When it comes to running your own business, the way you handle your budget and finances is key. After all, even if you have a product that is flying off the shelves, if you can’t properly manage your cash flow and keep your supply chain in check, you may wind up with problems financing future orders. As such, it’s important to approach every entrepreneurial venture with a keen focus on how you manage various financial matters since they are ultimately what can make or break the sustainability of your business.
One popular industry that many entrepreneurs are getting involved with is the CBD market. CBD is booming and, as such, more and more small business owners are looking to get their own piece of the pie by starting a CBD business. That being said, there is some financial outlay that’s necessary in order to get any business running, so you need to understand how to properly manage your debt obligations, creditors, and interest payments if you want your net income to be something that can support a sustainable CBD company. Keep reading for some tips on financing your CBD business and how to use various financial approaches such as the time interest earned ratio in order to keep a pulse on your business.
What do you need to know about the TIE ratio?
One helpful measure of a company’s financial viability is known as the TIE ratio. TIE ratio stands for times earned interest ratio, which factors your annual interest expenses into your overall income statements and the company’s earnings. For example, before a lender gives you additional financing, they may ask to know your TIE ratio, since just because you’ve got a high current income, it doesn’t mean that you can handle all of your financial obligations. It’s absolutely possible for you to be making a lot of money, but if your company’s ability to pay its additional debt and the total interest expense of that debt on an annual basis is compromised, a borrower may not be willing to fund your business. Especially if you have a lot of long-term debt and interest obligations, which would give you a high ratio, it’s unlikely that you’ll have enough income to exist on a long-term basis.
How does your TIE ratio impact your ability to get the equipment you need?
So, say that you’re looking for a lender to help finance some new equipment to help boost your CBD business’ production capabilities. You may have enough money to cover the cost of goods like cartridges, canners, cartridge fillers, and a vape cartridge filling machine; however, it might make more sense to finance this equipment from a business like Cool Jarz. If you have a high TIE ratio, you may not be able to get the money you need to finance these purchases, which could hold your business back.
This example illustrates why your company’s income alone isn’t enough to determine whether your business is actually financially viable. If the TIE formula reveals that your times earned interest ratio is too high, then you may not be seen as an acceptable risk worthy of a new loan. As such, in addition to keeping track of your financial statements, it’s important to take a look at your solvency ratio on your company’s income statement. This can help you better manage interest charges so you can avoid having a higher ratio when the TIE formula gets used by potential lenders and creditors. Ultimately, this will allow you to be a more attractive investment opportunity, offering you new possibilities as you work to grow your CBD company.
