A CRASH COURSE IN FINANCE

Friday, May 30, 2008

CAPITAL EQUIPMENT CAN MAKE THE DIFFERENCE BETWEEN "YES" OR "NO"

Make a capital equipment list and keep it up to date. Capital equipment is depreciable items that the business will use up over a period of year or more. Maintaining an updated capital equipment list is useful for insurance as well as tax and inventory purposes, and can make the difference between a “yes” and a “no” on a credit application. Banks and other funding source (trade, SBA, investors) look to collateral as a comfort factor. If you can provide a clean, up-to-date capital equipment list to substantiate your collateral claims, it gives these people a warm, friendly feeling about your business.

Use your cash-flow budget to carefully manage your cash. There are only four sources of cash: net from operations, new debt, sale of fixed assets, and new investment. That’s it. No others allowed. Cash gushes out in innumerable ways, though many are really part of net from operations. In fact, the only dependable and lasting source is from operations. If net from operations continues to be negative, you can only sell off so many assets before you can’t continue to be in business. If it looks like it will be negative, new debt or new or new equity will be hard to come by; investors and bankers aren’t fools. Or won’t be for long.

It all comes down to cash from operations. The reason for a cash-flow budget is to control the outflow of cash, to make sure that the cash you do spend is used for business reasons that fit in with your business plan. The discipline involved here is tremendous: Operating expenses can be controlled. Profits are tied to operating expenses – “A penny saved is a penny earned” – in the most direct ways. You cannot place too much stress in maximizing operations net.

What Should You Put on Your Financing Proposal?

Make sure to establish the appropriate time frame for your operating budget. Operating budgets cover a period of time, usually a fiscal year (required for tax purposes), but are most useful is broken down to a monthly or even a weekly basis.

Most businesses will find that a monthly budget is the most useful, as it allows enough time to smooth out some of the bumps, yet is short enough so that if you find something going wrong (r going better than you expected) you can take timely action. Information that is 12 months old can arrive too late to do you much good, especially during the early months of a start-up when reliable patterns haven't been established.

Next, determine how much you really need. Bankers and other investors look with justifiable skepticism at unsubstantiated requests for funds. Try to determine how much you really need as opposed to what you think would be nice to have. What is the least you can get by with? Do you have a compelling argument for more money - in terms of added growth, profits, lessened risk, and so forth?

Your Financing proposal should make clear: