Kathleen Parker FCCA explains the cashflow pressure points for start-ups and how the need for funding will arise.
Starting up a business often requires determination, ambition, the ability to get things done and the right financing at the right time. If you have a genuine interest to become an entrepreneur and pursue a business from an idea, then at some point you’ll likely find yourself wondering when and how exactly you’re going to raise the necessary money to progress things forward.
Start-up funding should be something you plan for. That’s because if you chart where your business is heading along with what you expect to achieve and when, then you’ll have plotted a course that will allow you to anticipate when the need for investment is likely to arise.
That means working with your accountant to document these things from the start when your write a business plan. In this post we highlight the likely occasions when you’ll need finance in the start-up journey as well as what you’ll need to think about and consider.
When exactly will you need to raise finance?
Cashflow and working capital are vital to the survival and growth of an organisation. The early days of starting out will likely incur plenty of expenditure up front to bring your idea to the market and establish your operations. Ask yourself:
How will you obtain or generate the money to transition from an idea to a product or service?
How are you going to generate the money needed to launch the business if you don’t yet have a product or service to sell?
So unless you're very lucky, you’re going to need some sort of investment straight off to get the ball rolling and, provide you with the momentum needed to start trading. If you can finance the setting up stage yourself or, if you’ve already received funding to prove your idea and it’s been a success, then you’ve overcome a challenge a lot of entrepreneurs to-be struggle to move past.
The likelihood is it doesn’t end there though. The need for funding will almost certainly arise again quite quickly because the costs of starting out will create a lot of cash outflow with little likely to be coming in. So as you start trading, the chances are it won’t be long before you need to raise more money!
For example, if successful early on you’ll soon want to move the business forward which may mean one or, a combination of:
Purchasing more stock
Buying new equipment
Taking on a new employee
Locating to your first premises
As the founder and owner, you’ll be focusing on the everyday running of the business and as part of this, it’s essential to consider how you’re going to manage both the day-to-day tasks while maintaining a healthy cashflow. This is absolutely vital to ensuring your enterprise survives the early, challenging days and thrives moving forward.
Think! Why do you need this money?
To raise money successfully – ask yourself; what’s the reason – or combination of reasons for doing so? Bank managers, investors, even friends or family will want to know how you will make use of these new funds.
As mentioned earlier, are you looking to prove your concept and launch or, enhance your product/service or maybe even take on a member of staff? That means answering what they’re going to be used for in your organisation and how that will assist with moving the business forward and achieving growth.
This should be mapped out in your business plan via your forecasts, including details of the likely impact of this funding on sales, cashflow and profits. That creates a useful yardstick both for you and the source of finance to judge the use of the funding and its impact. If the financials aren’t your area of strength then be sure to work with, or if you don't yet have one, choose your accountant to help you get these vital numbers into your plan.
What are your funding options?
How exactly are you going to raise finance? Obtaining a loan from your bank can be difficult, but the good news is that you don’t have to rely solely on such traditional methods. Sure, for some start-ups this can be the most beneficial approach, but for others this isn’t always the case; especially if you manage to spark the interest of investors, who might also act as a mentor to help you grow the business.
Entrepreneurs can often find themselves both overwhelmed with the choices and unaware of all of the options available to them. The basic principles can be summed up by two types of financing options: debt financing and equity financing.
Debt financing: money that you have to pay back, sometimes with interest
Equity financing: money generated through selling a share of the business and the investor gets their return when the shares are sold.
You need to consider these carefully and again, work with your accountant to help you come to a decision that best suits your circumstances. More often than not this will likely be one of:
Friends and family
Government backed lending
Finally, remember it’s a good idea to invest a significant sum of your own money in your business, especially if you’re pitching to investors. Why? If you’re not prepared to invest yourself, then why would an investor or any other source of finance risk his or her own money on your business idea?
Also even if you land significant funds, you may still need additional cash quite soon afterwards. There’s always likely to be unexpected expenses and events – but with a vast range of sources of finance waiting for the right business opportunity, some of which can be very tax efficient for the investor, there’s plenty of options out there.
The content of this post is up to date and relevant as at 21/11/2016.
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