How Much Money Does Your Business Need?

Posted by on October 12, 2009 · Leave a Comment 

By: Roseina Seip

Never enough Money!

You need money to start a business, expand your business, pay your employees, purchase equipment, buy inventory, you name it! Where do you get it? How much do you need?

Small business owners often do not adequately identify and justify their financing needs. They simply ask for a loan without truly understanding why they need it, or how much they need. Understanding these basic questions will help identify which course of financing to consider. For example, if you have short term needs, you may consider a line of credit to cover those needs versus a loan, especially when the application fees for a loan can be quite costly Conversely, if you are purchasing expensive equipment you may consider a long term loan, where normally the term of the loan depends on the life of the equipment. This allows your business a comfortable repayment schedule while allowing its investment to produce.

Operating Capital

There is a more important identification of financing needs: operating capital. Invariably I will ask the question: “How much do you think you need?” The common answers, “How much can you give me?” or “I think I need $10,000 but if you give me $20,000 I will feel more comfortable” or “I would like $50,000. I can put that to good use!”

Of course we understand this is not the correct way to identify operating capital. You may not want to borrow $50,000 if your needs are $10,000. As a consequence, you end up paying more in closing fees, and have idle cash for which you end up paying interest. On the other hand, you may not want to borrow $10,000, if your needs are $50,000. How will you cover your true need which is $50,000?

Understanding your operating capital needs is a vital component of what makes or breaks a business. Most small business failures happen because of a lack of adequate planning which often leads to undercapitalization. You may have heard: CASH IS KING! You meet payroll and most of your operational expenses with cash, not with profits. Profit is what you earn for the product or service you provide, not necessarily what is owed to you.

Working Capital

How do you identify your working capital needs? The answer: CASH FLOW PROJECTIONS. Cash Flow Projections are your monthly operating budget, and simply means anticipating the cash coming in that month and the payments you have to make during that month; a simple concept, but tremendously important. It gives the small business owner the opportunity to anticipate cash needs and identify ways of financing it.

There are three ways of financing :

  1. Internal sources: managing your existing assets and your cash flow.
  2. Equity Financing: self funding or attracting investors.
  3. Debt financing: borrowing money, through credit unions, finance companies, leasing companies and traditional banks.

Banks lend money either through the regular commercial programs or through the Small Business Administration (SBA) Loan Guaranteed Program. They require that you present your business plan, provide a balance sheet, and include three years of income projections and three years of cash flow projections (first year monthly).

Some of us, with the desire to start a business, or existing business owners, know our trade very well. If we are honest with ourselves, where we often fall short is the technical business training such as writing a business plan and adhering to it, understanding cash flow and financial projections and accessing capital to jump start the business or take it to another level

What do we do?

Capital is crucial in the formation, growth and expansion of any business. As the first SBA Certified Micro Lender in Central Florida, The Alliance provides small business entrepreneurs invaluable assistance determining their financial needs while also providing access to capital. Our focus on developing financial packages customized to meet each business’ unique needs and our ability to fund loans in the amounts from $500 to $50,000 makes the agency a valuable partner.

There are sources of funding at every stage of your entrepreneurial experience. Learn how to identify your needs and let the experts guide you to the appropriate program.

Filed under Finance & Accounting