As a business advisor, I work with many companies, including start-ups, that tell me how much money they want to borrow, and they want to hire me to help them obtain that much money. My first question is how they arrived at that amount. The answers include: "that is how much I need", a listing of equipment they want to buy therefore that is what they want to borrow, which is 100% of the equipment cost, to the most frequent response of all, "I can get". They have no plans or time frame of how and when they will repay the money. There is not any thought given to what the impact of this borrowing will have on the business. They are not even sure if the money they are asking for is enough to accomplish their vision or plan. If it isn't enough money, what will they do?
The first issue is what information the lender wants. They will not just loan or give you the money just because you want it or because you are buying equipment, a building or another asset, the lender will want collateral to take if you can not repay the loan. Banks are not in the business of taking over assets and then selling them. Lenders lend money. While you may have paid $100,000 for the asset, what value does it have if the bank has to sell it? Think about what happens to the value when you drive a new car off the dealer's lot.
A good way to approach this issue is to turn the tables around and ask, what you would want if you were lending money to an individual or to their business. You would want to know when you are going to be repaid and how the person you are lending the money to will be able to repay you. What is the source of this repayment?
These are the same questions you should be asking yourself before you talk to any lender. If you are going to borrow money you want to make sure that these funds will increase your wealth. You do not want to have partially completed your project and run out of money. What will you do then? You also do not want to borrow money if you can not repay it. If you can not repay the loan then you could lose your business.
One of the first things that should be done is to prepare a projected cash flow. This document should not only help you obtain the funds you need but should be used to control the spending of funds in the investment in to your company. This document will tell everyone who examines it, including the lender, the amount of funds that are needed to accomplish your plan. The presenting a well prepared projected cash flow to the lender will give comfort to the lender that you have thoroughly thought through this entire project. Most lenders require a projected cash flow statement; the lack of one can be interpreted to mean you are not objective and/or professional to borrow money in the eyes of a potential lender. This can diminish your chances of obtaining the funds you require.
This cash flow is similar to the cash flow your accountant prepares at year end and includes it with your income and balance sheet statements. The difference is that the projected cash flow is just that, it looks into the future. It should be done by month or week depending on the project. The assumptions should be developed and be part of the documentation. Once the assumptions begin to be developed your accountant or consultant can prepare the projected cash flow. There should be at least three different cash flow projections, based on three different assumptions.
One of these cash flows should be based on everything, or almost everything going perfectly. This would be your optimistic projection.
The second one should be if things do not happen as expected. This is called the pessimistic projection.
The third projection is what is referred to as the realistic projection. This should be as close as possible to what will happen in the real world. Some things will go perfectly and other things will take awhile for goals to be reached.
The pessimistic forecast tells you and the lender the maximum amount that will need to be borrowed. Even if you do not need the total amount that the pessimistic projection requires to accomplish the plan, make sure the lender will make it available. While we may never have another 9/11, what would happen if business stops for two weeks, as the airline industry experienced? What if you can't get the equipment you need because of flooding or a snow storm or a shipment delay? This pessimistic projection may be based on a 20% of volume as may have occurred in your industry during the rescission.
Make sure you consider additional funding if accounts receivables will increase because of additional sales. Thought should be given to changes in inventory levels, additional labor and any other item that will be impacted by this project. If new employees are needed, include those costs for training without an increase in sales during the training period. All your timing issues should be considered. Does the company need to make a down payment on the new equipment at the time of placing the purchase order? There also maybe lost time while the equipment is installed. If you are increasing the space you need, you may have a period of time flow re paying rent while you prepare the space for you specific needs. Sales increases usually do not happen in month one, but starts at a minimal amount and increases over time.
The purpose of doing a projected cash flow is not only to help you to obtain the funding you need and force you to think about all the factors that need to be accomplished to make your plan work but more importantly it will help you decide if this project will increase your wealth. When the cash forecast is completed, you will have a document, similar to a builder who has drawings so that he knows what to build. You now have a plan to help you accomplish your project on time and on budget. This projection gives you time to make any corrections during the execution phase of the project. Done right, the projection protects you from experiencing unwelcome surprises that represents unanticipated expenses.
The time you invest in preparation will avoid headaches later!
Robert Golden is an experienced, professional business consultant, helping companies improve performance and profits. He works with the highest levels of management to elevate and expand their awareness as to significant opportunities for growth and profitability. Email: Robert@rbgolden.com |
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