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.

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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:

• How much money you want
• What you want it for
• What kind of money you are seeking (debt or equity)
• When you want it
• Why it will make your business better
• How you'll pay it back
• What your contingency plans might be just in case things don't work out
  

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Budgeting is Play an Important Role

You can't run your business successfully without a budget. Nobody can. Cash is slippery and cost rise unless closely watched. You can't borrow money from a bank, secure trade credit, or attract investors without a budget.

Your operating budget serves a variety of purposes. It helps you hold down spending, provides and supports financial self-discipline, and helps you set time-lines and measurable goals. It gives you a scorecard, a way of seeing how well you are ding and whether or not you need to change some business behaviors.

You don't have to become an accountant to understand and use a budget. In fact, you are already familiar with budgeting from handling your personal finances. All your operating budget does is set down the expected amounts and timing of revenues and expenses in a standard form that can be used to strengthen your business decisions. Your operating budget allow you to know when you need financing - and when you don't.

No horse gets anywhere until he is harnessed.
No steam or gas ever drives anything until it is confined.
No Niagara is ever turned into light and power until it is tunneled.
No life ever grows great until it is focused, dedicated, disciplined.
- HARRY EMERSON FOSDICK, D.D.-

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Facts Impress Bankers while Guesses Do NOT.

It is important to be accurate and descriptive and to use vendor sources rather than guesstimates for start-up costs.

The process of going over start-up costs again and again, looking for economies and ways to lower those costs, is excellent practice for actually running your business. Careful cash management is one of those business skills that spells the difference between success and failure.

You will be very accurate in projecting start-up costs if you speak with vendors, check out catalogues and price lists, and look for hard (as opposed to approximate) prices. Don't guess. A businesslike listing of assets will help you build credibility, especially if you can show that you have indeed done everything reasonable to hold costs down.

Accuracy also pays off when you sit down with your banker and explain why you need to borrow money for your start-up. That portion of the start-up costs you pay for personally will show up as part of your investment in the business and can on occasion be used as collateral for a loan. Facts impress bankers. Guesses do not.

Use the form called "Start-up Costs You Only Have to Pay Once" to organize your start-up costs. Not all items will apply and you may have to add others.

Remember that you can't run a business without cash. Working capital is defined as current assets minus current liabilities - but for now, you can estimate working capital plus contingency needs to equal the costs of running the business for two months.

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To Start a Business, "Well begun is half-finished"

As the old adage goes, "Well begun is half-finished." If you start your business out on the right foot - which means with enough capital to get it up and running without being pinched for cash - your chancer of success soar. Part of the puzzle involves start-up costs for initial inventories, leasehold improvements, licenses, and all th other one-time costs that you will incur when you start up your business.

You can hold some of these costs down by using secondhand or borrowed equipment, renting space, and leasing equipment instead of purchasing. But the total amount will probably be more than you expect. Don't underestimate what you might need.

The dangers of under capitalization cannot be too strongly emphasized. Get the real figures. If they are manageable, great. If not, perhaps you can find ways to lower them. Don't plow ahead until you are pretty sure that you can afford to go to into business.

Use your cash-flow projections to determine how much capital you really need. Look for the deepest cumulative cash-flow negative point. A rough rule of imately how much capital your venture needs.

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What Do You Really Need? Plan It!

What are you planning to buy with the proceeds? Although it may sound odd, many small business owners raise money (or try to) before thinking their needs through. If you don't know what you need and why you need it, you can't defend your plan, nor present a cogent argument to financing sources.

What do you really need? Look at what you think you need from three points of view: bare bones, most likely, and what you'd get if money were no object. Keep in mind that ultimately any acquisition has to be paid for out of operating profits. Impulsive purchase destroy budgets. Moreover, bankers look askance at furnishing and equipment that seem to indicate lack of proper business restraint. The less you spend on frivolities, the more you'll have for necessities!

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Common Purposes for Financing and Their Sources

The purpose of the investment drives the type and source of the investment. The need for start-up cash is different from the frantic rush to meet payroll or making a calm decision to expand into a new market. Some of the more common purposes for financing and their sources include the following:

• Starting a business: Equity from the owner, investment from three Fs (friends, family, and fools) or perhaps an outside investor, loans drom the Small Business Administration (SBA) and other government agencies, credit cards, payout from an early retirement.
  
• Aquiring Inventory: Cash from operations, terms, and dating from suppliers.
  
• Purchasing Equipment: A loan from an equipment manufacturer or bank, payment made to a credit card or finance company; or a business owner may decide to lease instead of purchase.
  
• Expanding a business: Cash from cash flow and operating profits, new equity, a medium to long term bank loan to be repaid from profit, risk capital, proceeds from retirement funds (under some circumtances).
  
• Acquiring another business: Funding from direct investment, a bank loan, cash flow of the acquired entity, seller financing.
  
• Paying normal business bills: Cash from operations secured credit from a bank, warehouse financing, or funds from a factor of finance company.
  
• Increasing working capital: Stretching payables, funds from new equity, a long-term bank loan, or operating profits.
  
• Meeting unexpected personal financial needs of owner: Personal savings, personal loans, credit cards, a loan from the business, a salary advance.
  
• Acquiring fices assets: Funds from a mortgage, a long-term debt, seller financing.
  
• Unanticipated disaster: Proceeds from an insurance policy, retained earnings, owner's assets.

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