Financing Your Business

1. How Much Do You Need?

1.1 Draw up a budget based on your business plan (see Writing a business plan).

• The budget shows your forecast sales, expenditure and, most importantly, cash position for each month.
• The forecasts must be realistic. Inexperienced business people invariably make over-optimistic forecasts. Sales turn out to be lower and later than expected, getting paid takes longer and costs are higher.

1.2 Identify how much financing you require and when you will need it.

• A start-up business may spend more than it earns for two or three years. The amount of financing needed may continue to go up through this time.
• Many businesses have seasonal sales patterns that lead to predictable cashflow peaks and troughs. For example, a toy manufacturer faces heavy raw material costs in the summer producing a large stock of toys - but may not receive cash from sales until after Christmas.

1.3 Allow for some contingency funding. How much extra finance might you need?

• Consider worst-case scenarios to help you decide how much finance you should have available. What if a product launch is delayed, you lose your best customer, costs overrun or interest rates go up?
• How accurate is your forecast? If you are unsure, you may need to set up substantial contingency funding.

1.4 Plan to arrange all your financing. Even if you don't need all the money at once, don't wait until your need for the extra finance becomes urgent.

• For example, borrowing £20,000 in January and then asking for £20,000 more in April may alarm your bank manager. Let the bank know the total amount in the first place - even if you ask to borrow it in stages.