Partner Article

Financing Your Business Part 2

This is a series of articles written by an entrepreneur who has started, grown and managed a number of businesses. As a consequence of success through hard work, a bit of luck, experiencing good times and not so good times, and now enjoys what has been achieved.

“The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed“ (Henry Ford)

Your business won’t grow or succeed without good financial management. Cash is the life blood of any business and managing working capital is particularly important. All businesses need cash-flow management. Businesses fail when they run out of cash or run out of options to access cash. Businesses can make losses a number of times but can only run out of cash once.

Measuring cash usage and having a strong management of cash flow is fundamental to a good business. The temptation in the early days of a business is to be drawn into spending cash that you do not need to spend. Setting expectations of how you manage cash at the early stage will govern the attitude of the people who are involved in the business. Avoid spending on anything that does not add value to the business. Try and turn any spending into an investment rather than a cost. You get a return on an investment were as costs are one off spends with no returns. This is an attitude of mind.

As the business grows you will be faced with key decisions; do you fund growth out of your cash flow? Do you negotiate funds from external sources? What level of funding is required? What external funders will concentrate on will be the businesses ability to generate cash (the EBITDA of the business).

Always remember it is better to “buy your umbrella when the sun is shining”. The paradox is that when your business is doing well it is significantly easier to raise finance. Banks are more receptive, creditors are or more responsive, favourable debtor terms are easier to negotiate and investors are more willing to provide funds. Raising funds becomes more difficult if the business hits a rocky patch or starts missing forecasts. Trust me this will happen.

I have met a number of business people who, when cash becomes an issue, put their head in the sand and hope the problem will just go away. It can be a very stressful time for an entrepreneur but the way you deal with this situation will reflect on your capability of managing a successful business.

This is the time when you really need to take control. Identify the problem early, talk to stakeholders and advisors and then take the appropriate action. This might mean extending terms with creditors, collecting debtors more quickly, reducing headcount or pay within the business, extending loan terms, renegotiating with the bank or external funders. None of this is easy. It takes commitment, conviction and endeavour. The maxim should be that if you make an agreement with any stakeholders then stick to it or if things get worse then let the stakeholders know quickly. Unfortunately the bottom line is that running out of cash may mean that the business idea was not commercially viable from the start or that the market environment has moved against the business. The rule is always make the necessary decisions quickly.

This was posted in Bdaily's Members' News section by The Secret Entrepreneur .