Growing a business from the first seed of an idea is not a smooth linear journey and it’s not as simple as going from A to B. The destination is seldom decided as the business idea takes form, becomes a reality and then grows into a successful enterprise. The finance journey is continuous; there may never be an arrival point. For any business to travel on a journey it needs at all times to be appropriately financed. Businesses need to make sure there is the finance to back their growth plans.
Businesses are often started on overdrafts or credit cards, with help from friends and family, or by using the family property as collateral. But soon after that, the business will need to be financed so it can stand on its own two feet if it is to be a sustainably growing proposition.
Once a business is up and running on the growth journey, management will need to ensure that future plans for growth can be financed. If not, there is a chance the business will fail.
On the growth journey there will undoubtedly be ups and downs. Through the life of a business, as soon as plans are made, be they looking for growth or for survival or to batten down the hatches, the finance must be in place to support those plans.
All in the prep
The work to be done in getting a business to a position where it can take on additional capital need not be too daunting a task; however, nor should it be underestimated.
START by looking at the business afresh, with a questioning mind, so that the answers to the questions a potential shareholder or lender will probably raise are immediately to hand.
- Step out from your business – To make sure the business can move forward entrepreneurs must step out from the business and ask the questions that need answering.
- Take a fresh look at prospects and challenges – Circumstances change; make a fresh assessment of where the business is, what opportunities are, how achievable they are and what new challenges there are to the business.
- Analyse your opportunities – You need to make a detailed analysis of the prospects for the business in light of any changed circumstances. A review of the new upsides and the new downsides needs to be carried out and the impact of them assessed, together with the probability of different scenarios.
- Reach for the future – On the bases of the above analysis, prepare a detailed forecast, looking at the forecast profit and loss account and balance sheet and then, crucially, at the cash flow, which will highlight how much capital needs to be put into business to finance you latest plans.
- Think about finance – You then need to think about the financing options for the business, how appropriate and how attainable they may be. To secure debt financing and/or investment, you need to make your business proposition clear and understandable to your target audience – with a business plan.
The effects your business plan has on available finance
Having a strong business plan is the key to securing funding as it helps potential lenders or investors understand the vision and goals of the business. It also brings focus to management’s understanding of the business strategy.
It must be clear how much of the existing owner’s money is committed to the business. If a lender or investor thinks the existing owner does not have enough ‘skin in the game’, securing a loan or investment is likely to be more difficult, if not impossible.
If a business is looking for debt finance the plan needs to demonstrate how the business will be able to both meet interest payments and repay the capital element over the period of the loan.
Whether it is short-term debt finance or long-term growth capital, different equity investors and different debt providers will all have specific requirements when it came to the content of business plans.
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Cash is king
Being able to demonstrate good cash management sends out the right signals to potential investors or lenders. The only way cash flow can be kept under control is by understanding the ins and outs.
For any entrepreneur, wherever they are on their business journey, knowing what options there are along the way is key to making successful progress. Crucially, this applies to the financing options. The idea that an exact route can be mapped out for a business is one road analogy too far. Running a business will throw up many new challenges: closed roads or roads that lead to dead ends, so being aware of the alternative routes is critical. You may need to take advice on directions but if you are forearmed with the knowledge that there are alternatives, the journey is far less daunting.
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Look out for next week’s video on ‘Branding’ delivered our Digital Marketing Apprentice, Tanisha Forde.