Growing a business from the first seed of an idea is not a smooth linear journey 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 points of that journey 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, or with help from friends or 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.
The steps below will be invaluable for entrepreneurs who are starting a business, directors who are running growing businesses and established companies – of all sizes – as well as for business advisers and investors. It explains how to approach the financing decision, the questions to ask and how to treat it as a business process, so that it is not as daunting as it can sometimes seem. And if it does get daunting, good advisers can provide further guidance. This guide, though Anglo-centric, also provides details of where to obtain free advice on raising finance.
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. The table shows the options available to and the decisions faced by business-owners along that journey. 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. Entrepreneurs want to focus on doing business.
For many, finance falls under the category of administration, which may not be their forte. But to make sure the business can move forward they must step out from the business and ask the questions that need answering. Plans may have been made when the business was little more than an idea. Things change and circumstances move on. You need to make a fresh assessment of where the business is, what the opportunities are, how achievable they are and what new challenges there are to the business. 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. On the basis of the above analysis, prepare a detailed forecast, looking at the forecast profit and loss (P+L) account and balance sheet and then, crucially, at the cash flow, which will highlight how much capital needs to be put into the business to finance your latest plans. 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.
At this stage a business is likely to require outside advice and experienced resource to ensure that it is investment ready for potential investors, giving it the best possible chance to secure funding. Be open-minded. The funding landscape has evolved considerably over recent years and there are a lot of options available – some are new and some have been around for some time. Business plan Preparing a solid business plan is the key to securing funding. A robust business plan 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 helps them understand the risks inherent in the strategy and the impact of any deviations from their plan – particularly when it comes to funding.
Information will depend on the target audience, but it should incorporate: –
An executive summary, highlighting the main points, designed to grab the attention of potential lenders or investors;
- Details of key personnel, their responsibilities, skills and experience;
- Market analysis of the company, its products or services and its competitors;
- Details of current and intended client base;
- A marketing plan targeting new or existing customers;
- Historic financial information covering the last three years of trading (if available) – accounts (audited if available), and key accounting ratios;
- Cash-flow data, including information about standard payment terms and typical debt turn;
- Financial forecasts for the next three to five years, presented at the historical information, and highlighting the key underlying assumptions;
- Additional ‘flexed’ forecasts showing the impact of key downside scenarios, such as sales targets not being met or cost savings taking longer to come on stream;
- Cash-flow forecasts covering the next two to three years (or in the case of a start-up or turnaround, until the business moves into profit), clearly highlighting the amount of funding required; and
- How creditors, capital expenditure, debtors and sock will be managed over the forecast period.
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