Funding growth

Business growth requires cash and therefore cashflow.

As you will be well aware, sufficient cash resources are critical to enabling you to grow your business sustainably. Cashflow is the number 1 enabler of business growth (if you have enough) or the number 1 block to business growth (if you don’t have enough).

Cash comes from the following sources:

? Cash funds that you have access to – either personally or via family.

? Funds retained in your business from after-tax business cashflow.

? Funding from banks, or similar 1st tier providers.

? Funds from equity sale or sell down – either from current shareholders, or additional/new shareholders.

Identifying which sources are best for you and your business:

Looking at the 4 possible sources of cash outlined above:

Source 1 - Cash funds that you have access to – either personally or via family.

This cash has been either saved from tax paid income, gifted or inherited. The decision to use some or all of this cash personal. Its use should also be considered against other forms of funding if your personal risk profile, that of your life partner or relevant members of your family is low and therefore risk-averse. Consider the level of cash safety net that you need.

Also, as with all sources of cash, the use of this cash needs to be balanced against the return on your equity that can be generated by using this cash to grow your business.

Source 2 - Funds retained in your business from after-tax business cashflow:

This cash has been generated directly from your business interests.

Using this cash for business growth is, therefore, the simplest alternative, assuming that your need for dividends of cash withdrawal can be delayed.

This option is often not available for growing businesses, because every cent generated from cash flow is needed to maintain working capital in the business.

Source 3 - Funding from banks, or similar 1st tier providers:

There are often emotional or knowledge blocks to access bank funding, as follows:

The agenda of any bank is simple and unchanged:

1. The bank must be prepared to take on the risk of lending to your business.

2. The bank must clearly see a path to both have the interest, and the loan principal repaid.

3. The bank simply wants interest and principal on your loan repaid, as per the terms of the loan.

4. The after-tax cost of borrowing from a bank should be much less than the after-tax return on your capital resulting from the business growth this bank funding generates.

These 3 points are critical:

• To access bank funding, you will need specialist professional help to create, understand and learn the use of a forecast the performance of your business in terms that the bank is prepared to accept.
• As you build trust with your bank, and in particular build evidence of being an excellent customer and credit risk, the bank will be more and more willing to lend you funds.
• The ultimate position of power and control that you can reach with a bank is to have unused, available bank funding facilities, that you can drawdown at any time to fund business growth, plant, IT or opportunities to acquire business assets or other businesses. Cash is king, and on-demand cash via unused bank facilities gives you access to instant cash, on-demand. I work with many of my clients to achieve this aim.

Source 4 - Funds from equity sale or sell down – either from current shareholders, or additional/new shareholders:

Equity is another source of funding.

With Equity comes an agenda, which is seen, understood, consistent and helpful, or unseen, not clearly understood, inconsistent and unhelpful.

Somewhere between the two states of the agenda that comes with equity is the situation you will face, and have to learn to live with.

When comparing equity funding to bank funding:

1. You may in the short term have the choice of only one and not both.

2. You will only know the true agenda that comes with equity over time. Even a trusted equity provider may change their agenda, or have it changed for them by life and/or business events beyond their control.

3. The agenda of banks does not change – i.e. borrow funds, and repay the debt and the interest within the terms of the loan.

4. At the same time banks can be fair-weather friends, and be driven by offshore principals, and “portfolio balancing” decisions, whereby they decide that even good businesses in “perceived high-risk industries” may be less attractive to lend to.

5. Overall, trust, track record and demonstrated performance are everything – and this applies to both debt and equity. A known equity partner may be a sound bet, just as a bank that you have built up trust with and shown the ability of your business to consistently and reliably repay debt.

How do you access to cash via banks, financial institutions and providers of equity?

You must have a business plan.

You must have a financial forecast.

You must be able to clearly articulate the value of your business to the marketplace, for both your clients and your prospects.

You must, on the one hand, demonstrate that you are a reliable stream of cash, and also on the other hand succinctly and clearly be able to articulate your business culture:

• 1. how you nurture and develop your people, and;
• 2. how you protect and nurture your other business assets. Most of all yourself.

Monitoring cash flow, and making cash go a long way

The key rules of conserving, generating and wisely using cash have not changed over the last 40 years, and will not change. These key rules are:

Invoice and collect promptly:

• Invoicing - the number 1 rule regarding cash management is “whoever invoices first is paid first”. Naturally, you must invoice as per your terms of trade but always invoice as soon as you can.
• Collections – a routine to review all debtors, categorise into aged columns, and then follow up all debtors that are overdue is critical.

Forecast cash flow, compare actual with forecast performance regularly, and identify and correct root causes of both success and failure:

• Identify the root causes of success, analyse the precise factors, and do more of whatever these factors are.
• Identify the root causes of failure, analyse the precise factors, and do less of whatever these factors are.
• Establish a routine and cadence, either weekly or monthly.
• Embed these practices in your business, and also in the minds of your managers, and all of your people.

Examples of my work on funding growth with current and past clients:

Improving cashflow

• Virtually all of my past and current clients both needed to and can improve cash flow, and do improve cash flow, as we work together.
• While the key action elements of improving cashflow are relatively simple, the art is connecting these elements across the whole business, to deliver the result that is needed:

1. That is, extracting every dollar of cash from the business;

2. While maintaining excellent customer and supplier relationships;

3. And therefore creating the maximum amount of precious cashflow and cash within the business, to use as working capital.

Creating and maintaining a financial forecast, and related cash management disciplines

The first step in my work with clients is to explain precisely both the benefit of a financial forecast to the business, what actions are needed to create the financial forecast, and identify and assemble the sources of information that are needed to create a financial forecast.

I will then work with the relevant people within my clients business to:

1. Either build the forecast myself and then train the financial resources within the business to operate the forecast or;

2. If the right level of financial resources does not exist within the business, then I either help my client to recruit or access them. Alternatively, I create and run the forecast myself for my client. Both tactics have proved effective over the years, depending upon the needs and circumstances of my client.

Creating a clear and easily understood bridge between the value of the business, and the financial forecast

For a financial forecast to be of maximum use, both my client, and my client’s key people need to understand the financial forecast, but in a commercial sense, not necessarily a financial sense.

I work with my clients to move away from a mindset of “financial forecasts are only for financial people”. Moving to a mindset of "everyone in the business contributes by their roles and actions to the generation of positive cash flow and working capital”.

I always find that once the bridge is built, and the jump is made from “financial people only” to “this is a key business tool for the whole business”, then there is a quantum leap in both the success of the financial forecast and also the amount of positive cash flow and working capital that is generated.

Accessing equity

When either a client has achieved the maximum amount of cash flow and working capital, or if a client needs to attract an equity partner or shareholder within their business, I have and continue to work with a number of clients to assist them to attract equity.

The attraction of equity work that I do for clients falls into the following categories:

1. A party known to my client has equity or may have access to equity, and my client wishes me to either play the role of matchmaker, or the role of detective to flush out the true intentions and agenda of the party, to enable my client to determine the best course of actions.

2. A client may need equity but does not have either the skills or contacts to either source equity or present their business to an equity player in the best possible factual light. In this case, I will use my banking, commercial and financial networks to source this equity, while often creating a financial forecast for this specific equity requirement.

Creating tax-efficient structures to ensure that the maximum legally allowed amount of positive cash flow generated stays within the business as working capital

I have within my network trusted providers of the specialist professional taxation and entity structuring services to enable my clients to both:

1. Legally minimise their tax, and also:

2. Structure their entities so that their business and personal assets are both protected, and enhanced, with very clear boundaries between business and personal components.

I find that this work with my clients ensures that their hard-won assets are maximised so that they:

• 1. Achieve clear, common sense, efficient entities, so that:
• 2. They can concentrate on using their skills to build both their business and also:
• 3. Their commercial and financial strength and assets.

Funding Growth is the first of the 7 principles used to deliver revenue increases to businesses from $5m to $10m plus.

My next LinkedIn article will explain the second principle: Invest in the four key productive assets within your business.

All Rights Reserved ? 2019 Murray Fulton