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SBSA SMEs Seminar 2010 The different stages of business • How do I grow? • Grow using cash from the business or borrowed money? • How do I go about borrowing money? Take-off or Finance Phase • Understand operating ratios of industry • Manage expenses • Increase sales Cash flow needs to be enough to cover costs and to grow the business Survival or Cash-flow Phase Start-up Phase • Can I deliver my products? • Can I expand my customer base? • Do I have enough money? Need to learn how to run a business, how to develop and execute a business plan, how to access finance 6 Months 1 - 2 Years 2 - 5 Years Sources of Funding your business Personal Savings Primary source for most business world wide Family & Friends • Often cheapest source because it is loaned at a low interest rate, which is beneficial when getting started • Make sure they know what they are getting into – they have • to know the risks Bank Finance • Most likely source of borrowing apart from family • You have to be able to show that your business is viable and bankable – Business plan and cash flow projections • Management need to convince bank that it has the skills and expertise to manage the business risks Equity Finance • Mostly for growing or expanding business • Disadvantage: you have to give equity or partial ownership • Criteria: 1. Experience and abilities of owner/management 2. Industry, products and services offered or market opportunity 3. Growth of the business 4. Return on Investment Loan Originators • Helps prepare loan application • Submit loan to all banks and other financial institutions simultaneously • Analyse proposals received and advises Franchisee on the merits of each • Introduce Franchisee to Relationship Manager General Lending Solutions Lending Solution What you need the money for: Overdraft Working capital: Cash Working capital: Stock Office Equipment Business Medium revolving term credit plan loan Business mortgage Debtor finance Vehicle & Asset Finance Plant and other equipment Fixtures and Fittings Vehicles Other second hand assets Property What does a bank look at when assessing applications? Financial criteria • Owner’s contribution to the business • Realistic projections • Ability to carry and repay debt • Assets in the business Management • Profile of the owner/jockey • Management, financial and marketing skills • Technical skills and qualification Environmental • Viability of the business • Risk associated with the industry • Location • Competition • Barriers to entry Security/Safety • Tangible collateral (real assets) • Intangible collateral (future cash flows) • Personal assets of owners Information required when applying for finance • Business Plan • Financial statements of the business • Personal statements of assets and liabilities for all owners • Projected income and expenditure • Cash-flow forecast • Amount and source of owner’s contribution to the business • Details of proposed collateral Reasons loans are declined • • • • • • • Business is unsound, risk is too high, bank cannot determine risk – business is not sustainable (70%-80% of all new businesses fail in the first two years) Lack of owners commitment, often indicated by his/her contribution to the business Business plan does not provide adequate information Purpose of the finance required is not justified Character or suitability of owner Passive investment – owners not involved in the business Insufficient security or lack of collateral when risk is deemed high Business Plans – see www.standardbank.co.za >Business>Starting a Business>search “Business Plan” Ingredients for a financially successful business Transferable value • Retained equity • Future profitability Cash flow • Working capital cycle • Breakeven • Margin of safety • Seasonality Profitability • Sufficient margins • Sustainability Return on Investment • Mutually beneficial • Pay back period Debt structure • Debt: equity ratio • Working capital • Capital expenditure • Affordability Stability • Sound balance sheet • Track record Managing your cash flow It is important to establish good practices which will assist you in managing your cash flow effectively and will help you to ensure your business’s financial health: • Budgets and budgeting A budget helps you to keep an eye on the future while tracking past performance. • Financial statements Financial statements provide you with the information you need to measure your business’s success and to make sound financial decisions. • Bookkeeping chores Bookkeeping is an administrative task which requires daily attention and helps you to stay on top of your finances. • Proper invoicing Proper invoicing will assist your business to receive payment from clients and keep track of outstanding payments. • Collecting debt Late payments and bad debt can create cash flow problems for your business. Poor cash flow management is one of the major causes of failure in small businesses. Improving your cash flow There are a number of ways to improve cash flow within your business… • • • • • • Don’t buy excessive volumes of stock or inventory if there is not a good business reason for doing so. Keep overheads or expenses to a minimum. Improve suppliers’ payment terms. Arrange an overdraft at your bank that you can use in an emergency situation. This may just be the life line that is needed to help your business cover a lapse in cash flow for a short period. Manage your debt effectively. Improve debtor collections and reduce debtor terms Improving cash flow is not a ‘once off event’ but rather a way of doing business THANK YOU “If you're not appearing You’re disappearing” legendary jazz musician, Art Blakey QUESTIONS Thank You