A good number of small- and medium-sized enterprise (SME) owners are familiar with the process of taking out a business banking loan—either from a traditional bank or a digital bank like Maya—to finance investments and other operational expenses for their businesses. But too few may know that taking out a loan also means that a business should be prepared to update or refine its current financial management strategy in light of receiving new capital.
In particular, since the business will have to account for the loan’s repayment, budgets may need to be adjusted to accommodate this new obligation. An entrepreneur taking out a business loan should always ensure that there’s enough money for loan repayments each month, all so that the business avoids financial strain or late payment charges.
However, the act of revising a financial management strategy, especially if it’s been around for years, isn’t as easy as it sounds. For SMEs in particular, this can be a difficult endeavor as these companies often deal with the challenges of limited resources and strained cash flows to begin with. If you run your own SME, you might be wondering: how can you update your financial management strategy to make the best use of the new funds—and how will you be able to make sure that the loan funds inspire growth and revenue potential, just like they’re meant to?
To meet your loan’s repayment schedule without any hassle and implement sound financial housekeeping after you’ve taken out your loan, here are some tips that should prove useful:
1. Adjust Your Cash Flow Projections
Loan repayments will add a new fixed expense for your business. Failing to account for them in your cash flow projections can lead to shortages or confusion when the payment deadline comes. As such, take the time to update your cash flow statement to include the monthly repayment amount so that it won’t get overlooked amidst all your other financial obligations.
In addition, account for any changes in income or expenses caused by your loan usage. For example, say you used the business loan to purchase equipment that you’ve been renting all this time. You can then eliminate the rental costs from your projected expenses moving forward, allowing you to allocate towards loan repayment or other expenses instead.
2. Prioritize Loan Repayments in Budgeting
Timely loan repayments should always be a top priority when it comes to budgeting if you want to avoid late fees, higher interest rates, or damage to your business credit score. One financial management adjustment you can make in line with this is to identify and cut non-essential expenses. These include excessive business travels, unnecessary subscriptions, or underperforming marketing-related expenses, among others.
The key is to thoroughly review your current expenses to better determine which ones you can do away with. This strategic budget adjustment should make it easier to fulfill your monthly loan repayments as well as other essential expenses such as inventory costs and employee salaries.
3. Look for New Revenue Streams for Your Business
Additional income will provide you with more flexibility when it comes to your expenses, allowing you to effectively manage your debt while still maintaining your business growth. This can be done in a variety of ways, with the most obvious being to add a new product or service to your business offerings. However, make sure to conduct market research first to see if there’s truly a demand for what you’re adding to your catalog. This will prevent a waste of resources over launching a product or service that customers don’t need.
Another way to increase your revenue potential is to strengthen your online sales. With many customers now preferring to just shop online, you may be missing out if your business is limited to a physical store. Look into setting up an online store and selling some of your items there as well so that customers who can’t visit your physical branch can purchase on your website or on an e-commerce platform.
4. Optimize Your Operational Costs
Operational costs can take up a huge portion of your monthly budget. To determine areas where you can cut back on those costs, conduct an operational cost audit as part of your overall plan to adjust your financial management strategy. Consider negotiating with your current suppliers as well or looking for new ones who can offer the same quality at a lower price. At office headquarters, remind your employees to use water and electricity efficiently so that the company can lower its utility costs.
The funds you free up will make your monthly loan repayments much easier on the pocket. Over the course of the year, try to keep your operational costs as low as possible without compromising your efficiency and productivity—which is crucial for a small business like yours.
5. Top Up Your Business’s Emergency Fund
Having a financial buffer ready ensures that you won’t miss a loan payment even in case of an emergency, such as an unexpected drop in revenue or in the event that your equipment breaks down and needs to be replaced.
Set up your business emergency fund in a separate account and allocate a portion of your profits each month to top it up. You may also consider investing in liquid assets such as money market funds that can be easily accessed when you’re in need of quick cash.
Staying disciplined is also vital when maintaining your SME’s emergency fund. Avoid dipping into this fund unless absolutely necessary. To help you stay on track, you may set target amounts (for instance, three months’ worth of operating expenses) that you have to meet within a specific timeframe. This will allow you to stick to a goal rather than only setting aside money when you feel like it.
If the money is managed well, a business loan can transform your SME’s prospects and open up a plethora of new opportunities for growth and development. But you will need to be deliberate in your approach towards adjusting your financial management strategy so that the loan brings about a positive impact—not a negative one—on your business’s finances in the long run. Let the tips above guide you towards ensuring your SME’s financial stability and profitability, even as you’re fulfilling your loan repayment obligations.