Happy Days Are Here Again?
By now you should have committed your goals and business objectives to paper and are reviewing them twice daily. See the blog post dated December 20, 2013 for details.
The next step for your business is to compute how much working capital you will need to meet your business goals. Pro forma projections are typically done incorrectly. They always show a profit which is not the point of the pro forma in the first place. Many business owners believe that if they fail to show a profit, their pro forma projection will not be considered by a bank, finance company or factor.
The purpose of the pro forma is to determine what your cash flow needs are going to be and how you, as the business owner, are going to satisfy your cash flow needs. There are only two solutions to this problem and neither is the final answer: debt or equity. How will you make up your cash flow shortage for your business?
If you are fortunate enough to be in a business where the rates of return on capital are significant or exponential then you have a good chance of raising equity to cover your working capital needs. Even with the Jobs Act you will need a significant amount of time and legal advice before you can present your equity opportunity to investors. The question becomes where do you find equity investors? Institutional investors want to invest in large companies or technology companies that are major disruptions. For the rest of us, that leaves friends and family. Again you must prepare properly and ensure that your friends and family understand the risks involved with the investment and can afford to lose their money. Can you stand the thought of losing money invested by your friends and family? If so, then proceed with your friends and family. If not, then continue reading.
Most business owners typically lean towards debt because they have already invested personal equity in their companies. Debt can take many forms depending on the type of business you are in.
Getting back to the point; once you develop your pro forma cash flow projections you fill in the cash shortfall with either debt, equity or a combination of both. Once you make this decision, you are on your way to not only execute your business objectives but to also put the appropriate capital behind the initiatives to succeed. Your pro forma projections may still indicate that you are making a profit but at least you will know what the source of your working capital will be.
On December 30, 2013 the Wall Street Journal had the following headline in its Small Business section “Small Businesses Anticipate Breakout Year Ahead” and on January 3, 2014 in the Markets section an article titled, “Biggest Lenders Keep On Growing”. When you have time to read these articles, you will learn that small businesses have been optimistic for the last several years and by the end of the first quarter to the middle of the second quarter of 2013 the U.S. economy lost its steam. Furthermore the larger banks are forcing the small Community Banks to consolidate to remain competitive. These two forces cancel each other out. Small businesses cannot grow without working capital and large banks are not funding to small businesses. A friend of ours is a commercial banker at a community bank in New Jersey and for the last 90 days he and his staff have been training. Do you think they were training on how to make more loans to small businesses? If you said yes you would be incorrect. They have been training on how to operate their bank without running a foul of Dodd Frank.
This was startling news and demonstrates that regulation can strangle the nascent recovery everyone is expecting for 2014. Don’t let your business plan get derailed because you cannot borrow money from a large bank or a Community Bank. Find a secondary financial institution that can either provide an asset backed loan or an invoice factoring facility so you can grow your business and be part of the recovery. The only other choice is to become a statistic. January will be over before you know it. Make it a goal to have a funding facility of some type in place by the end of the month so that you can be part of the 2014 recovery that everyone is talking about.
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