Recent turbulent events highlight the importance of financial literacy and management. The pandemic recession in 2020 proved that money can be exhausted in just a snap.
On the brighter side, these sudden changes opened more avenues for easier business entry. Supported by the digital and fintech revolution, more businesses became operational even without brick-and-mortar. So, it’s no surprise many young entrepreneurs are penetrating the market.
Most US-traded company CEOs are over 50, but younger ones are rising. One example is Mark Zuckerberg, who’s just hitting 40 this year.
More noticeably, the age of startup founders is decreasing, showing that more younger people are geared toward business. We can’t blame them because business formation processes and financial transactions are more convenient today.
Even so, young entrepreneurs must not be too complacent and excited as the economic landscape remains a bit stormy. It has yet to recover fully despite the decreasing trend of inflation.
With that, they must be more careful with their financial management to ensure sustainability if another recession comes. Their business may still be vulnerable to external risks, so ensuring adequate capital is crucial. This article will highlight some financial moves young CEOs may take to achieve business success.
Keep Track of Your Financial Performance
The easiest way to understand and assess the financial health of your business is through your historical business performance.
The first step you can take is analyzing your Income Statement. It shows how your business performs for every reporting period- monthly, quarterly, and annually. You must always check your operating revenue and compare it to previous reporting periods.
It will show you the trend and determine the factors affecting it, such as pricing, demand, and even seasonality. It is more crucial when your business has two or more products and services. Checking your revenues will help you determine which products derive the most and least returns.
For better accuracy, check your COGS and operating expenses. Deduct them from your operating revenue to derive the operating profit. You must also compare them to previous reporting periods. Doing so will help you determine which product is the cheapest and most expensive to produce.
Most importantly, it will show which is the most and least profitable. That way, you will know how to make the necessary adjustments. It will help you set the optimal pricing and production volume to generate the best sales and margins.
Simple, isn’t it? But the process does not end there. You must also check your Balance Sheet to see the overall financial health of your business. To make it easier for you, the accounts to check depend on the nature of your business.
You must check your cash and debt levels if your business is capital-intensive. Measure them with your income statement using the net debt/EBITDA ratio to determine whether you earn enough to cover your borrowings.
It will also show how many years you can pay your borrowings, so a ratio of less than 4.0x is considered good. You can also use Quick Ratio to measure your business liquidity within one year. Debt/Equity Ratio is also a good metric. You can see how much you leverage borrowings and equity to raise capital.
Lastly, check your Cash Flow Statement, particularly your FCF. It is more precise than your operating income since it focuses on transactions alone. Excluding non-cash items, this metric accounts for operating assets, liabilities, and CapEx fluctuations. Also, it shows the actual cash you generate from your sales.
Pay Your Debts
Debt has always been associated with negative perceptions due to its potential risks. But more often than not, it helps the business finance its expansion, acquisition, and production if cash is insufficient. It always depends on how you manage and use your money and borrowings.
Using your loans to generate more cash is good for you. Otherwise, it may be time to rethink your business strategies and adjust your production.
Debts have different maturities, especially if they are for business purposes. Some even take ten years to mature. However, regardless of their maturities, you must pay your debts on time to avoid higher interest and penalties that will result in higher business expenses. Make extra payments for your principal, making it easier and cheaper to repay your loans.
Suppose you borrow $100,000, payable in twelve years, and will bear 5% interest yearly. After one year, you have already paid $15,000, the combined principal and borrowings. Your remaining balance is $90,000.
But since it will bear 5% interest, it will increase again to $94,500 ($90,000 + 5%). After two years, it will be $84,225. In short, only 70% of your payment goes to the principal.
Your total payment will be $160,000 in twelve years, showing that you paid an extra $60,000 or 60% higher than the original amount.
But if you add an extra $2,000 monthly, the total payment will only be $136,000 in eight years. You will enjoy a $24,000 discount, much higher than the total extra payment of $16,000 ($2,000*8). Making additional payments is crucial, and the example shows how it makes interest much cheaper as it shortens the repayment duration.
In the same way, it is essential to pay your existing debts before starting a business. As a young entrepreneur, you may still have existing student loans. Getting approved for your commercial loan application will be challenging since it affects your credit score.
If the government sponsors your student loans, there is a chance for deferment or forgiveness. You have to pay if it is from a private entity. That is why you must take advantage of strategies to repay student loans.
You can apply for student loan refinancing, which gives more favorable repayment deals or terms. You are sure to pay consistently and even make extra payments to increase your credit score and business loan approval chances.
Take Care of Your Employees
Capital and labor are the two primary components of a business. Capital covers all monetary and non-monetary assets used for production. Meanwhile, your employees make up for the other half of your business. Without them, all your assets will be useless. That is why making your employees happy and ensuring they are well cared for is essential.
A salary increase is one way to motivate them. However, many other factors should be considered, such as career growth and work environment. Job promotion and soft-skills training may help them become more productive and avoid the feeling of being stagnant. Non-work-related huddles and scheduled open-door meetings can help them breathe and feel heard.
Doing all these can increase your operating expenses. However, recruiting, hiring, and training new ones can be more expensive and time-consuming.
Invest and Reinvest
As an entrepreneur, you have to find many ways to multiply your capital and earnings. Aside from operational expansion and M&As, you can put a portion of your cash on hand in stocks. Stocks are riskier but give you more money back than bonds.
Over the years, the stock market has been through sharp ups and downs, given the crises it has been through.
But one thing is clear, the stock market has always returned stronger and higher. Two good example are the S&P 500 (SPX) and the NASDAQ Composite (IXIC). The table below shows their seventeen-year and average annual returns.
| SPX | IXIC | |
| Seventeen-Year Returns | 252.33% | 536.52% |
| Average Annual Returns | 7.98% | 11.43% |
| Standard Deviation | 15.89% | 18.26% |
We can observe that both stock indices have risen substantially since the Global Financial Crisis. The standard deviation is noticeable, but the uptrend remained evident and outweighed it.
Watch Out for Macroeconomic Disturbances
Inflation and interest rate changes have a substantial impact on the business sector. These are more evident in highly cyclical industries, particularly banking and real estate. But regardless of the nature of your business, you must update yourself on the recent changes.
For instance, inflation affects purchasing power and production costs. It will be difficult for you to lower your price and production volume if the price of raw materials keeps increasing. It is much more challenging if your income cannot keep up with inflation. Meanwhile, interest expenses may remain costly if the Fed delays its plans of cutting interest rates thrice.
Takeaway
Managing a business at a young age can be both challenging and fun. It is more thrilling to maneuver it as the macroeconomic landscape remains shaky. But with proper financial moves, you will remain unfazed and cushion the unfavorable impact. And you can even discover growth opportunities to sustain your expansion.
