Running out of money is one of the major reasons startup businesses fail. That's why startups need financial resources to survive. The definition of financial resources is the money you have available for spending. Types of funding commonly used in business include venture capital, cash in the bank and assets your company can convert to cash easily.
Your financial resources are money available for spending. Typically this includes cash, liquid assets, equity funding and loans. Your resources should include enough cash or cash-equivalent assets to keep you afloat for three to six months.
The definition of financial resources covers a variety of business funding. Liquid assets are a common financial resource. They include both cash and resources that can convert to cash easily.
- Cash: Your cash on hand is such a valuable resource it gets its own financial statement, the cash-flow statement. This resource includes the cash you have on hand at the office and what's available in your bank account.
- Checks: If you have checks from customers that you haven't cashed yet, they're another source of ready money.
- Stocks and bonds: The market for these assets is well established, which makes it easy to put them up for sale and get cash.
- Foreign currency: If you keep foreign currency on hand for overseas operations, it should be simple to convert that into local currency.
- Operating income: This is the money generated by your business's operations. It's important not just as a financial resource but because generating money by selling goods or services is a measure of how well your company performs.
Illiquid assets can also serve as financial resources, but not as efficiently. You can turn company real estate into cash, for example, but it won't be as fast or efficient as selling stocks.
Many entrepreneurs don't have the financial resources to go it alone. The definition of financial resources extends to outside funding that can help you get your business off the ground and keep it going after the launch.
- Equity financing: Raising funding from equity is a trade: you give up a share of ownership in your business in return for money. Taking a company public and selling stocks is one way to raise equity funding. Keeping it private and selling an ownership stake to venture capitalists is another.
- Debt financing: Taking out loans is an everyday part of business finances. It has an advantage over equity in that you don't have to give up any control. The flip side is that you have to make regular payments on the loan, including interest.
- Grants: Federal, state and local governments have various initiatives for supporting business. These include low-interest loans, but also grants for businesses that bring jobs into a community.
No type of business funding converts into cash as fast as cash. It's important for your business finances to have cash reserves, even if you have access to other resources. If you have short-term investments that you can convert to cash instantly, you can count them as part of your reserve.
There's no magic formula for the right size of your reserves, but having enough to run for three to six months is a standard recommendation. That amount will vary according to your needs. Going over past cash flow statements or projected expenses can tell you how much three to six months operating expenses is for your business.
Having a cash reserve that's too small to support you is a mistake. So is putting too much into your reserves. Money that just sits in a bank account is a valuable resource but spending more of it might help your business grow.