The Dirty Half Dozen
The Six Biggest Financial Problems in Aboriginal Business
If you're reading this article, it's probably because you're interested in Aboriginal business. Why did you start or are starting a business of your own? I hope one of your answers to that question is to make money! A discussion of profits and wealth inevitably leads to the subject of finance and financial factors that aid or prevent you from making money. So here is an overview of the six biggest financial problems facing Aboriginal business today.
#1 Setting Financial Goals
The starting point in financial management is goal setting. Miss this step and other problems are sure to follow. Too often people rush to start a business and just want to be in business. You don't get in your car and just drive; you have a destination in mind. The same logic applies to financial goals. You have to decide where you want to end up before you take action to get there.
The first thing you must do as a business person is to decide what profit or return on investment you hope to achieve in a given time. Each future decision you make should relate back to these goals. Specifically, each decision should contribute to the achievement of your financial goals. I strongly encourage you to start thinking about your goals right now.
#2 Managing Growth
Any business that survives the initial startup eventually enters into a period of growth. The key to success is that growth must be managed. This requires that you understand growth.
Consider the process of planting a garden in the spring. You obtain the seeds and fertilizer, spend time watering and hoeing, and through the summer the garden grows. In other words, you put resources into something and waited for it to produce a return. In this case, you expect fruits and vegetables in the fall.
It would be foolish to say in the middle of summer, "This garden is not producing anything. I should just abandon it." because we know the plants are not yet ripe for harvest.
The exact same principles apply to business. A young, healthy, growing business requires a lot of resources, but as long as it remains healthy it eventually will produce returns. Therefore, consider not only the rate of growth but the timing of it as well.
#3 Managing Cash
Cash. It is what makes the business world go round. However, there are some misconceptions about cash. It is not net income and it is not just what's in the cash register. Cash is the money on hand plus the business's chequing account balance. Realizing what is meant by cash is the first step in managing it.
You receive cash when you sell your product. You can use cash to pay your bills. Perhaps most importantly, you can invest cash.
Think about the relationship between these three things. If you can collect more cash, and collect it faster, but pay out less cash, or at least take longer to pay it, then you will have more to invest. Apply this relationship to your business and you will be on the right track to effective cash management.
#4 Acquiring Assets
Every business needs assets. Regardless of what the assets are, the way a business operates is that assets are used to generate profits. This is not to say more assets means more profits, because every asset has a cost. The problem then becomes assets generate profit on one hand, but on the other hand they cost money. So how do we tell if the benefits are greater that the costs?
What this tells us is that the cost occurs before the benefit. This raises a fundamental princple in finance: The value of money changes over time. Because of inflation and other effects, the value of a dollar today is more that the value of a dollar next year. If you spent a dollar on an assets, which will generate exactly a dollar of profit over the coming year, you will actually be making your business worse off.
Therefore, make sure the future benefits of an asset outweigh its current costs and account for such things as inflation. Otherwise, the asset probably shouldn't be aquired.
#5 Raising Funds
Raising funds follows right after acquiring assets. You want to buy an asset so you can have future profits, but how do you pay for it right now?
Sources of financing that come to mind are past earnings, bank loans or government funding. However, financing is much broader in nature. Regardless of the amount of time involved, any funds that you are using which technically belong to someone else are a source of financing. For example, if you purchase $100 worth of supplies at the start of the month and you are billed to pay at the end of the month period you have the supplies and the cash. In theory, that $100 is a source of financing for the month. The point to be made is that there are many sources of funds. Consider the cost, duration and features of each and select the one that is best for your situation.
#6 Evaluating Financial Decisions
The most frequently heard argument against planning and budgeting is that things never work out anyway. Does that mean your plans wre a waste of time? Hardly. To improve for the future, try to learn from the past. In other words, evaluate your financial decisions.
For each decision or plan you make, compare what you thought would happen to what actually occured. Most people quit at this point because they are frustrated with the results, but this is where the learning can take place. Find out why the actual result was different from the planned result.
Once you know the causes, build them into your next decision and it will be more accurate. Keep repeating this process and over time you will notice things go as planned more often than not. Then when it comes to evaluating your financial decisions, you will be pleased to see positive results.
Your business can be more profitable and successful. However, first you must address the six biggest financial problems in Aboriginal business. To assist you, each of these problems will be examined in detail in future issues.