By Evan Carmichael on February 10th, 2013
Ryan Rosett is a Bronze author on EvanCarmichael.com – to view his articles click here. We asked him for his #1 Tip for Entrepreneurs, here is what he said:
Although we hold grammar to very high standards, the capitalization we are talking about involves how much money a business has for its own operational needs. From working with small businesses and their financials on a daily basis, we’ve heard a huge range of reasons why business owners find themselves needing additional working capital.
The specific purposes for needing capital may differ, but the fundamental problem is the same: the business may be flourishing, but their current cash flow doesn’t allow them to expand, or purchase inventory & equipment, or deal with an emergency situation. The root of this issue is that while small business owners are meticulous in managing their money to open their business, they don’t maintain the same control and discipline over managing their money once the business is operational. It often takes more money to operate when a business is booming, and under capitalization can turn fortuitous growth into chaos.
Here are our recommended steps to capitalize correctly for the future:
1. Determine your financial status, and forecast future financial need: Before you can make any operational changes, you need a full understanding of your current standing; begin by making a list of your current costs and expenditures, as well as any foreseeable purchases/payments in the near future. Next, add up your revenue streams to determine how much cash is flowing into the business. Look at the expected payment times on your receivables, and mind any large gaps between payment periods. Now that you know how the money moves, come up with several hypothetical scenarios to determine if your retained earnings will be able to handle them; will you have the money to hire a new employee when things get hectic? Do you have enough money to purchase inventory for a rush? Does your delivery van’s transmission seem suspect? Along with needing money for growth scenarios, planning for when something goes wrong can be a business life-saver. If any of the answers to these questions seem shaky, then make sure you have outside capital sources on standby.
2. Have at least 3 capital sources researched and ready: Even if you’re fully in the black now, it is crucial to have a plan ready for when a sudden need for money comes up. There are many different sources for capital – traditional banks, private investors, and alternative finance such as merchant cash advances and equipment financing can all offer you working capital. Each has their pros and cons depending on the situation, which is why it’s crucial to have different avenues to choose from. For example, bank financing is a cheap and reliable option for money, but in situations where time is of the essence, having to wait 90 days for the loan to possibly get denied is not an option. Merchant advances offer speed, ease, and flexibility, but can be more expensive than a bank. Knowing which funding source to use when is one of the greatest pieces of wisdom an entrepreneur can have.Once your potential capital sources are chosen, learn the application processes and prepare the necessary documents for each one; having your financials organized beforehand can save you crucial days in getting the money you need.
3. Rinse and repeat: Now that you’ve pulled the reins on your money, keep it under control; we recommend you do a financial review each month, or at least quarterly. Check for inaccuracies in your forecasts, adjust for new revenue streams and liabilities, and revisit your contingency plans. From this, you can identify new issues and uncover new opportunities, and your future projections will become increasingly accurate. You’ll sleep better at night knowing that you’re managing like the big dogs and that you are fully prepared for whatever tomorrow may throw at you.
Ryan Rosett, CEO and Managing Partner of RetailCapital, is a serial entrepreneur who has successfully founded companies in nearly every corner of the finance industry. His experiences have solidified him as an expert in commercial finance, small business development, real estate finance, and debt management. His current endeavor, RetailCapital, provides financing alternatives for small businesses that are unable to attain traditional bank loans.
Tags: capitalization, cash flow, daily basis, delivery van, emergency situation, expenditures, fundamental problem, gaps, grammar, growth scenarios, hypothetical scenarios, operational changes, payment periods, purchases payments, receivables, recommended steps, revenue streams, small business owners, small businesses, working capital