March 16 2014 Latest news:
Wednesday, May 23, 2012
Cashflow is the lifeblood of companies– without it, you fail; it is as simple as that.
However, in order to reach the magical break-even point, most businesses need to find a way either to stretch out their startup capital or to raise money via debt or equity.
“Bootstrapping” (spending less to make more)
This seems obvious, but so many businesses fail to keep a tight hold of the purse strings. Whatever you are buying, always:
1 ask for a discount
2 ask for better payment terms
3 ask for more at the same price
4 ask for work/a sale; and
5 offer to promote their business.
You might not get it, but every £1 you don’t spend gets you closer to break-even without raising more money, or reducing the amount you do need.
Equally, make sure you get paid promptly and build lasting, profitable relationships with clients. Developing existing clients is easier than finding new ones.
Persuading someone to hand over their hard-earned money is never simple and is the subject of thousands of books, but as a bare minimum, a smart investor will want to know:
1 The current value and position of the business
2 The overall return they will receive on their investment;
3 How this will be paid, e.g., dividends or on an exit by sale;
4 The quality of the management team;
5 What the business plan is; and
6 The likelihood of success, e.g., existing orders or signed contracts.
If you can’t provide these, your chances of raising equity finance are minimal.
Also bear in mind that selling equity in your business reduces your ownership and control, so choose your investor carefully. If you can, find one that brings more than just money to the table, such as contacts, cheaper premises, better marketing tools, industry expertise and so on.
The benefit of borrowing money is that, relative to equity, it is generally cheaper, but a) most lenders will want some form of security, which may well be your house and b) due to the lower rate of return, lenders will look for something much lower risk than equity investors, so the information requirements can be even more onerous.
Growing a business is a fantastic challenge but with opportunity comes risk. It’s always better and cheaper to anticipate and preempt problems than have to deal with the consequences. Professional advisers at this stage can be worth their weight in gold, but find one that understands your business and works regularly in your industry.
Keystone Law is a large full service commercial law firm, that has helped hundreds of businesses, private investors and entrepreneurs from start-up, investment, rapid growth and on to eventual exit. We are delighted to speak to anyone serious about investing in or growing a business.