This Chapter is an overview of the financial ramifications of a business. It is a web of intrigue which can destroy you, if you do not know what you are doing.

It is accepted that it can take at least 6 months before you start making a profit, so you must have had a survival plan for this period and restrict as much as possible your expenses but going all out to make a profit.  Questions you must have answered are-

•    How do you make money?
•    How to cost products?
•    Know how to prepare and keep to a budget?
•    How to control spending?
•    How to manage income, expenses and profit? If you think revenue is profit-walk away.

Perhaps the first question to be asked is “Are you Solvent?” Allied to this is “Cash is King”. If you have limited cash and unrealisable assets (assets you cannot turn into cash) you are in trouble. You must understand and know how much money you need to stay in business. I appreciate that you would have drawn up a business plan for your financier, but you would probably have exaggerated your profit –even if you may have been making a loss, otherwise you would not have got your loan, and worse still you would have signed a suretyship in your personal capacity.

If the business fails so do you. Notwithstanding the aspirations set out in the business plan you must be certain that the figure are realistic, and to be on the safe side take the expected costs of starting up and double it and at the same time halve the estimated profits. You must therefore ascertain (with professional help) whether you can earn sufficient money from the business to meet your overheads, and most importantly make a sustainable profit. It cannot be stressed that these are emotive issues and will prove whether you have the mental approach to stay in business.

Provided you have cleared the first hurdles and you are keeping your head above water, you must now fully recognise that estimated cash flow (if wrong) is one of the major causes for failure of a business-the outflows (payments) must be less than your inflows (collections)
Be aware of the warning signals influencing cash flow, such as-

•    Growing too rapidly without cash resources.
•    Low profit margins.
•    The rapid increase due to factors such as inflation, interest rates, which cannot be handed over.
Another danger sign is that the owner, especially of a small business, believes that the money in the business is his so he can take what he likes. Money in the business belongs to the business not the owner; technically it is theft to take it without just cause.

Points to note

•    A bad habit is that owners are inclined to load their expenses (not connected to the business).
•    Don’t play around with tax-get advice
•    If you have a cash flow problem and you start to borrow, you pay interest which can worsen your position. Interest can drain cash flow (such as overdraft). Capital repayments also put a strain on cash flow.
•    Invoice promptly,
•    Have prompt debt delivery, slow down paying creditors.
•    Check your financial position; you don’t finance major assets by overdraft.
•    Watch working capital ( the value of the current assets less current liabilities)which must be sufficient to finance the running of the business
•    To get loans these days the borrower often has to chip in (sometimes 30/40%)-where is he going to get the money. The banks etc may pay the rest provided that you stand surety for that balance (banks are therefore not really risk takers). Try not to use savings, pension monies, retrenchment pay, increased mortgage, loans from friends etc BUT you may have to.
•    You wont get financing without giving collateral (surety)-In the USA 75% of persons in business have not been able to give collateral, relying on friends and family.
•    Short term borrowing is better through overdraft.
•    Equity finance (giving away shares for a monetary injection) assists but although you are limiting the risks you are limiting the rewards, a balancing act.
•    Make sure you understand the terms of loans, let the signer beware.
•    Make sure that the repayments for loans is less than profits/dividends, otherwise you are in trouble.

Having been successful with the start up (80% are not) and having run a sustainable business for a few years, you now want to expand internally (organically or by acquisition). Point to note for acquisitions are-

•    Watch the valuation – you must not overpay for the business.
•    Do your homework especially the financial position, reputation and the cash flow of the target-get advice.
If you are going to sell and want to get a good price, ensure that you have tidied up your business and it is well run and profitable.
To repeat cash flow is the life line of a business. Ignorance of the law may not be an
excuse-Ignorance of financial compliance could lead to disaster.

If nothing else understand that money coming in must be more than money going out.

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