Being cash-lite not only creates real business problems – it can also damage relationships, both personal and professional. How can you avoid some of this pain, or at least know that you’re doing the best you can?
Should you borrow?
You can almost always raise money from somewhere if you want it badly enough. However, just because you can borrow, doesn’t mean you should.
Here’s some of the situations where borrowing could help.
You have a profitable business, but fairly new as a business owner
You may not have anticipated lump sum payments for GST and income tax.
Beany provides all clients with their own Tax-iQ page with live data from Inland Revenue. Your upcoming payments are clearly shown, including payment plans with Inland Revenue and adjustments discussed between you and your accountant.
You have a profitable business, but you can be more profitable with more money
You’ve done the maths and can see that if you invest some money now, you can grow your business or your profits.
Work with your accountant to present up-to-date financial information and an accurate forecast.
You’re making a loss, but you are on a growth trajectory and understand how much more you need to invest to get to profit
Your current financial situation probably doesn’t read well at the moment, so start with a cash forecast. Be prepared to defend your assumptions.
Your accountant can definitely help with this process. It should be realistic, not just having monthly figures calculated by dividing the total expenses for the year by 12.
Here are some reasons why you should NOT borrow money:
- Your business consistently makes a loss, and you hope that things will improve.
- You have a ‘break-even’ business and have been drawing money out to pay your own expenses, and now the business is beginning to feel cash flow pressure.
- You have a profitable business and now want to buy an expensive vehicle or a piece of equipment that (realistically) will not add value to the business.
What is the true cost of money?
The financial cost – paying interest
- The bank interest rate, with a loan secured against your house, is fairly low because the bank can always sell the property to recover the debt.
- A financing company will lend against specific assets purchased, but you’ll find the interest rate between 15% and 20%.
- Many small businesses will just top up the mortgage as it’s an easy option. However, if you have your mortgage over 25 years, you’ll probably end up paying significantly more interest.
What about other costs?
The interest is the tangible side of borrowing, but you also need to consider the weight of debt on you, your relationships and your business.
Cash flow forecasts
How do you know the level of borrowing you need, unless you make a financial plan in the form of a cashflow forecast? You can’t.
The bank will insist on seeing your cashflow forecast when they consider your request for funding, and will expect it to be reasonably accurate – projecting sales doubling each month will probably be difficult to justify.
Your accountant can help you prepare for this, including forecasting several scenarios – a base forecast, and best and worst-case situations.
Write it down
Simple yet critical. If you go to the bank, then clearly, they will provide reams of paper documentation detailing everything. If you go to your Mum, it will probably be a more casual arrangement.
Regardless of the source, we strongly suggest that the agreement be in writing and signed by all parties. Sometimes we hear what we want to hear, not what was actually agreed.
Beany offers a Success Pack which can either be an add-on to an existing pricing plan, or purchased separately. We help you set goals for the next year and beyond, prepare forecasts, and set six meetings annually to discuss your progress and offer advice.
Summing it all up…
Why do you need the money? Finding money is never the answer. Understanding your reasons for needing it are.
If you have a deficit, you need to honestly seek the reasons which underlie the shortfall. If you’re not sure, or not completely sure, use an expert or a qualified friend to help you achieve absolute clarity on this point.
It is too easy to raise money to fill an operational gap which is created by poor profitability (or lack of profitability) instead of correcting the business model to plug the hole.
The bottom line? Ask your accountant.
Beany accountants offer free unlimited support with all of their accounting plans, so you never have to worry about being charged for answers to those burning questions.
To make things even better, GeoNext customers get 10% off Beany accounting packages for life! Sign up here or use offer code GEONEXT when you sign up.
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