Working out how much you need

This is the critical issue for all new businesses. Unfortunately, most get it wrong and this contributes to their downfall. If you have followed my advice with your forecasts you will not have included any opening capital. Your forecast will have established how much you actually need to start and run your business for the first year. The cash flow forecast will be showing an initial negative figure. This figure should, if you are making a profit, decline in value over the period of the forecast.

Only now can you consider sources of funding and arrive at a suitable financial package for your new business. In this

respect you will need to look at two different aspects:

• ˜ What do I want the money for?
• ˜ How quickly can it be repaid?

The sample cash flow forecast shown below makes a number of assumptions regarding debtor and creditor payment times. It is not relevant to discuss them now, but you will need to make your own assumptions in this regard. The major factor is the bottom line — the bank balance. As you can see, this peaks with a funding requirement of just under £70,000 in the second month. The requirement then falls steadily over the first six months.

What you need to consider is where that funding will come from. The next factor is whether the funding should be long-term or short-term. For the moment we will assume that you have a total of £50,000 to invest in your new business.

As you can see, the majority of the funding -£40,000 – is required for capital expenditure. This is a long-term investment in the business. The balance of the funding requirement – £30,000 – is to fund working capital. Note the substantial reduction over the six month period. This gives the following overall funding requirement:

• ˜ Long-term funding – £40,000
• ˜ Short-term funding – £30,000

For the moment let us concentrate on the long-term funding. Assume that the capital expenditure is to be spent in two main areas:

• ˜ Tools and equipment – £25,000
• ˜ Vehicles-£15,000

This could be funded in a number of different ways. It could be funded entirely from your own pocket, although that would restrict your choices later. As it is probably easier to gain funding for capital expenditure than for any other purpose, you need to take advantage of this.

The tools and equipment are going to last you, say, a minimum of three years. In the same way, the vehicles will also probably be good for three years. On this basis, funding over a three-year period is probably most appropriate. The question is: how much should you put into the package?

It would not be unreasonable to borrow half of the requirement for tools and equipment. It is also possible that grants could be available for such items. For the purposes of this exercise, let us assume 15% of expenditure. The motor vehicles could be funded, for example, by loan, hire purchase, or leasing. In most cases a deposit of 20% would be adequate.

This would create the following potential funding requirement:

• ˜ Tools and equipment – £12,500 debt + £3,750 grant + £8,750 owner’s capital = £25,000
• ˜ Motor vehicles – £12,000 debt + £3,000 owner’s capital = £15,000

At this stage, you can see that your total investment stands at £11,750, or just under 30% of the total long-term funding. This would not be unreasonable. It also leaves a number of options open. For example, bearing in mind the short-term funding of £30,000 required, even if this were to be funded entirely by you, bringing your total investment to £41,750, this would still leave a healthy £8,250 in reserve.

This is not, however, the best solution. The short-term funding requirement is extremely short-term. It would not be unreasonable to ask the bank for an overdraft of half the requirement, i.e. £15,000, for a six-month period. This would bring your total investment to £26,750 against total borrowing of £39,500 and grant funding of £3,750.This solution also leaves you with £23,250 in reserve.*

Once you have decided the funding requirement, make sure you amend your financial forecasts to take account of these figures. Do not forget to put in suitable

repayments within the expenses section of the cash flow forecast.

Being ready for the presentation

So far you have done your research, written your business plan, compiled your forecasts and decided on the right funding package. What now? First of all, check all your plans again. Make sure they stand up to criticism. Look at all the angles again and ensure that you have covered every possible eventuality. If there are any questions left unanswered, make sure you answer them. If you can show the potential funder that you have considered every question they may ask, they should be suitably impressed. *

Compare the words in the business plan to the figures in the forecasts and make sure they match. It is pointless stating in words that you are going to spend £x on capital expenditure if the forecasts reflect £y.

If the forecasts have been prepared by someone else, for example your accountant,

make sure you understand them. The business plan and forecasts are yours and they must reflect your goals and objectives. The accountant will not be monitoring your ongoing performance, you will. You must ensure that you understand the underlying assumptions in the forecasts and be able to explain clearly and succinctly why you have made those assumptions.

• ˜ The number of plans I have seen that have been written by two different people is astonishing. This was fine in itself if they had taken the trouble to work together. They obviously had not because invariably the wording did not match the financial information. This certainly did not inspire confidence and inevitably their request for funding was declined.

Only once you are entirely happy with your business plan and forecasts should you present them to a potential funder. *

It may have taken you a number of weeks to put the proposal together, so allow the

funder sufficient time to properly analyse your proposition. Push them for a quick decision on granting the funding and it may well be ‘no’ simply because you are not giving them sufficient time to review your request.

• ˜ The best meetings I have had regarding requests for funding did not involve any real discussions about the business plan. I was already sold on the concept and as a result the only discussions were about the terms of the borrowing.

Summary points

• * Plan your new business carefully. Make sure you have researched the market thoroughly and have clear business objectives.
• * Involve your bank from the outset. Use their business start-up guide to help you write your business plan.
• * Prepare your financial forecasts based on a worst-case scenario. If the worst actually happens you will then be prepared for it.
• * Do not consider investing all of your own financial resources into your business. Gaining the right form of funding is extremely important.
• * Once your business plan is complete and your financial forecasts have been compiled, check them all thoroughly before sending them to a potential funder — you only get one chance so make sure you get it right first time.