Cashflow is key for your business
This is part three of a four-part series. The first part looked at entrepreneurship and owning your own business, and was followed by part two, all about starting a business and what it entails. Now let’s move on to the next stage.
So you want to start your own business?
Individuals have expressed that dream to me quite often over 30 years of professional practice.
Dreams provide the incentive. Realistic thinking provides the path to pursue.
Having your own business, your creative ideas, your focused initiative, your execution, the actual selling of you and your product or service (and making a decent living) is one of the most fulfilling jobs ever. You are making an impact on your community, however small or large. You will have influence on your economy, peers, with informative collaboration with other business owners.
But, you’ve got to get launched, and keep running successfully.
In part two of this series, Moneywise featured traffic flow planning.
Today the main focus is cash. You need access to a float of cold hard cash to launch stabilisation before you can even consider taking home a paycheque.
You must have it, lots of it, if you plan an inventory, and/or employee heavy operation. You possibly need enough cash to sustain growth for a year.
Theoretically, cash for your business should be self-financed with far less of it borrowed. But, few of us have those personal resources, or want to deplete them.
Furthermore, you have to consider age, income, work cycles demographics, and “black swan” events (such as Covid-19).
How old you are, where you are in your career, what do you own, what do you earn, and how close you are to retirement (or are already there), are large factors on the decision to become a borrowing business owner.
Why? Let’s compare the overview finances and job prospects of two composite individuals with ownership dreams.
John is 24 and has a good job but is bored at work. He is very smart and wants to “forge” his own destiny. He has savings, a good credit rating, is innovative and ambitious and is one an upward trajectory in his career.
Michelle is 64 and retiring in a year. She wants to start a business to keep “her personal career identity and independence” in retirement. She owns her home, free and clear, and has an adequate pension. She has good savings and investments, but must manage lifestyle expenses carefully once her full-time career ends.
Readers, what commonsense thoughts strike you immediately? Feel free to comment.
GETTING THE FINANCING
How, when, and with what, will these two ambitious individuals fund their entrepreneurial dreams?
There are almost endless lists of alternative financing instead of filling out a bank lending application. Research – on your own, since space does not permit here – hundreds of financing options, conventional and alternative. Some to consider are:
• Conventional bank financing
• Venture capitalist – a loan with a document caveat to take an equity position
• Peer-to-peer lending sites
• Personal cash and/or family contributions
• Friends and associates informal lending, but with a carrot conversion to shareholders
• Borrowing against a personal investment portfolio
• Borrowing against personal Certificate of Deposits
• Home equity line – essentially borrowing against your home
• Grants for new development in finance and related matters do happen. See: Contributors to Khan Academy: Bill Gates, Google, Bank of America, College Board, etc https://www.khanacademy.org/about/our-supporters
John plans to fund-seek from as many alternatives as possible. You never know, he just might reap a bonanza.
Michelle plans to self-fund part and borrow conventionally by using a lump sum distribution from her pension, against her investment portfolio and refinancing her home for the rest. Her plan is cringeworthy, here’s why:
John is young with a bright future. Even if the business fails, he can recoup over time. Michelle cannot.
Pardon the cruel truth. No matter how exceedingly confident, smart, business-savvy an individual in his/her sixties is, time is not on Michelle’s side should she need to recoup losses in unprecedented business downturns. If she does not have significant retirement assets, she may never recover after losing her pension, probably her investments in a market crash, and her home.
Three composite stories where homes were collateralised to finance a business.
• Dad funded son’s construction firm. Business roared for three years, then a recession hit.
• Grandfather backed granddaughter’s new business and building purchase. Traffic never carried a number to breakeven.
• Most recently, the court case involving a father and son who put their home for collateral to help a friend in a business start-up, that then failed.
So how can these dreams become reality?
John may do well with a GoFundMe or small venture capital financing, slowly building his dream in his garage. Millions have done so, becoming famous and/or profitable along the way.
Michelle should consider using any of three strategies:
• Start her side business with minimum funding – way before retirement, say five years ahead. She’ll know if it is a viable operation and she can then just ease out of her regular job, make her side dream a full-time path to ownership success.
• Avoid any cash upfront heavy business route, such as inventory, employees, equipment, etc.
• Investigate service-type businesses that require minimum cash outlaw: Care giver, consulting, free-lance positions.
But, she should never ever use her pension, investments, or house as collateral. Yes, I know banks won’t like me. However, the heartache of losing a home is emotionally and financially devastating.
- Wikipedia: Khan Academy is an American non-profit educational organisation created in 2008 by Sal Khan, with the goal of creating a set of online tools that help educate students.
- Start-up Costs: How Much Cash Will You Need? Business News Daily, by Sammi Caramela, July 2, 2020
- As They Aged, They Started Businesses for People Like Them, Retiring, Susan B Garland, October 16, 2020 New York Times – excellent article.
For older would-be entrepreneurs who want to capture a piece of the ageing-related market, “you have to think of how you take your skills and passions and shift them to a new area,” said Mary Furlong, a consultant on longevity marketing.
• Martha Harris Myron, CPA JSM, a native Bermudian, is creator of Pondstraddler Life™ Financial Perspectives, international financial consultant to the Olderhood Group Ltd Bermuda, and financial columnist to The Royal Gazette, Bermuda. All proceeds from these articles are donated by The Royal Gazette to the Salvation Army, Bermuda.