Do You Need Funding?
by Tim Berry
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.
really what a wonderful explanation
I am inquiring on how to get funding for my business and how to get the government grants that are offered in new york.
Please advise
Thank you
Lisa
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