Does Your
Business Have A Finance Strategy?
Most businesses don't have any type of
workable and relevant finance strategy. And, the
direct result is wasted or lost opportunity to take
advantage of profitable situations. Deals fall through
every day because the buyer could not arrange adequate
financing. Sales are not made because there is
insufficient capital to finance inventory and accounts
receivable. Businesses fail everyday because they can't
manage through their cashflow cycles.
 In
many cases the problems could have been avoided if a
finance strategy was in place.
So what exactly is a small business finance strategy?
Simply put, a viable plan to assemble
the necessary combination of debt and equity required to
operate a business. For whatever reason, most
business owners do not invest much time proactively
planning their future capital needs through some sort of
formal or informal finance strategy.
In my experience, approximately 80% of financing
activities are under planned. Or, put another way, very
often the last thing considered in a business decision
where a cash outlay is required is where will the money
come from?
The result of this lack of planning is that business
transactions, dependant to some degree on financing, are
put in jeopardy on a regular basis as the seller
frantically scrambles around for a funding source.
Even if financing is located in time to save the deal,
it can come at an unnecessary expense, and the related
loan conditions may restrict the way the business
operates in the future.
As an example, lets say that a buyer was in the process
of finalizing the purchase of a business and had
arranged for the purchase financing using all the to
be acquired assets as security for the loan
instrument. After closing, the buyer tries to arrange
working capital financing, but discovers that no lender
will provide him with a line of credit unless he can
offer a first charge on the current assets as security,
which have already been pledged to the primary lender.
So, the business sale gets finalized and all the assets
change hands. There's only one small problem. The
Business doesn’t have enough working capital to operate.
There are many versions to this type of situation where
more expensive subordinate debt is secured, or other
personal assets are pledged, to obtain the working
capital. But even then, if the working capital does not
allow for any contingencies in cashflow projections, a
new problem can arise in short order if the business has
a few slow months, which is not unusual when a change of
ownership occurs.
And by the way, none of this is unique to business
acquisitions.Opportunities are destroyed everyday
from a the lack of finance preplanning.
In fact, many business opportunities would never even
be considered in the first place if the average business
owner had a better understanding of his borrowing power.
Too often, the business planning process goes beyond the
financial means of a company and the business ends up
taking on financial commitments that would have
otherwise been rejected if better financing and
repayment information was considered at the beginning of
the process instead of near the end.
A meaningful financing strategy needs to look at the
capital needs of the entire business today and in
future, allowing for contingencies, expansion, growth,
and so on. It needs to take into consideration the
monthly cash requirements, planned capital expenditures,
and type of debt instruments that meet the business
needs.
If you were to develop a financing strategy, how
would you go about it?
Well, I would recommend that you begin by understanding
where you are today. The Balance sheet is the starting
point of a solid finance strategy. Whether you have a
current Balance Sheet or not, you can easily sit down
and make one that will help you with this process.
Just remember this is not an accounting exercise to
calculate net book value and the unamortized portion of
goodwill. You are simply trying to account for all
assets and debts and determine the Fair Market Value of
each.
The Balance Sheet, both personal and business, expresses
your current financial leverage. From there, you would
need to understand your current cashflows, and those
projected over at least the next two years.
Now you have a solid view of your borrowing leverage as
it relates to assets and cashflow, which are the corner
stones for most commercial financing transactions.
While assets and cashflow by themselves will always be a
large part of any financing decision, there are other
factors that need to be considered in your financing
strategy. Things such as credit history, industry,
sector, geography, historical track record and
experience, customer base, supplier base, and asset type
and condition, all need to be factored in as well.
Financing risk elements can vary significantly from one
business to another, so knowledge of how the commercial
financing market place views your particular business
application is a key component of a finance
strategy.
Once you arm yourself with the relevant financing
information for your particular business, you can then
apply this knowledge to your overall business strategy
and make it much more robust in the process. Remember, a
finance strategy is just an element of a broader
business strategy.
But the finance strategy by itself also provides you
with the ability to make better business decisions
faster and helps you understand any steps you need to
take to achieve certain business goals in the future
that will require capital.
The key point to be made is that, as much as
possible, finance strategy should be a proactive versus
a reactive undertaking of your business.
The more relevant the financing strategy, the more
likely your business will be in a position to take
advantage of opportunities and avoid harmful and even
fatal cashflow deficiencies.
Go Here To Contact Me About Business Financing
From
Finance Strategy To Home
|
