Scaling a startup or any new business is one of the most important goals for an entrepreneur. One of key elements of success in this regard is financial prudence.
What is Financial Prudence?
In layman’s terms, financial prudence is simply the practice of carefully managing your available funds.
For instance, not overspending or spending unnecessarily on things that you don’t need makes you financially prudent.
What is Financial Prudence in Business?
When it comes to business, financial prudence counts as the optimal and careful management of available capital by keeping a watchful eye on your expenditures and avoiding the wastage of capital through careless or unnecessary transactions.
Minimizing your business overheads by maintaining efficiency and utilizing your resources to their maximum capacity in order to conserve capital is an example of being financially prudent in business.
Why is it important?
While becoming profitable in a new business might be a marathon that takes several months or years, it doesn’t mean that you don’t have intervals that require 100 meter dashes on a regular basis.
The inception of a business and the initial time period is crucial and not an easy task to execute. Therefore, it is important to create an efficient line of internal systems.
How to go about it?
1) Test The Waters
Before investing in expensive machinery and equipment or buying huge quantities of stocks, test the market response to see whether your target segment likes your products and services.
Inventory and production setups will take a considerable amount of your money, time and other resources so it is wiser to estimate the cost to benefit ratio beforehand in order to avoid running into problems at a later stage.
2) Maintain A Contingency Fund
Being financially prudent is not limited to avoiding overspending. An efficient use of your available funds is to also set aside a considerable amount for rainy days.
Having a contingency fund is essential for creating reserves that might come in handy if your business runs into unforeseen expenditures or sudden expansion plans. Moreover, the extra capital can come in handy to keep the ship afloat in the face of heavy losses or unexpected liabilities arising from lawsuits and revised regulations.
3) Create A Dynamic Revenue Model
Just like putting all your eggs in one basket is risky, so is having a rigid revenue model. A business should have the foresight to be able to make rapid changes to its revenue model. There is no golden formula for success, and that’s why being dynamic can help change unsuccessful models to profitable ones.
Your business should never be limited to a single source of revenue stream at any point in time.
Yielding the best results can mean adopting different strategies at different times based on market regulations, cost of inventory management, customer demands and legal requirements.
The Bottom Line
Dynamic planning, efficient utilization of capital and other resources, having a reserve fund, controlling your expenditures and being familiar with your markets are some of the many crucial elements of financial prudence that can help a business establish its foothold in the market and grow exponentially.
