Financial Tips for Start-Ups - Part 11a Step by Step Into Self-Employment on the Net
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| Photo by Firmbee,com on Unsplash |
On the one hand, in today's part 11a, I would like to give a few tips on the subject of finance. What should you pay attention to, why is liquidity important and how do you deal with liquidity bottlenecks?
In the second part 11b, I give tips on funding opportunities for start-ups. The second part will appear next week.
<< Part 10 - Taxes
>> Part 11b - Subsidies
[Overview of the article series " Step by step into independence on the Internet "]
(to the funding check for founders and self-employed )
Financial Tips for the Self-Employed and Start-Ups
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| Financial Tips for Start-Ups - Part 11a Step by Step Into Self-Employment on the Net |
"Liquidity comes before profitability!" is one of the most important phrases for the self-employed.
Many companies and start-ups do not go bankrupt because the business model did not work or the competition was too strong.
A great many go bankrupt because of liquidity problems. The self-employed are unable to pay the short-term liabilities. No matter how good the order situation is, if you run out of money, things don't look good.
Liquidity Planning
In financial mathematics, there are 2 calculation methods for your degree of liquidity.
These two formulas should be used regularly, especially if you have major expenses.
1st-Degree Liquidity
This is also called cash liquidity. The following formula is used to calculate the proportion of short-term liabilities (i.e. bills that you will have to pay shortly yourself) that you can pay with your cash reserves:
Liquid funds (account) / short-term liabilities * 100
The rule of thumb here is that you should achieve at least 25%. Of course, more is always good.
Example:
If you have short-term liabilities for 4,000 euros and 1,000 euros in the account, this is first-degree liquidity of 25%.
You need these cash reserves because not all customers pay their bills immediately. In this case, only 75% of the short-term liabilities have to be covered by incoming receivables.
2nd-Degree Liquidity
This calculation is even more important.
In addition to cash, you also include your short-term receivables:
(cash + short-term receivables) / short-term liabilities * 100
This value should, of course, be over 100%, otherwise, you will receive/have less money than you have to pay yourself.
Example:
You have 1,000 euros in the account and another 4,000 euros will be paid in the next 2 weeks in claims from customers. In contrast, there are 4,000 euros in short-term liabilities that you have to pay.
That would result in second-degree liquidity of 125%.
This is basically enough to stay in the black, but ideally, this rate should be even higher to increase liquid funds.
Liquidity planning is of course all the more interesting and important the more receivables and liabilities you have. Because even if there is an increase in income over the whole year, you have a problem if the liabilities arise mainly in the first half of the year and the receivables only come in in the second half of the year.
Then you have a liquidity problem and that has already broken the necks of many.
Reserves
That is why you shouldn't start your own business without financial reserves.
As a self-employed person in the network, you often do not need large investments and the regular liabilities are also limited, but of course, you also have to include the private costs here and something is usually due every month.
In 2006 I was lucky enough to have received a substantial severance payment from my old company. We put most of this money back and did not hit it on the head.
And that was a good thing since my independence started rather slowly and the first few months there were more expenses than income. I also lived on my reserves.
Therefore, before setting up a business, you should build up a good cushion and/or have a partner with a regular and good income.
Anyone who starts with a reserve of EUR 0 is taking a great risk.
Gross Instead of Net
Many start-ups also underestimate the tax office. In the last article on taxes, I pointed out that not all money that ends up in your business account is your own. From this, you have to deduct the sales tax paid by customers, the income tax that you still have to pay, and, for example, the trade tax.
The tax office is very strict and even if there are deadline extensions, you should always have enough money available for these payments.
You just have to get used to the employee view of your account. As an employee, the salary that ends up in your account is initially completely mine.
This is completely different with the self-employed. This is where the “gross income” comes, so to speak, and in addition to the payments mentioned above, you also have to pay for health insurance * and possibly other insurance.
Help with Liquidity Problems
What to do if you are in a liquidity bottleneck?
First of all, it is important to recognize this as early as possible. Therefore, one should use the above formulas regularly.
Then it says: don't panic.
First of all, you should make a cash fall and analyze exactly how high the liquidity gap is. So you compare cash and short-term receivables with short-term liabilities (this includes all expenses, including taxes, insurance, etc.). Then you will see exactly how many euros are missing.
If you then know the shortfall, you can do the following, among other things:
- Take out a loan within the family.
- Analyze the short-term liabilities. What must be paid for immediately? What can wait?
- Deferrals are also possible. You should speak to suppliers as well as tax offices, insurance companies, etc. and, if necessary, agree on installment payments or longer payment periods.
- Possibly your house bank can grant a long-term loan or increase the overdraft facility.
- How about a debt collection agency to finally collect outstanding and long-overdue invoices?
- You can, for example, borrow from your capital-forming life insurance. If you have had this for a long time, you can pledge it and then redeem it later if you still have insurance coverage.
What shouldn't you do?
- In no case should one simply not pay bills. This doesn't solve any problems and just creates additional annoyance.
- You shouldn't sell your life insurance either, as your own family will be in much greater trouble if something happens to you afterward.
- If the situation is hopeless, take credit from the family and thereby drag them into the abyss.
- You shouldn't let it get that far in the first place.
Temporary Liquidity Problems or a Fundamental Problem?
The tips above on how to avoid temporary liquidity problems only work if the problems are temporary. So if, as described above, for example, your receivables are higher than the short-term liabilities, but the incoming payments come later.
This means that your business model works as a whole.
You have a big problem when your business model doesn't work and the liabilities are consistently higher than the receivables.
Then you shouldn't postpone the inevitable and run up even more debt through loans. Instead of just going on like this, you should analyze your business model very carefully and, if necessary, take advantage of external help.
You can turn a lot of screws to reduce your costs and increase your income. The adjustment of one's hourly rates, the purchase prices for work equipment/material, expenses for ineffective advertising or insufficient advertising, oversized office space, etc.
And only if you have a long-term perspective that promises more income than expenditure, you should stay afloat with short-term liquidity solutions.
Long-Term Approach
In the long term, you have to earn significantly more per month than you need to live. This may seem a bit too greedy for some at first, but the problem of liquidity bottlenecks requires exactly that.
If you work 12 hours a day and earn enough money in normal times to make ends meet, you will quickly find yourself without money in bad times.
Therefore, the goal must be to earn more in good and normal times to have reserves for bad times.
And keep in mind that times can change. So don't just start acquiring new customers and building reserves when you run out of money.
Conclusion
In this article, I have given what I think are the most important tips for managing your finances.
Many self-employed people fail not because of their work, competition, or orders, but because of their finances, and that could often have been avoided.
So It Goes on
Part 11b deals with funding for business start-ups. What is possible there and where can you find the relevant information.
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