This type of loan can, for instance, be useful in helping overcome a temporary cash shortfall. One such example is an advance in current account, which can afford your business some financial breathing space in periods when customers are late making payments.
Looking to quickly overcome temporary cash shortages?
Go for positive net working capital
When you are able to fully repay the debt of your business in the short term using your current assets, you have positive net working capital. The sum of customer receivables, inventories and available cash must, therefore, exceed short-term debt.
Call in the experts
An accountant or financial adviser can always help you, so be sure to come and discuss things with one of our experts. Together, we’ll look at the financial health of your business. If you’d prefer to speak to someone right away, contact KBC Live.
