Each business has its own individual requirements for funding in both the short and long term planning process.  Forecasting for these requirements is a key portion of the business plan.  Failure to accurately plan for these requirements will in all probability and at the very least stall the expansion and/or growth of the business. Before the meltdown in the gas prices this summer, a financial analysis through a predictive statistical tool was performed at one of our business locations (St. Augustine, FL).

The best laid out business plans are just that… plans. Plans need fluidity in order to serve as a conduit for change. Based on the analysis, the business model was not productive and the sacrifice was made to close the location. Pride could have prevailed and we could have kept the location open. However, pride will get you nowhere. The case can be made that failure allows you to improve. In essence this provides a buffer so that you do not make the same mistakes in the future. The case can be made that this is the truth for all budgets and hence is at the crux of our current financial meltdown. There are a plethora of conspiracy theories about why our economy and our finances are in their current schizoid phase with depressive mood swings. I’m not a conspirator, so I will leave that to the pundits. Having gotten that off my chest, these companies cannot learn from mistakes if they do not fail or at a minimum realign business strategies.

External funding is broken down into two main categories:  Debt funding and Equity funding.  Both systems have a time and a place when they are useful.  Debt funding is the preferred method if it can be accomplished.  Some endeavors require so large an investment that it makes this process unviable and at that point the entrepreneur will need to look at Equity funding where other individuals have a recurring interest in the company over a long period of time. This is discussion can be thoroughly discussed by the financial gurus. I have but a meager conceptualization of the nuances involved in budgeting.

Debt funding allows the entrepreneur to hold control of the assets that a company accumulates as well as the profits that are generated.   So if your company grows to several million dollars over time you retain all of that growth (within reason).

 In An Applied Approach the Equity funding is explained as allowing outside investors to purchase a portion of the company and therefore a portion of the proceeds from that company’s growth.  This means if your goal is to grow a company to a certain size, then sell (exit strategy), you have to grow it beyond the point of exit by the amount that you funded with equity.  This is further convoluted by the terms of the investment, which could bring that total to a much higher ratio than the Equity purchased in the early stages.

In order to avert problems with funding an entrepreneur needs to forecast the needs of the company with both short and long term assessments. Reasonable and ethical assessment of the current and projected cash flow of what is needed to both start and fiscally maintain the company and sustain it for the long term is not an easy task.  There will always be anomalies and emergencies that will change the landscape of a person’s business, plan from the written concepts. If you run a business during these economic times and you have not adjusted your short and long term assessments with judicious prudence, you are headed for trouble. The case can be made, that many individuals have failed to realize these adjustments. The gambit runs from the solo entrepreneur to the big 3 automakers. Imagine if you will, the Three Little Pigs and the Big Bad Wolf trying to blow the little houses down. The three houses had the names GM, Ford, and Chrysler. The only surviving house was the house the third pig worked diligently to build and restructure. Each pig stated “not by the hairs of my chinny, chin, chin”. Many of my students quip that I can take any complex task and break it down to a simple analogy. This is no exception. However, in the above video, the three members were able to overcome the external forces of the wolf by using everything at their disposal to stop the threat.

Money management is always a subjective subject, and there are no hard fast rules that ALWAYS work. However, if you surround yourself with sage guidance, honest friends, positive forethoughts, may difficult decisions (like closing a location that is crippling the overall health of your company), and practice writing SWOT analysis, your business will start off on the right foot and if it does not, you will not end up on the wrong side of the financial fiasco wondering what went wrong when the house comes crumpling down.

Cheers,

Dr. Judy

 P.S. who thought the big bad wolf was the victim in the pot? Did it cross your mind that it may have been an innocent victim called Santa? If you thought the person in the pot was the wolf we need to work on analyzing perceptions.