Many people want to commence their own business, but hesitate because of the difficulty of funding such a venture. It is great if you have an inheritance or a ‘pay out’ from work or superannuation but even then people worry that they may lose their savings if their business idea does not work.
The first thing you have to recognise if you want to run a business, is that there is a degree of risk attached to all business ventures and you have to be prepared to take some risk. ‘Risk adverse’ people make very poor business operators (and this includes the partners!) However it is prudent to take steps to minimise risks, especially financial ones.
The greatest difficulty all ‘start up’ businesses face is lack of seed funding to commence. Work out what the minimum capital is you require to get the business started; then work out how long you think it will take before you will make a profit; also decide how you will access start up capital (loan, use savings, part time work to support the business etc.)
I have known successful business operators commence with $500 on bank card! Many people commence a home based business (HBB) because of the lower setting up costs and most of them carefully consider alternative funding. It doesn’t matter what type of business you have or what size Micro or HBB you have, lack of finance, lack of financial controls, and lack of cash flow will be the most common problems you face.
Ways that operators can (and do) finance their business are varied.
1. Employment – Take on outside employment to fund your business at its start up level.
2. Savings – If you are fortunate enough to have such resources, it is still imperative that you have a plan in place.
3. Bricks ‘n Mortar – Many businesses get finance from banks through a line of credit based on the collateral in their home.
4. Banks – The most successful way to utilise banks to assist you, is through a credit card, as long as you can pay it in full within the specified credit terms.
5. Partners – Even though this can be a good solution, it is also fraught with danger and often results in ‘falling out’ with the eventual collapse of both the business and the friendship.
6. Venture Capital – For someone to invest in your business, they will want to make a profit and will be looking to invest in the realm of $250,000.
7. Loans – If a relative or friend assists you to get started by advancing you a loan, be professional and ensure you know what interest they charge and how long you have to pay it back.
8. Equity Partners – A loan from an equity partner usually does not have to be repaid, unless the business is wound up or sold.
Once you have decided how to fund your business you must also be able to keep the cash ‘flowing’. It is not so much that poor profit will send a business under, it is more likely to be poor costing and lack of cash flow. It is essential to keep an accurate set of books to help minimise the risk. Remember – keeping accurate books can help you keep your money
Costing must be accurate too. If you are in a service industry hourly rates charged may appear high, as they have to cover non-billable hours, overheads and billable hours. The biggest mistake made in costing a manufacturing business is inaccurate (or simply forgotten) overheads.
Make sure your trading terms are in writing and that customers are given a copy. Take the time to explain the terms to them you do not want to be in a position later of a customer saying Oh I remember something being handed to me but I never got around to reading it or I didn’t understand it”.
If you do not have bookkeeping or accounting skills then ensure you engage the services of both. But don’t use the accountant to do simple bookkeeping tasks you will pay through the nose if you do. I uniquely solved this problem (as I am not good with numbers) and don’t necessarily recommend it – I have been married twice and they were both accountants!