The majority of businesses need financing. Cash flow is a bit different than profits. 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. Debt or investment is outside financing with the purpose to help business meet expenses and grow. While some smaller businesses can exist without financing, and even some medium and large businesses that are fully-grown, stable and conservatively managed can get by without financing, most businesses need some outside help to get started, to expand, and to supply their regular needs for working capital. Your business plan should tell you whether you need financing or not, 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 by mans of loans or investment. One of the most common reasons for needing financing, by far, is “Accounts Receivable.” That is the accounting term for the amounts 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.
Another common reason for financing is paying for inventory. If you want to sell things you need to buy them first. Often you have to pay for your inventory before you sell it. This means that 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 finance 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.
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