We all know that cashflow is the lifeblood of a business. As long as cashflow…
Business Funding Can Cause Big Problems
Business finance, funding, overdrafts, working capital. Name it what you will, at some stage the question of money is going to raise its head. It’s the one thing most small businesses will agree they need more of. And there’s no doubt that having more money into the bank can make things easier…Or can it?
It’s true, most businesses need some money to get off the ground, but in my experience it’s dangerous to focus on money as the pill that’s going to fix the ills of your business.
Most small business owners will tell you that banks are impossible these days, they’ll only loan you money when you don’t need it. A friend of mine recently had a bank tell him they’d be happy to loan him $50,000 if he were to put $50,000 in a term deposit first.
Naturally my friend was miffed. But, there’s a good reason most banks are reluctant to loan money to small business. Small business owners are not very good with money. In fact they have an appalling track record with the stuff. I know, I know… You’re different… You’re nothing like all those drongos that go bankrupt.
Interesting aside: I read recently, that 80% of adults consider themselves better than average drivers. Think about that for a moment.
Banks don’t like losing money
I’m no friend of the banks, far from it, but the reason banks are reluctant to loan money to small business, is that they stand a very good chance of losing their money. Small business owners generally have no idea about managing their cash flow, they don’t run accurate and consistent financial reports, they confuse cash with profit and they generally don’t know which parts of their business make and lose money.
Small business is a game of keeping your fingers crossed. And banks know better than most that injecting more money crossed fingers leads to disaster. Instead of swearing at the banks, take a lesson from them: getting outside money into your business is the last thing you should do.
The last thing you should do
The last thing, after you’ve done everything else, in other words. After you’ve tightened up all your procedures and reporting, after you’ve learnt to manage your cash flow, after you’ve worked out what jobs, what clients and what projects make profit and you got rid of the ones that don’t.
The time to inject more money into your business is once you’ve got your fingers on the pulse and you’re making money, not before. The dream of being flush with cash can make things worse. The investment needs to be paid back in some way, so overheads go up and cashflow get tighter.
Worse than that is the effect on the mindset of the business owner. As soon as the cash is in the bank or the overdraft is established, the pressure comes off. Suddenly it’s not a drama anymore when you’re late in invoicing or clients are slow payers. Suddenly doing a job that only barely breaks even is ok.
Back to the beginning, with a new debt
And before you know it, the overdraft is fully drawn and the business is more or less at the same state it was prior to the cash injection, but now you have a big debt.
Before you consider borrowing money, sticking more of your own money in or getting and investor to put money in for you, make sure you’ve learned to become a great financial manager of your business. Get the financial reporting right, regular and ensure you understand them. Install discipline around invoicing and collecting. Implement software systems that tell you where you make and lose money in the business. (Read about the 7 steps to make your business rock-solid here)
And above all: make profit. If you do all that, consistently, banks and others will line up around the block to loan you money. The irony is of course, that by then you may not need it anymore… Now that’s a problem we’d all like to have… I promise you.
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