Özgur Arslan-Ayaydin, Ph.D., is a clinical associate professor of finance at the University of Illinois at Chicago. Her main area of expertise is the analysis of investment decisions of corporations and the way they finance their assets through various combinations of debt and equity, which represent their total liabilities. Arslan-Ayaydin teaches corporate finance, investments, international finance and Islamic banking and finance.
Arslan-Ayaydin offers five tips to small business owners who would like to differentiate themselves in the marketplace in finance.
(Photo courtesy of Özgur Arslan-Ayaydin)
What are the top five things small businesses can do to be successful in terms of finance?
- Market research for external financing. Do not only count on relationships while applying for a loan. Always compare for the best terms of available rates, fees and policies provided by the suppliers of external finance. While doing this, make sure to compare only those of established ones and, if possible, regard their ratings and reviews.
- Optimum liquidity. The ideal is to establish that the amount of short-term debt never exceeds your liquid assets. However, make sure that there is a reasonable ceiling on your liquidity, given that excess liquidity has an opportunity cost too.
- Fixed versus variable costs. There are two types of costs for a business — fixed costs and variable costs. Small businesses need to be more flexible to better cope with future uncertainties. You bear the same amount of fixed costs even when your business does not generate any revenue at all. The higher the proportion of fixed costs, the higher the revenue level that should be maintained to stay in the business. If the proportion of the variable costs is higher in the total costs, your business can survive even at a relatively low revenue level.
- Cash versus profit. A company may be profitable, but its value can be low due to being cash poor. The financial health of a company depends on the company’s timing and quantity of cash flows. Therefore, providers of external finance mainly focus on your business’s potential to generate steady and predictable cash flows.
- Keep your records systematically and up to date. Providers of external finance need to obtain your financial information to know all about where the money came from, where it is used and where it is now. This way, you can provide an accurate representation of your business to them. Moreover, it helps you to be better aware of the timing and quantity of the cash inflows and cash outflows.
This article was written by Michelle Guilbeau for Small Business Pulse