For small businesses, managing resources efficiently is one of the greatest challenges. According to some recent statistics, 82% of small businesses fail due to cash flow problems. Therefore, when investing your business resources, you need to make data-backed decisions and always consider your business’ liquidity.
Here are a few steps to take.
Analyze your Financial Health Regularly
When entering the highly competitive business world, you need to have a certain level of financial literacy. You need to know how to conduct a solid financial analysis for your business and read its results. Only this way will you be able to estimate the company’s growth potential.
Now, there are a few key areas you should keep in mind when conducting a financial analysis:
- Revenues: Revenues represent your company’s source of money. You should first track the revenue growth that shows how your income increased/decreased from one period to another. Revenue concentration shows what your major sources of income are.
- Profits: To build a financially healthy company and growth it, you first need to have stable profits. To analyze your profits, you should track your gross margin (the difference between revenue and cost of goods sold), operating profit margin (the profit your business makes on dollar after paying off variable expenses and before paying tax or interest), and net profit margin (the profit your company gains after all expenses have been paid off).
- Operational efficiency: It tells you whether you’re using your company’s resources wisely. One of the most important metrics to track here is the accounts receivable turnover ratio that says how good you are at collecting invoices.
- Solvency ratio shows the interest to your investors. For example, by tracking return on equity, you will see how much your investors are gaining from your business.
- Business liquidity is the final metric to track, showing you whether your business remains profitable once you cover all direct and indirect costs. For example, by staying on top of your current ratio, you will see whether your company can cover all short-term debt from its liquid resources.
Common Types of Business Investments
There are three common types of investments in the business world.
The first ones are ownership investments that are usually related to a company’s real estate, stocks, precious objects, etc. The way ownership investments work is quite simple – by investing money, you become a partial owner of the company. Now, they’re pretty risky. As the value of the investment jumps or falls, you will share the profit/loss with other investors.
The second are lending investments, where you basically behave like a bank. Namely, when a company needs money, they can sell their bills, bonds, and notes to investors and get the money needed. The need to sign a contract, agreeing that they will pay back the debt. This method is safer than ownership investments and, therefore, generates lower ROI. The most positive thing is that investors’ rights are prioritized. For example, if a company goes broke, you will still have a claim of its assets.
Finally, there are cash investments. As they’re the safest investment tactic, their return is also low. Now, there are different types of cash investments, including T-bills (short-term government bonds), commercial papers (unsecured debts issued by big companies), marketable securities that need to be redeemed within a year, and so forth.
Some other Ways to Boost your Liquidity
Invest in real estate
Back in 2015, the Week In China portal wrote about a growing trend – many investors were switching from stocks to real estate. Furthermore, most of them used the money earned on stocks to buy rental properties. The reason for that is logical. Stocks are an overly volatile market, while real estate provides greater stability and an extra stream of cash.
Send invoices on time
When it comes to customer interactions, timing is everything. Sure, choosing when exactly to send invoices to your customers depends on numerous factors, including your niche, the type of job, and the service you offer. Issuing invoices on-spot is perfect if you’re doing a small-scale job, while sending invoices 24-48h after finishing the job is a great way to boost customer loyalty without compromising your bottom line. You could also send monthly invoices, especially if you want to automate invoicing processes and reduce paperwork.
Invest in your employees
While attracting new candidates is important, retaining existing staff is the only way to boost your business’ liquidity. Namely, the costs of losing an employee are high. Every time someone leaves, you will need to invest in cross-channel candidate prospecting, the hiring process, onboarding a new team member, and providing them with proper training and education. This takes time and can jeopardize your overall workplace performance.
Think about the things that make your employees happy. Provide them with flexible work arrangements and let them balance their personal and professional lives more efficiently. Recognize their hard work and reward them accordingly. Most importantly, give them the opportunity to advance. The investments you make in your people will generate a far higher ROI than any other tactic mentioned.
Invest in digital marketing
The Manifest says that 99% of businesses are increasing their digital marketing investments in 2019 and beyond. Therefore, by ignoring digital marketing, you’ll soon miss out on an opportunity to reach wider audiences and maximize your revenue.
Now, there are numerous ways to enter the digital marketing waters. For example, you could start by investing in content promotion and distribution. Statistics say that businesses that blog are 13X more likely to generate a positive return on investment, while email marketing ROI is over 122%. You should also have a solid website, optimize it for search engines, and promote your business on social.
No matter if you’re outsourcing your digital strategy to an agency or you’re handling it in-house, the initial costs of implementation may be high. Still, they will pay off multiple times in the future. As your business’ exposure, reach, and credibility grows, your leads and sales will also skyrocket.
Handle overdue payments
Overdue payments can hurt your business performance, not providing you with the resources to keep your business operational. Luckily, there are a few things you could do to prevent that.
First, send a follow-up email. Be polite and simply ask a customer whether they received your previous invoice.
Second, you could offer rewards for early payments or charge a penalty to those that don’t respect the deadlines you set.
If all else fails, you could always consult a business mediation service or even go to court. However, remember that these options usually lead to paying additional fees.
Hire an accountant
Managing your business’ finances and increasing its liquidity usually requires a high degree of financial literacy. If you’re not skilled at managing mountains of invoices, bills, and receipts, then you should hire an accountant to do that for you. This way, you will ensure that your finances are in the right hands and, at the same time, have more time to grow your business creatively.
Over to You
For small business owners, business solvency is key to further growth and success. That’s why you need to invest your resources strategically. Have a solid strategy that will help you allocate your resources safely and boost your potential for greater returns. Diversify your investments and experiment with different tactics to boost your liquidity. Most importantly, don’t forget to track your financial health.
About the author:
Jacob Wilson is a business consultant, and an organizational psychologist, based in Brisbane. Passionate about marketing, social networks, and business in general. In his spare time, he writes a lot about new business strategies and digital marketing for Bizzmark blog.
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