So, To Sum Up My Essential Guide To Raising Business & Property Finance
By taking the steps covered in my guide, and having an awareness of what both lenders and investors are looking for in your business proposal your chances of success should improve greatly. It is important to highlight all the positives whilst being prepared to anticipate and mitigate the negatives or potential risks. If your proposal has been thoroughly researched and presented in a clear and professional manner it will be taken seriously by lenders and investors and will be more likely to attract the funding your business needs. However obtaining the funds initially is just the start. You will need to keep a constant track of the progress of your business constantly updating your business plan along the way. You will need to quickly respond to changes in the market place, new products, increasing competition and new legislation whilst also ensuring that your business has sufficient cash flow to survive and prosper. All these areas and more are covered in our Post Investment Guide.
Ensuring your business stays on track
So, lets assume you have secured the funding you needed to expand your business. So what happens next? Now that you have successfully secured funding your first action is to ensure that you comply with the terms and conditions attached to the funding agreement and maintain a first-class ongoing relationship with your funding partners. The first part of this guide covers how you can instil confidence to your funders.
Obtaining the necessary funding is just the start. Your role as business owner is to ensure that your business grows and prospers whilst keeping aware of changes in your market place. In these challenging times business failures are running at a record high level in the UK so it is very important to understand the key risks attached to running your business and then how to manage and reduce them This guide looks at the most common causes of business failure and focuses on two key areas which must be addressed effectively: 'Planning ahead' and Managing cash flow'. It then goes on to cover some steps you need to take in both of these areas to keep your business on track. Accompanied by a sound sales and marketing strategy following these steps should help your business overcome some of the common pitfalls which ultimately lead to business failure
Managing the relationship with your funders
Many business owners see their relationship with their funders as a and not as the open, honest and constructive two-way relation. Ensure that any conditions or covenants attached to your business's facility are met Lenders attach a lot of importance to the covenants and other co to any lending facilities provided. An example of a covenant might be cover' clause whereby annual repayments are to be covered by net profit agreed minimum multiple e.g. two times. The reason these types of conditions appear in bank facility letters is that they act as an early warning system to the lender of trouble, which may affect the ability of the business to repay its debts. The business owner must be aware of any covenants and conditions attached to the facility, why they are there and needs to be comply with them. Failure to do so will not help the ongoing relationship, which will be important if and when problems arise that require further funding as part of the solution.
Adopt an honest and open approach
Keep your funder informed and tell them the bad news as well as the good Always do what you say you are going to do. Some business owners try to hide bad news and that invariably turns out to be counter-productive. They may forget that the goals of the lender and the borrower are the same i.e. they both want the business to prosper so that its loan is eventually repaid. Banks will generally try to work constructively with their borrowers because a partnership approach tends to result in the most positive outcome. A business relationship where there is little trust and communication a threat to the business.
Provide information in a timely manner
If a funder has to chase you for basic financial information, it may give the impression that you are neither organised nor on top of the financial position of your business. It does not create confidence and in extreme situations may suggest a lack of honesty that would be disastrous to the relationship. If your business needs further support provide your funder with plenty of notice Funders often have difficulty making speedy lending decisions particularly if they do not have all the facts at their disposal and are always suspicious of such requests. The terms of such facilities may also be more onerous then they would have had to be had the business owner given the bank time to understand the situation better If you anticipate your business needs additional financial support, give your funder the earliest possible notice so that you can explain more clearly how you will resolve any underlying problems and impart confidence to the funder view the relationship with your funder as a partnership.
Remember that the reason you secured the funding in the first place was that your funder has confidence in your ability to succeed and wants to share in your success. For that reason a funder will try to be supportive even in difficult times provided you are open and support requests with up to date financial information. Once the funder starts to lose confidence in your abilities the relationship tends to fall apart. It is vitally important that you do not allow this to happen and if it has started to happen, take immediate and effective measures to remedy the situation. View the relationship with your funder as a partnership. You both share the same aspirations in that you both want the business to be successful, you both want to prosper from the relationship and you both want to work through any problems together.
Common causes of business failure
It is a fact that when economic conditions become challenging there are more business failures. However, that does not mean that your business will not succeed. Knowledge of why businesses fail is important because if you reasons behind this, you can take steps to ensure that you reduce the potential key risks to your business.
This will improve your chances of success
Below is a list of some of the more common reasons for business failure in the UK. This list is not exhaustive and in many cases a combination of reasons lead to a failure.
Poor planning no clear strategy or goals
Inadequate financial records poor or lack of forecasting
Inadequate capital/ uncontrolled growth
Lack of resources loss of key personnel- failure to build a strong team
Inefficient cost and quality controls
Failure to anticipate cash flow/poor management information
Failure to control cash by maintaining high stock levels, paying suppliers/creditors too promptly, and receiving money from debtors/ customers too late.
Extending too much credit and poor credit control
Taking on too much debt to the point where serviceability becomes difficult
Failure to react to market and customer trends
Failure to innovate technology trends or failure to diversify product/service offering
Ineffective marketing / failure to define and understand your market and customers
Failure to gain new markets/over-reliance on a small customer base
Diversification into unknown areas with little knowledge of costs and competition
Businesses can fail for all sorts of different reasons but in almost all cases failure could have been avoided through either better planning or effective management of cash. For instance, failure through the demise of a major customer may be considered to be outside one's control. However, arguably this is a planning issue and a problem that could have been avoided, i.e. an analysis of the business beforehand should have identified the potential risks of a large exposure to one major should have been taken to expand and diversify the customer a risk. issue and a problem should beforehand should client and action base to mitigate such as a risk.
Planning ahead
There is a well known phrase "failing to plan is planning to fail". In the world of business this is, sadly, true. The importance of good planning cannot be over-emphasised. Planning is a key part of managing your business. It is important to continually review the progress of your business and fine-tune your business strategy regularly Why do so many businesses do not do this? It is often because many business owners do not find the time to take a step back and many continually focus upon immediate problems rather than long term goals. As a result there is a risk that such businesses end up "fire fighting"', in other words reacting to increasingly desperate situations rather than planning forward in a structured manner.
Creating the time to plan effectively
Many business owners complain that one of their biggest challenges is to be able to set aside sufficient time to plan. This is best countered by the phrase: “work on your business, not in it. Discipline is paramount. Business owners should not spend their time doing too many day-to-day things that keep their business ticking over (working in your business). Instead they should delegate, outsource or automate these tasks and concentrate instead on the "big picture". The "big picture" relates to the more strategic tasks that will make your business expand, become more profitable, more efficient and ultimately more saleable/ valuable (working on your business) Many business owners find it extremely difficult to let go of tasks and to empower employees to take them over. They also find the transition from being a small family business to a larger enterprise difficult to manage for the same reasons. Many business failures are a result of business owners not being able to see the "wood from the trees". In other words they only discovered the problems in their business at a late stage and too late to take the necessary action to avoid them because they were too near the day-to-day and were unable to notice what may be approaching from a further distance It is an essential discipline to set aside time on a regular basis to plan your business effectively and so we will now look at what goes into this process.
Updating your business plan
Often business owners make the mistake of producing benefit of a third party e.g. their bank, as part of the process of raising finance. As a result, business plans often get written only to be thrown into a drawer never to the light of day again. A business plan is an essential part in the process of plan business. It must become a living, breathing document and what you want your business to achieve and how you plan to the business plan should be "owned" and not produced just to keep somebody else happy.
One reason that a business plan should be regularly updated is that it needs to reflect the changing market. Possibly some new opportunities to sell products may have materialised or maybe you have developed a new product that will have a dramatic effect on your business. Perhaps you have reached your goals faster than you thought would be possible and new goals need to be established or maybe your original goals did not reflect current market conditions accurately and you need to make some changes. Regardless of any events, your business plan should be updated quarterly to remain current. When economic conditions are tough, sound planning becomes even more important. Your ongoing business plan should be focused on four key areas:
Changing market conditions which will impact on your business
Effective forecasting to keep cash flow on track
Reviewing the performance of your business
Reducing the key potential risks faced by your business
Changing market conditions
You need to be constantly aware to changes outside of your business. It is often true to say that the businesses which respond quickly to market changes action, changing plans, where necessary, have a stronger chance of survival success The following are areas to watch out for . Interest rate and exchange rate fluctuations. Business owners should recognise the potential impact of these movements on their business and plan ahead accordingly. There are ways of mitigating any downside risk by hedging and this should be strongly considered especially if margins are tight and these movements could have a significant adverse impact on profitability.
Competitor activity
Business never stands still and there will always be new competitors entering your market. They might be offering superior products or similar products at a lower price or with a premium service. Not keeping pace with the competition is likely to cause major problems for any business. You therefore need to be constantly aware of what your competitors are doing and then you need to plan your strategy accordingly.
New legislation
New legislation can potentially have a massive impact on a business particularly if there are difficulties in conforming to it. There may be a need for new systems, additional staff, training etc. all of which mean increased costs. Business owners not only need to comply with existing legislation (e.g. health & safety) but also need to keep a close track of any further potential legislation which could have an impact. Good businesses plan ahead for this.
New technologies and innovations
Just as new competitors enter the market new technologies and innovations might also enter your market leaving your products outdated. This could ultimately have a massive impact on future sales. Business owners need to be constantly aware of any new products or technologies entering their chosen market and ideally should be at the forefront of them
Effective forecasting to keep cash flow on track
The business planning process should always be accompanied by up to financial projections which should be continually updated and revised (at least monthly).
Seasonal fluctuations
Cash flow invariably never runs in a straight line. If there are aspects of your business that are subject to seasonality you need to reflect that in your cash flow forecast. Examples of this are the Christmas and New Year period where business overheads tend to remain constant but collections from debtors are delayed Businesses need to plan for their particular unique seasonal circumstances and ensure that there is enough cash set aside to cope with peak payment times.
Realistic payment terms in terms of debtor receipts and payments to creditors
For most non-retail businesses, obtaining payment for work done is a constant challenge. Invariably a large proportion of your customers will not pay on time. This needs to be properly reflected in your cash flow forecast. As regards payment to creditors your forecast should reflect when payments are due to be made (quarterly /weekly/monthly / subject to achieving certain conditions etc). Whilst you might want the flexibility to delay payments to creditors, in the event of emergency, you should plan your business in such a way that there are always funds available to pay your creditors on time It is most important that you maintain good relations with your suppliers and a healthy cash cushion .
Reflect any anticipated increases or reductions in sales turnover
Ultimately the sales figure is probably the hardest to predict and the one that has the largest impact on the bottom line. If sales consistently fall below plan, have you reduced your overheads to compensate? Many businesses gear their overheads towards achieving an anticipated level of sales but fail to take any action should the forecast sales levels not be achieved. Conversely, if sales are consistently ahead of plan this might prompt you to make positive changes to your business plan to capitalise on the opportunities. There might be opportunities to sell other products to the same customers or an opportunity to make further capital investment or expand into new markets
Beware of overtrading
Overtrading is a term used to describe businesses which expand too quickly to the point that they start to run out of cash. Many businesses consider a sizeable increase in turnover as a sign of success. It should be, but if the expansion is not properly controlled it could actually bring the business down due to a lack of sufficient financial resources to fund this level of expansion. Any sudden large increase in turnover e.g. landing a new large sales contract needs very careful planning. A business can win a significant large order, take on additional staff to complete it, redeploy resources away from other orders and purchase new materials. If there are delays in production and also delays in receiving payment for the goods the impact on the business could be terminal because whilst all these things are being paid for, cash has yet to hit the account and other regular payments still need to be met on time.
For example, businesses can fail because the bank calls in their debt after not having received a loan repayment and had that business planned ahead to ensure cash was held back for this purpose or changed the terms of the expansion to make it more controlled, an otherwise successful business would not have ended up in liquidation proceedings with its creditors (such as the bank). Any large increase in business requires careful planning and cash flow management. The 'Managing cash flow' section of this guide outlines some of the strategies that you can employ to increase the amount of available cash or plan its use more carefully. A key way to predict the impact on cash resources is to regularly maintain and update a cash flow forecast (minimum monthly).
Your market performance and direction
How well is your business performing compared to competitors? Which markets are you aiming for next and how can you stimulate more sales?
Your products and services
Are your products and services fit for purpose? Do any changes and enhance need to be made? How do they compare with those of your competitors?
Operations
Your premises, location, methods, processes and technology, IT and quality control Can any of these be improved to make your business more efficient?
Finances
How is your business being financed? Is your business achieving its financial forecasts e.g. sales, profit and cash flow? Closely analyse the reasons for any variances against plan.
Your organisation and your people
your structures, people planning, training and development. Could you get more from your team? Are they fully bought in to your business goals?
Setting future direction
Look at where your business is now and where you want it to be heading over next 1,3 and 5 the years. What are your markets now and in the future? How do you gain market advantage and what resources do you need? What external factors are likely to affect the ability of your business to compete? You need to understand the potential risks to your business and manage the accordingly.
Mitigating key potential risks
It is important to identify any key risks to your business at an early stage and take steps to address or mitigate them. Common risks include:
Losing customers and failing to replace them
Increased competition
Poor cash flow
Failure to anticipate problems
Inability to adapt to a changing market environment The potential impact of these risks on a business is described elsewhere in this guide. In terms of developing a plan to mitigate them you should, as the business owner, consider doing the following:
Develop strategies to manage the risks you take
If the risk in taking on a large contract is that you could increase fixed overheads with no guarantee of further business, strategies to manage this risk might include: taking on sub-contracted workers, hiring plant and equipment, extending suppliers' payment terms etc Carry out a S.W.O.T. analysis
The SWOT analysis (strengths, weaknesses, opportunities and threats) is one of the most popular strategic analysis models. This is the strengths and weaknesses of your business' capabilities and any opportunities and threats to your business.
Ask yourself "what if?" questions
In order to gauge how well insulated your business is against potential risks a good exercise is to think about potential scenarios that could have an adverse impact on your business in the future and to consider whether you have taken the steps necessary to mitigate these risks. Consider a number of potential events which could occur and test how prepared your business is to deal with them. This type of forward planning should enable you to anticipate and manage risks. At the very least it should
Managing cash flow
Many businesses suffer from ongoing cash flow problems and, as discussed previously, often these could have been avoided through better planning, Whilst planning is a vital part of the process it is important of how cash flow can be managed effectively and combine this with know the various options available in terms of conserving cash. to have an understanding You might have heard the expression "cash is king". This is particularly true in y times where asset values have fallen. A business needs cash to what its turnover is, how many assets it survive. In the short term, it doesn't matter has or what they are worth or even if the business makes a profit. What matters is the ability of the business to pay its bills and meet its overheads on time. If it cannot do this the business will not survive in the short term.
Raising cash from your business assets
There may be unencumbered assets within your business which could be refinanced to raise working capital e.g. vehicles, plant and machinery. In addition a change in policy from buying capital equipment to leasing it will conserve cash. We have already discussed factoring or invoice discounting which can release cash from the sales ledger. Lastly, "if you don't need it sell it" - there is no point in keeping an unused machine or asset just in case' if you have immediate cash needs for the business to survive Having secured the necessary funding to help your business move on to its next stage this guide has been put together to help with the ongoing process of planning ahead and managing cash flow, both of which are essential ingredients in managing your business effectively. Whilst this alone will not ensure success- after all you still need a quality product or service and customers amongst other things - it should address the most common reasons for business failure and put you in control. Managing relationships is important for businesses at all levels but there is probably no more important relationship to a business than that with its funders (investors or lenders). You need to have their continued confidence because you are likely to need their continued support as your business develops.
Written by Maurice Sardison
Explore Your Finance Options Here.
Visit our website for more news and product information, or click the button below to submit a short enquiry form for your finance needs.
