Limited Capital is Limiting
According to a recent article in the online WSJ, there are successful companies that started on a shoestring. Examples of these are Live Worldly, LLC, beginning with a $40 investment, Food Tour, with a $100 investment and Floor Works New York that began on $145.00. While these company owners are not gazillionairs, they have achieved a level of enviable success. However, limited capital does have its, well, limitations.
Depending on the stage of growth, and your long-term vision for growth, the need for sufficient operating or investment capital changes. Of course, the best time to get a handle on needed financial resources is during the start up stage. This is critical to the growth of your organization and it’s true whether your company delivers products or services.
Many business leaders believe in the hard work philosophy. If I work hard, I will be successful. The CEO for Food Tours states that he invested “$100 and 100,000 hours.” Being short sighted about the amount of money one requires to run a business is not only limiting, it will take a toll. Limited capital can negatively affect growth, both in terms of achieving targets such as the number of clients/customers, revenues, and profits; but also in achieving more long-term visions. An example is in attempting to deliver time sensitive products and the lack of funding to deliver them in a timely fashion. Therefore, right from the beginning a good business plan is essential.
It is a good idea for the CEO who is seeking outside funding for his or her startup to procure assistance in drafting a solid business plan. The reason is that a business plan requiring outside funding is different from an operational business plan. A certain level of expertise is needed to guide the CEO through this critical process. Paying for this expertise up front will produce an appreciable return on that investment. However, funding options can be challenging.
Being clear about both the start up and operational needs of the organization is essential. Full and honest disclosure is more likely to produce investors. Many CEOs in the early stages of growth may think that procuring a grant or loan is the way to go. Here is a dose of reality from the Michigan Small Business & Technology Development Center’s Guide to Starting and Operating a Small Business:
“GRANTS:Are you hoping for a grant? As reported by Kerry Miller in Bloomberg Businessweek (February 27, 2008), “If you are searching for a government grant or no interest loan to start a business, don't waste your time. The myth of abundant ‘free money’ to start a small business has stubbornly defied debunking for decades. Like most myths, it contains a kernel of truth—the U.S. government does give grants to assist small businesses. Of course, virtually all of that money flows to local governments, state agencies, and nonprofits—not individuals.”
LOANS:Are you hoping to get a loan? Lenders expect you to have ‘skin in the game’ and be able to put up 20-30% of the total startup cost either cash or equity investment.
CHARACTER:What is your credit history and score? Lenders are looking for reliable borrowers who have demonstrated responsibility and have a high credit score.
COLLATERAL:Do you have collateral against the loan amount? Lenders generally expect you to pledge assets against the loan that have a net value greater than the loan amount. Keep in mind that purchase value isn’t resale value and banks discount the value of even brand new equipment to what they think they could get if they have to sell it to satisfy the debt. $100,000 worth of equipment might be worth only $50,000 to the bank as collateral.” Other options include family/friends, using your own savings, using the equity in your home, cashing in your life insurance, credit cards, retirement plans and working either full or part-time while growing your business. Attend workshops, seminars (preferably free ones), websites and the Small Business Administration (SBA) for additional resources. Procuring funds is not the only challenge.
Understanding and being able to present to investors about how money will be spent is essential. Develop a sold profit plan (annual budget) and use this as a tool to hold you accountable in terms of seeing a return on an investment every month Not doing this step will result in your company running out of money. Here are some critical questions to ask:
- Has the company identified the capital needed?
- Does the company have a profit plan?
- Does the company have an investment plan?
- Has the company identified potential investment sources?
Briefly, without cash, there is no business. The CEO must make it his or her business to understand the financial needs of the company. To paraphrase a marketing campaign by Ford, This is job #1. Comprehending the critical components that drive the ability of a company to be profitable allows the business leader to stay ahead of financial challenges. Obtaining funding also requires the development of a well thought out marketing plan along with a well thought out sales process.
Simply driving a lot of revenue into a business is not a plan. Many companies have gone under with solid sales. By taking the time upfront, to identify all aspects of a business growth plan, outlining key processes, hiring plans and capacity issues, a business leader will increase his/her chances of success ten fold. Don’t let limited capital limit the ability to operate and more importantly grow your company.
Thank you for reading this blog. Questions? Comments? Call 404-320-7834, or visit www.performstrat.com.