Inside Small Business | Small Business & Home Business Marketing

“Small Business Challenges: Financing Your Business”

Part One in a Three Part Series on overcoming small business challenges
By Ed Gillooly, Managing Principle of HIRE Finance

On one hand, most small businesses (76% according to Arthur Andersen) say they can find adequate financing for their business, and yet one of the biggest reasons experts cite for business failures is insufficient capital.

This dichotomy can easily be explained: most small businesses simply don’t do enough planning to accurately measure the amount of financing they need. So when they are “caught short� and the need for capital is immediate, they are in no position to get it. They end up surprised by the need for more cash, and can’t credibly answer how they got into the situation or how they’ll get out. If the business owner has less than stellar credit or is over-leveraged, what might have been a “bankable� situation can wind up ending the dream of owning a business.

Banks (and lots of other sources) are in business to finance you. They NEED to make loans to make money. But requesting a loan without doing your homework is the sure fire way to be labeled “High Risk!” To be successful, you must be prepared and organized. You must know exactly how much money you need, why you need it, when you’ll need it, and how you will pay it back. That information can only come from a detailed financial plan.

Your financial plan should contain your projected financial statements – Balance Sheet, Income Statement, and Statement of Cash Flows – for the next year (minimum) to three years (ideal). If you’ve been operating the business, you should also provide any historical financial statements on your results to date. While many business owners rightly decide to let accountants or consultants help to develop their projected financial statements, they cannot be accurate and useful without the participation of the business owner.

When it comes to financial planning, “it’s all about the assumptions.� You want to build a plan that documents the assumptions that you’re making about the business. Ideally, it should be done in a way that allows you to easily adjust them based on feedback from your financing sources, as the business changes over time, or as your insight into operations grows. Too many plans end up with the legendary “hockey stick� revenue growth without any direct link or logical increase in expenses. What’s the average sale? What’s your close rate on prospects? How many appointments does it take to close the sale, and over how much time? These are just some of the assumptions that have to be answered – and “costed� - into your plan’s expenses to ensure your plan is reasonable. Your accountant can’t answer these questions without you.

You also want to develop the plan in a way that supports analysis of our business moving forward. Do you have more than one product or service? Does your plan develop information on the net profit of each product? Which are the stars and which are the dogs? No financier likes to “feed the dogs.� Neither should you!

Who will ultimately finance your business depends in large measure on the amount of financing needed, its relation to your investment in the business, whether it’s a long term or short term requirement, and the purpose of the loan. All that being said, start with banks first. They typically have the most ways in which to finance your business and can be very valuable to an entrepreneur, especially early in the life of the business. Many banks can provide you with equipment leasing options in addition to short and long term loans, for example, which can be very helpful to capital-intensive operations.

Even if your financial plan indicates you won’t need capital for years, the time to start a banking relationship is immediately. The key word is relationship. Share your financial plan with them, as well as the outlook for your products and services, and what you think you’ll need in the long term. Update them on the progress against your plan as you go along – every three months or so. This gives the bank an opportunity to see how you operate as a businessperson, and to give you valuable feedback along the way. If you find yourself in need of cash to cover an unanticipated event, you won’t be an unknown commodity to them, and you’ll have a much better chance of success than someone who comes in “cold� with a loan proposal. And if you decide to be more aggressive by growing your business with borrowed money, they’ll know your original plan and how you’re exceeding it.

Ed Gillooley is Managing Principal of HIRE Finance, a Philadelphia-based consulting firm that provides entrepreneurs the financial know-how to grow their businesses. For more information, please visit www.hirefinance.net. He can also be reached via email at ed@hirefinance.net

           

Posted on Thursday, April 20th, 2006 at 2:30 pm and is filed under Money/Finance, Small Business. You can follow any responses to this entry through the RSS 2.0 feed.