The Significance of Funding for Business
The significance of funding for business cannot be over emphasized. With rare exceptions, money is crucial to get a business up and running. Once profits start coming in, some of that revenue can be reinvested in the business to attract more customers and rake in even more profits. Proper planning and cash management ensure that business funds are not wasted on initiatives with a poor return on investment.
Money as a Barrier to Entry
According to MaRS, money, aka capital requirements, represents a significant barrier to entry for many people interested in starting a new business. For example, even a chef with incredible passion and talent must be able to afford all the startup costs associated with opening a restaurant, including the building lease, kitchen equipment, dining furniture, staff paychecks and business licenses. Obtaining a business loan or other form of startup funding, allocating the money wisely, and making enough profit to pay back the lender is certainly easier said than done. With everything else being equal, money is often the limiting factor preventing a business from opening.
Many business ideas are never funded and not necessarily for lack of trying. If a business idea seems too risky or the loan applicant has poor credit, lenders and investors won’t provide funding. Without funding, people who don’t have personal savings to dip into can’t launch a business.
Funding for Market Research
Entrepreneurs may find themselves in a catch-22 early on in the planning and fundraising stages of business development. To obtain funding, they need to convince lenders that their business idea is viable and will generate enough profit to repay them. However, this persuasion usually requires statistics about the potential customer base and competition, according to MarketResearch.com. This research in itself costs money.
Entrepreneurs may end up using personal savings or getting loans from friends and family to carry out the market research, with no guarantee that the results will be favorable.
Money for Product or Business Development
The initial round of funding is used to develop the product or business idea further. A new product is designed, manufactured and tested, whereas a service-oriented business might purchase the equipment and space necessary to carry out day-to-day operations.
The role of money in business marketing also becomes apparent at this stage. After the product is created or the service process has been fleshed out, it’s time to attract customers and their money. Effective marketing is a full-time job and not cheap. Adequate startup funding should be set aside for marketing to generate the crucial cash flow from customers, which becomes the sustaining force of all businesses.
Importance of Cash Management in Business
It’s important to remember that startup funding is a type of loan. Unless the money is expressly given as a gift, you’re expected to pay it back to the lender, whether through direct payments or profit-sharing. Carefully managing your income and expenditures in the early stages of your business ensures you can afford to repay the loan.
After you pay off the startup funding in full, that same careful cash management keeps your business afloat. You may be able to obtain additional business loans down the road, but you’ll often need to demonstrate that the funds will be used to develop a new product or project that will generate additional income. Lenders do not want to throw money at a sinking ship.
It’s smart to hire a business accountant to organize and update all financial records and transactions. Collaborate with your accountant to generate expense reports and identify cost reduction opportunities. An accountant can also create financial reports that allow you to track your business’s income so that you can strategize accordingly. For example, a dip in sales might require a fresh marketing push.
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