Do You Need Funding? 17

Most businesses need financing. Cash flow is different from profits, so profits don’t guarantee money in the bank. There’s financing needed to manage starting costs, inventory, waiting to get paid, and other factors. Much of that is what we lump together as “working capital.”

Most people think of financing as debt, borrowed money. In this context it also includes investment capital. Either debt or investment is outside financing that helps a business meet expenses and grow. While some smaller businesses get by without financing, and even some medium and large businesses that are mature and stable and conservatively managed can get by without financing, most businesses need some outside money to get started, to expand, and to supply their regular needs for working capital. (Working capital, by the way, normally means cash in the bank to cover cash flow deficits caused by normal flow of the business. Technically, it is current assets less current liabilities. )

Your business plan should tell you whether or not you need financing, and how much. The plan should estimate cash flow for your company and if cash flow is negative for any good reason – and there are good reasons – then you plan to add money as either loans or investment. The most common reason for needing financing, by far, is “Accounts Receivable.” That is the accounting term for the amount of money a business is waiting to receive from customers for sales already made but not paid for. Most business-to-business sales involve delivering an invoice and waiting to get paid. Businesses that sell this way have to deal with collecting money owed, and while they wait to collect, they have bills to pay. Therefore, they need financing.

Another common reason for financing is paying for inventory. To sell things you need to buy them first. Often you have to pay for your inventory before you sell it. That means you need financial resources to deal with pay cycles.

Start-up businesses often need financing to cover their initial costs and expenses while they are starting, before they can start selling.

A correct business plan process will point out the gaps that need to be filled with financing. For a start-up company, use the plan to help calculate needs and early expenses and the early deficits as the company gets started, and then plan to fill those needs with borrowed money or investment. If you can’t get enough funding to cover the needs, then you must either change the plan to reduce the needs, or don’t start the company. For an ongoing company, use the plan to calculate cash flow from normal operations, and turn to financing as needed to support working capital requirements.

Don’t be surprised by needing financing. Most businesses do. Some smaller, cash-only businesses get by without financing. They sell for cash, buy in cash, and don’t spend what they don’t have. It’s easier to get by without financing as a service business than a product-based business, because you don’t have to deal with inventory. A home office is less likely to need financing than a business location you rent. A one-employee-business is less likely to need financing than a business needing employees.

About the Author Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

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  • http://berihun Berihun

    really what a wonderful explanation

  • http://www.paloalto.com Jake Weatherly

    Hi Lisa,

    We have a number of funding resources that we recommend including a database of venture capital sources that we maintain inside of Business Plan Pro, partnerships with communities focused on start-up funding, and a wonderful relationship with the Social Enterprise Alliance to help non-profits develop earned income or social enterprise strategies for non-profit funding.

    For grants specific to New York City, a good place to start will be to search online by geographical area and then narrow your search by mission or purpose. Most grants are awarded for ideas that align with the specific objectives behind the grant.

    Jake Weatherly
    Director of Customer Experience
    Palo Alto Software

  • Mary Tremani

    I am very much interested in Real estate business and Agricultural businesses as I see that it’s a demand in this developing nation.
    My success in these business will enable me to assist the disadvantaged and unfortunate people in the rural areas where Goverment services such as health, education and others such as road, water supply sanitaton is not reachable regularly.
    There are suitable geographical land features for agricultural purposes or even for building rental houses for business.The Goverment of the day don’t have money to use the land for genuine purposes in order to bring vital services to the people. Therefore,
    people are flactuating into urban areas building settlements and live in scrap houses and poor lining condition. Are they any means to help me seek financial grants to venture into this business so that my success and profit can be used to bring development in this developng country?

  • Jessica

    I would like to start an ethnic beauty supply business and I have transferred all of my ideas from my head to paper but I need financing and that’s when I can hit the ground running! I am so excited about my ideas and I have been thinking up new ideas for years but I need to start thinking of ways to get financing as passionately.

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    Hello,
    I am a fitness professional who has a fitness program for kids that I started in Hawaii. I am currently living in Southern California and need some funding to start here. Mainly for flyers, mailers, postage, video production etc. Does anyone know of any state funding or grants for fitness for kids? Or is there anyone out there who might know of an investor who might be interested? I would eventually like to franhise my program as well.
    Thank you for your time.
    Aloha

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  • Deshon Harris

    Yes i was wondering how do I get the proper funding for start-up money.Im a new company trying to get on its feet and i would really appreciate the help i really do need it.

  • Ms.Meng

    Just wondering if there is someone out there who live in Canada and is knowledgeable about “opening a small business”. Someone who I can talk to, ask questions, and discuss some issues. I would really appreciate it if you could email me at (s3rious.inquirer@yahoo.ca), I really need an opinion / advice.

    Thanks greatly,
    Ms.Meng

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  • Mchunu Ayanda

    i trully like the explanation but you said if you dont get funding you should either less the needs or dont start the business,i dont agree with stopping the business.

  • http://www.wix.com/beyondthemic/2800 JEHMAL KORNEGAY

    To whom it may concern,
    I have an up in running business that has potential to increase profit quickly but the business needs capital to stay on the same steady pace. What methods should be use to obtain loans, grants, and funds from larger businesses or banks?

    Thanks,
    Jehmal M. Kornegay

    • Chris Ayo Eniola

      hi where have you looked into im in a similar position looking for start up funding

  • teawanna brwn

    Hi, am a stay at home mother of six, and full time student. My husband and I was looking to start up a catering business and need help with start-up cost. Your help would be greatly appreciated. We would love to buy a home for our children. Thanks and reply soon.

  • http://gmail masentle

    I have searched for 3 hours,and I still cannot find a proper example that shows profitability and sustainability calculations.

  • Thando Sikhosana

    I am currently running a bar and a salon in a rental premises but i’m interested in a guest house. Where i run those business there’s lots of portantial i just need some advise and finances …

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    I WANT MONEY TO MY SHARE BUSINES

  • Christopher Adams

    I want to start my own business…and I do have my business plan. What should I do now, because I don’t have that kind of money to start my business

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