There are many reasons that you might want to raise finance for your business. You may be developing a software asset or continuing to develop one, looking at hiring a team at a faster pace than you’d achieve with organic growth, or looking at capitalising on an opportunity. Whatever the reason, it’s essential that you understand the numbers that make up the changes you’re anticipating.
Getting the Structure Right
Once you’ve got an idea of the likely costs that you’ll be incurring over the next 12 months (you can look longer term later), you need to think about the revenue your business will realistically be able to generate over that period. Putting the 2 together will give you an idea of either the profit or losses you’re predicting over the next 12 months.
Next, think about the timing of various financial events during the year. When are you planning on recruiting? Will you need to move premises, and if so when and at what cost? What are your businesses tax obligations and when do they fall? When will your revenue likely be generated and how long do you think your clients will take to pay? Are there any other existing obligations in place such as loan repayments?
Be prudent with each of the above assuming worst case scenarios where there is an element of judgement. Your accountant should be then able to turn your answers into a working Profit & Cash forecast for the next 12 months.
Not Every Business Requires Finance
Once you’ve got your forecast into the monthly structure explained above, your Cash Flow Forecast should be able to give you an indication of the potential finance required to ensure you have enough cash to survive.
It might be that even when being prudent, you are only showing a requirement for a small amount of cash to tide you over. In this case, you might want to consider whether raising finance is really the answer? There are lower cost alternatives that may be more applicable to your business – such as extending your overdraft. Your bank may be the first port of call before looking further into potential lenders.
Make Everything Tie Up
Once you’re decided that raising finance is the right move for you, you need to ensure that the Profit & Cash forecast you’ve prepared with your advisor ties into your overall business plan. If you business plan runs for longer than 12 months then consider extending out the forecast to reflect your top-level numbers.
Having the detail will also confirm whether your top-level numbers are realistic based on the people you want to employ, costs you believe you’ll incur and revenue you believe you can generate.
Think About the Consequences
You’ll be raising finance in return for one of two options, Debt or Equity. Essentially, it’s either a business loan or giving away a percentage of the company. Both have their advantages and disadvantages:
Raising finance in return for Debt means that you don’t dilute any existing shareholders percentage equity in the business. Providing the business remains profitable you can continue to pay dividends in accordance to the current structure. However, you’ll usually be required to start repaying the loan from month 1. In addition to this you’ll be repaying the capital plus interest, so the cost of a loan can be very high depending on the amount borrowed. You’ll also be required to put up guarantees against the loan in most cases, sometimes against your personal assets.
Raising finance in return for Equity means that there is no loan to repay and interest isn’t a factor. There’s also no guarantees required as the investor is now a shareholder in the business rather than a creditor.
However, you’ve now reduced your ownership in the business in return for the investment. This has both short and long term implications. In the short term, you now have to pay dividends to the investor in line with the new share structure. As a result, it’s likely that full-time employees who are also shareholders will move to being paid more through PAYE which will cost the business additional tax. In the long term, you are reducing the amount you’ll receive on sale of the business. However, if the investor can also bring things ‘to the table’ be it contacts or experience then you will probably feel the benefit of a higher eventual sale price.
Unsure where to start? We can help! Give us a call on 07866200275 or email martyn@agencycfo.co.uk.
