Steady cashflow is very important for a small business attempting to grow. So who has it, and how do you get it? The answers will vary considerably depending on a number of factors including the stage of growth, how much funding is required and how well the business is structured.
Throughout the business lifecycle: concept, start-up, growth and value/exit, every business needs sufficient funds to support the operations and achieve the next set of objectives. Some businesses fund themselves out of operating cashflow, others by enticing equity participation, still others through loans, finance leases and debt funding. The type and amount of funding required, available and attainable are critical issues for most business. The trouble is, most small business owners have little or no concept of the potential sources of funding, or importantly, how to structure the capital and debt structure of the business.
Almost every business starts with an idea, a concept, a new way of doing things. Growing in this early stage involves turning that idea or concept into reality. Doing so requires funding in some form. Most commonly, business owners fund the concept stage out of their own pocket, from savings or by mortgaging their home or other property. As a result, funds are typically scarce and it is difficult to justify spending even a small proportion of the available funds on concept testing and development. An overwhelming proportion of business owners tend to jump straight into the business and, in doing so, place the entire future of their business at risk. Concept testing is a critical stage of any business’ growth and should not be compromised.
Ensuring adequate funding is typically a case of what you can beg, borrow or “steal”. Seek out family and friends or take out personal loans. However, be aware that these funding methods rarely provide the entire amount required. Your own funds need to be invested too and if external capital is involved, be very clear with a shareholder agreement in some form as many future disputes can be avoided.
The start-up phase involves physically bringing the business to life. For some businesses this involves expensive fit-outs and specialist equipment, others need vehicles and office space while others only require a webpage and home office.
The selected business model will affect capital financing decisions. High profile retail businesses will cost significantly more than a mobile or a work-from-home business. Very few businesses start out 100 percent debt-funded, instead relying on contributed capital from founders (savings, house mortgage or personal loan).
It is easy to estimate the set-up and fit-out costs required to establish a business. Therefore, it is easy to establish the amount of finance required. Estimating the level of working capital required to fund the business is a completely different question.
Working capital is the money used to fund the ongoing operations of the business. It includes funds invested in stock, outstanding debtors, cash at bank and other operating functions of the business. Operating losses often result during this period and must be funded out of working capital. Estimating working capital requirements demands robust analysis and assumptions about the size of the loss the period over which it will continue.
During the ramp up “cash is king”. Accurate cash forecasting is critical to minimise the borrowings required. Active cashflow management and forecasting are often overlooked. Active cashflow management means continual; weekly or even daily during early growth. Most business owners do not understand how to prepare simple cashflow projections or, even worse, don’t have the discipline to do so. “Pay now, worry later” is a dangerous mentality during start-up and the cause of many business failures. Businesses at this stage of growth rarely have the back end systems necessary to produce quality and timely management reports, an essential element in strong cashflow management. Investment in reporting and management systems is critical to support the business in the medium-to-long term.
It is also critical that the choice of any accountant or bookkeeper is an informed decision. Speak to their other clients of a larger size to see how well the basic compliance accounting has been managed. There are a staggering number of bookkeepers or accountants that have contributed to major cashflow blowouts due to poor practices that the founder or business owner was rightfully relying on.