For the small and start-up business 'Cash Flow is King' â No cash - No business - it's as simple as that!
In the early days of starting a new business many people concentrate on making profits. But profits are not much use if they are all tied-up in debtors, work-in-progress, or equipment. This particular difficulty is common to almost every type of business: manufacturers, contractors, retailers, even accountants and solicitors. Sometimes it is a seasonal problem, in other cases cash shortages are a constant problem.
The cash flow problem is relatively easy to recognise - you just have no cash. You may have lots of stock, efficient plant and equipment, large amounts of debtors, and even an excellent profit record, but if you do not have sufficient ready cash to pay your way you have a big problem. This problem cannot go unsolved for very long â so lets look at how you can avoid this.
In creating your Business Plan you must list all the costs involved, and allow for unforeseen costs. Growing your business will eat money and, therefore, keeping a close eye on your expenses on an ongoing basis, and ensuring that debtors pay you on time is vitally important. Similarly, monitoring expenses, as a percentage of your turnover (total net sales), and comparing to the anticipated ratio in your Business Plan is well worth doing. This will keep your finger on the pulse of the business' financial health. Many people focus too much merely on the turnover figure and take their eyes off the ball when it comes to expenses. Remember that broadly speaking:
Turnover minus Expenses = Profit!
Financing Your Start Up
You may never get a better analysis of your Business Plan than when you approach a bank, potential investor, or an agency about finance. If you need money to finance your start up, it will only be available if you can convince the lender that you can pay it back.
The hardest question to answer is what kind of capital should you seek? - Often we are not aware of options that are available to us, or don't have the time to explore what is possible.
There are three main sources of money to fund your business idea: -
Equity is the capital invested in the business by you, the owner, from your own resources. The advantage to the business of equity is that there is no interest charge and a return is only paid to the investors if the company is making a profit. There are two main sources of equity: -
- Funds from personal wealth
- Profits generated by the business after takeover
If you are contemplating using your own funds to finance your business start-up it would be wise to get advice as to the most tax efficient method of investing your hard-earned money. For example, if you invest your funds as Share Capital you can only 'get it out of the company' by selling the shares to an interested party, or by closing the company down and distributing the resultant funds to the shareholder(s). This might attract Capital Gains Tax (CGT). If, on the other hand, you give your business a loan, then this can be repaid to you tax-free.
It doesn't make sense to use your savings 'to pay yourself' from your private bank or savings account as the enterprise gets under way and 'save' the company having to pay you in the early stages. Your business should always be charged a realistic wage for your efforts from the start. In the case where you have access to such funds you could lend the money to the company to pay yourself until such time as the business is in profit, and the loan can then be repaid.
Obtaining funds from family or friends can seem an easy and convenient way to fund your business, but there are a number of points to consider. For example, it is essential business practice to enter into a written agreement as to the precise terms on which such funds are sought and given. It is often too late some years after money has been given to the business and a problem has arisen, to recall the terms on which the funds were procured. Discussions as to what people 'thought' was agreed invariably end in an acrimonious confrontation and can ruin otherwise long-term friendly relationships.
When seeking funding it is important to realise that money alone is generally not sufficient. It is equally important that the investor understands the business, and brings other attributes to the table such as experience, customers and profitable contacts in the industry or other 'door opening' benefits.
Equity is free to the business on a day-to-day basis. If the business is in need of additional funds it may be an option to seek additional business partners, as an alternative to debt. Be careful though, because many business people make an early and costly mistake by 'giving away' equity stakes in their enterprise to secure start-up funding. If your business idea has real potential in the longer term, early equity disposal can eventually prove very costly for you.
If you are going to take equity partners, be sure that there is an agreement in place from the start so that the investor knows what they are getting, and how they are to get their investment back at a later date. One or two 'reasonable' sized investors are better than a number of small investors. Too many small shareholders can stymie further investment, perhaps from Venture Capital Funds, by creating too much investor 'clutter'.
There are a number of Venture Capital Funds available to invest in business projects. Investments can range from as little as â¬50,000 to many m millions, depending on the ultimate potential of the business idea.
Venture Capital seeks out worthwhile projects in need of funds at a critical stage of the enterprise development. Venture Capital Funds generally want their money back over a shorter term than most other fund sources and, accordingly, impose strict conditions on their investment terms as to repayment time scale and equity stake.
When dealing with Venture Capital Funds, you must be conscious of the precise detail of any agreement entered into. Venture Capital Funds have a tendency to put increased pressure on non-performing enterprises that return looking for further investment. It is prudent when seeking Venture Capital Fund investment to be sure that you obtain adequate funds to deliver the expected results at the first attempt, otherwise you may find that you literally have bitten off more than you can chew, and any second bite leaves a lot less of the ultimate pie to be enjoyed by you.
Some agencies, such as Enterprise Ireland, have a panel of potential investors who have indicated their willingness to invest in worthwhile businesses. Most of the major accountancy firms and legal practices also have clients willing to take a financial plunge given the right opportunity. When contemplating such a course, you should attempt to secure the financial backing of someone who knows the nature of your business, and can bring more than just money to the table. It is essential that the investor also brings experience, input, customers, and 'door opening' abilities.
There are various types of debt. Some of these are general in nature, and some tailored to a particular purpose. Providers of debt finance like to see a reasonable financial investment contributed by the owners of the business. This is because: -
- They do not like to take all the risk
- Equity money is free
- In the case of insolvency, the debt is paid back before equity.
Lenders describe the relationship between debt and equity as the 'debt to equity ratio' or 'gearing'. There are many different types of debt, some of which are listed below. Only some of these are likely to be relevant to your business: -
- Term loans.
- Government Loan Guarantee Scheme.
- Trade creditors.
- Invoice finance (for businesses that sell on credit).
- Hire Purchases.
- Commercial mortgages (for business property).
- Plant and equipment finance.
- Leasing (for vehicles or equipment)