Options for financing your business

There are a number of different ways to obtain finance for your business.  When deciding which route to take you should consider the use to which the money is to be put, who carries the risk and the overall cost.

All of these questions should be addressed by your business plan, which should include detailed profit and loss, cash flow and balance sheet forecasts.  The rest of the plan should underpin the numbers and cover marketing, sales, HR and operations.  Any lender or investor will want to see this before they make a decision. 

Option	Description	Who takes the risk?	Relative cost	Remarks
Bank loan	A fixed amount advanced and paid back over 1 – 5 years	The business – unless the bank makes you sign a personal or director’s guarantee in which case it is you	Low (depending on interest rates)
Bonds	A fixed amount advanced, fixed interest paid  over 5 – 20 years and then the advance paid back	The business	Low	Only available to larger companies
Investor	You sell part of your business in return for a lump sum	The investor	Zero to very high depending upon the future value of your business	The investor will want representation and may want some day to day involvement.  Implies you are able to put a value on your business now
Factoring and invoice discounting	The factor advances a proportion of each sales invoice as it is issued and the balance (less a fee) when the customer pays	The factor – as long as the business follows agreed rules.	High	Factoring includes outsourcing the sales ledger process.  Invoice discounting does not.  Not usually available to very small companies.  May include bad-debt insurance at a price
Overdraft	An arrangement to allow you a negative bank balance for short periods	The bank	High if done over extended periods	Very flexible
Hire purchase or leasing	A third-party pays the supplier for the equipment and then recovers the money from you over a fixed term	The business	Medium	HP, finance and operating leases are treated differently in your accounts
Lines of credit	Your suppliers accept delayed payments from you	The supplier	Low	Ties you in to the supplier
Grants	Various government and other initiatives	The grant-giver	Zero to low	There will usually be restrictions on the uses to which the funds may be put
Sale and leaseback	You sell fixed assets for a cash injection and then pay the buyer for continued use of the assets	The business	High - depending what happens to the market value of the asset and future interest rates	Builds in long-term committed recurring costs
Business credit card	Use a credit card issued to the business and set up a direct debit to pay it off in full each month	The card issuer	Zero if fully paid off each month – high otherwise	Flexible and gives up to 30 days interest-free credit each month up to an agreed limit

Calculating the best financing route for your business can be complicated.  You need to understand what would happen under at least three scenarios – best case, worst case and most likely case.  This is best done using a cash flow model on a spreadsheet.

Remember that flexibility (future options) has a value in itself.  The greater the uncertainty about outcomes the more you should seek a flexible financing solution.

You can also invest more of your own capital in the business – either in the form of a loan or by purchasing equity (by issuing more shares).  There are also less formal routes to funding for very small businesses such as borrowing from friends and family.

If you'd like to know more about developing a business plan then this event is for you.

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Using SWOT to build a business plan

When you are building your business plan then a SWOT analysis can really help you chack your assumptions and address riska in the plan.  The purpose of the SWOT analysis is to consider how well the organisation is equipped to deal with, or take advantage of, its internal capabilities and external changes.

Complete the following table and then, for each factor you have identified, decide whether it is necessary and feasible to take action.  If it is, the action should appear as an objective or project in the business plan.

Note that this approach can be used for individual products or markets as well as for the complete organisation.

Internal – relating to your company when considered against your competitors and what your customers want
Strengths		Weaknesses
External – the impact of changes in the market in which your company operates
	Opportunities		Threats
Political
Economic
Social
Technological
Legal
Environmental

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What should go into a business plan?

A basic business plan for internal use only should contain the following sections:

-          Executive Summary

o   Written last, a brief extract of the key points of the plan

-          Purpose (Vision, Mission, Strategic Objectives)

o   Where the business is going and why

o   How it will accomplish this

o   The main milestones

-          Market Analysis

o   For each product:

§  Description and proposition

§  Customer segment

§  Size of market and growth forecast

§  Competition

§  Strengths, weaknesses, opportunities, threats

o   KPIs and targets

o   Projects and actions

-          Sales

o   For each product:

§  Forecast and key performance indicators

§  Commission scheme

§  Pricing and price increase strategy

o   KPIs and targets

o   Projects and actions

-          Operations

o   Required resources for planned sales

o   KPIs and targets

o   Projects and actions

-          Suppliers

o   Critical suppliers

o   KPIs and targets

o   Projects and actions

-          People

o   Structure, roles and reporting lines

o   Training and development

o   Reward and incentivisation

o   Communication

o   Succession plan

o   KPIs and targets

o   Projects and actions

-          Money

o   Profit & loss and cash flow for the plan year and following year

o   Comparison with previous year

o   Base plan, worst case and best case

o   Risks and opportunities

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How does your business score?

The balanced scorecard is a method developed by Kaplan and Norton to help businesses turn their strategy into action

- It provides a way to take the organisations vision and turn that into measurable objectives

- It has four layers

o Financial – the outcomes for shareholders defined in financial terms

o Customer – the outcomes for customers defined in terms of the benefits they receive and sales

o Internal – the processes that deliver the customer benefits

o Learning – the capabilities of the organisation, its people and its systems which deliver the internal processes

- Each layer is defined in terms of performance measures, performance targets and initiatives

- Initiatives are the projects or changes that are required to reach the targets

How can this be applied in a small business?
- This can be applied in a small business to both develop a strategy and to develop the business plan which will deliver this strategy

- The Vision is used to define financial targets. The financial targets are used to define customer targets. The customer targets are used to define internal targets. The internal targets are used to define learning targets

- The changes necessary to achieve the targets are identified and these become projects or initiatives in the business plan

- The performance measures become the key performance indicators (KPIs) for the business. They are regularly reviewed by management to ensure that the strategy is achieved

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Are you offering your customers too much?

A customer buys a package of benefits when they buy your product or service.  Some of these benefits are more important than others to your customer – some they may not want or value at all, some are critical and some they may not even realise they get. This will be different for each customer.

Some of these benefits cost you more than others to provide – some cost you a lot and some are free – or may even reduce your costs.  If you understand the relative value and cost then this allows you to make adjustments to your product, pricing and proposition so that you optimise revenue and margin.  This is the basis of the low-cost airline model. The benefits that were removed were valued less by passengers than the price reduction made possible by re-designing the airline process.

If you'd like to find how to apply this to your business then this event is for you.

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Do your customers love you or leave you?

If I love my customers can I charge what I like?

The most-often quoted study on why customers leave is one attributed to, variously, The American Society for Quality, the US Chambers of Commerce and a book called “Lessons from the Field” by Howard Feiertag and John Hogan. This gives the following reasons for customers leaving:

o Death or moving away – 4%

o The influence of friends and relatives – 5%

o Competitor marketing and special offers – 9%

o Dissatisfaction with product or price – 14%

o Perceived indifference of the supplier – 68%

- A study by RightNow Technologies says

o 73% of customers leave because of poor customer service but the supplier thinks that only 21% leave because of customer service

o The supplier thinks 48% leave because of price when in fact only 25% do so

- Mercer Management Consulting research shows that for a selection of retail outlets, only 15% to 30% of customers are price sensitive – that is, they would change supplier for a better price

- So retaining customers is not (usually) about price – it’s about letting the customer know you care.

So - if I love my customers can I charge what I like?  And how do I get all my staff to provide great customer service?

Find out at this event.
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Are market forces tearing your business apart?

Michael Porter cam up with a great model - The Five Forces - to help think about markets.  It was aimed at big businesses but is great for SMEs...


Find ways to reduce the bargaining power of customers.  Reduce their choice of alternative suppliers by making your proposition unique or reduce their share of your total sales by selling more to other customers

Find ways to raise the barriers to new entrants.  Build special knowledge or resources into your service and proposition.  Develop and nurture relationships that are hard to replicate, for instance, local government preferred supplier status.

Use competitive intelligence to avoid being caught out by products or services that will replace your own

If you'd liek to find out how applying this model to your business could turbocharge growth then this event is for you.
 
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