Many businesses fail as a result of insufficient funding. Over investment or loaning too much money into the business is not necessarily the answer either, but a business without sufficient funds can only fail, everually. The guidelines in this article / tutorial explain the steps to take to prevent under funding a business at its sunset and during its active life. The same guidelines can be followed when a business runs out of cash flow and when you may want to grow the business further.
Under-funding, or too low a capital investment by the owners or directors, always leads to failure, especially when funds can not be raised to float the cash flow required to operate the business adequately to produce profits and positive operating results.
Raising further funding can be complex, it is better to fund a business from your own funds for as long as possible to keep the business afloat during tough times and until it can fully stand on its own and float itself. A couple of golden rules need to be applied when starting a new business and when expanding a current business.
- Make sure that your business plan is watertight, and that it is also realistically achievable at the same time.
- Make sure that you put enough money into the business at the outside to keep it running for six months before showing a profit. This is because new businesses, especially, can easily take up to six months, sometimes longer, before they start to produce meaningful profits and the required cash flow. It takes time to establish a firm place in the industry or market of your business; very rarely can one hit the jackpot immediately. This is only possible if your product or service is scarce in your area.
- Keep tight control over purchases and expenditure from the first day. Keep cross checking to the budget and the business plan.
- Golden rules Follow to apply when purchasing a business, or a going concern.
- Have a qualified accountant analyze the most recent audited and certified financial statements of the business that you want to buy
- Ensure that all the statutory returns (taxation, regional and local authorities, employment office, etc.) have been submitted and are paid up to date.
- Make sure that your accountant drafts a valuation of the business from his analysis of the financial statements. He must establish whether the business is actually worth the price being asked for it. Does the price fully represent the value of the assets as shown in the balance sheet.
- The accountant must make sure that the royalties, if any, are worth what they are stated at in the Balance Sheet.
- Establish whatever the value of the Goodwill, if any, is truly representative of the customer base, or whatever the goodwill figure may represent.
This type of business collapse and failure does not need to happen to anyone, especially if these basic guidelines are followed. Wishing you every business success.