Clearly identify the resources you need

Your business plan and your budget should tell you what resources you need. If you are starting up a business, you will need to consider organization and start-up costs, capital expenditures, and working capital requirements. You will need sufficient liquid assets to operate your business until you start generating a profit and positive cash flow. If you are already in business and are planning for growth or an expansion, the resources you need will probably be similar. You should not necessarily over-estimate your resource requirements, but a degree of conservatism may be in order, in the sense of adding in a certain cushion, to ensure that your plans will not be affected by a lack of resources.

Use your own resources, without sacrificing your personal or family budget

Using your own resources, and those contributed by your partners, if applicable, may be one of the most efficient ways of financing your business, in the sense that you will not have to pay interest and will not have to give up an equity interest in your business to a third party. But you should not over-extend yourself and use money that you and your family need to pay living expenses and maintain your standard of living. Having your own business means taking on personal responsibility and commitments, but imposing too much of a burden on your personal life may not be productive for your business.

Consider loans or investments from family and friends

This is obviously a personal decision and choice, on both sides. You should be realistic in assessing your ability to repay a loan, and should consider how much participation and decision-making authority you want from family and friends if they have an ownership interest in the business. Support from family and friends may provide more flexibility, especially when you are just starting up a business and find it more difficult to obtain bank loans or other outside financing.

Compare the cost of different sources of financing

The cost of debt financing (loans) is interest. The cost of equity financing (investments) could include dividends or a share of the profits. Comparing the two may involve a cost of capital calculation and analysis. You would in effect compare the interest charges on a loan with the percentage of your company’s retained earnings or accumulated profits that really belong to the investor.

If you can obtain loans from different banks, compare the interest rates and payment terms they offer. You may want to determine the total interest cost over the life of each loan to have a comparable base. Small differences in the interest rate can add up to significant amounts over a long-term loan. Keep in mind that short-term unsecured loans, such as lines of credit, generally carry a higher interest rate than long-term secured loans, such as mortgages.

Consider the possibility of venture capital or angel investors

These are equity types of financing, so you will be obtaining funds in exchange for part of the ownership of your business. An angel investor is generally an individual who is willing to invest in higher-risk, start-up companies, in exchange for a higher rate of return than on other investments. Venture capital, or risk capital firms are also interested in investing in a business with good earnings and growth potential. Typically, angel investors are more likely to invest in a smaller, entrepreneurial company, while venture capital firms deal in larger amounts. An angel investor may also be able to contribute significant knowledge and experience, and could become a good advisor for your business. A search on the Internet will show you how many angel investors and venture capital firms are out there. But especially in the case of an angel investor, there is a personal relationship involved, and you may want to seek out this type of financing by using your network of friends, business associates, and professional advisors.

Prepare and use a cash flow forecast

A cash flow forecast can be structured as a schedule, or calendar of cash receipts and payments, to give you a clear idea of when you expect to have money coming in and going out. Cash receipts would be a function of sales and credit terms, service billings, progress payments on contracts, payments on account, or other sources of income. Cash disbursements would be scheduled based on the due dates on invoices from vendors and contractors, payroll payment dates, tax payment deadlines, due dates on loan installment payments, and other expenditures. By seeing how cash is moving through your business, you are in a better position to anticipate needs and manage cash deficits and surpluses during the period.

Let your vendors help you finance the business

By negotiating payment terms with your vendors (30 days from invoice date, for instance) you will have effectively obtained short-term financing for your operations.

Use inventory management strategies and techniques

How much inventory you need to have on hand will of course depend on your line of business. But inventory carries a cost. It represents resources you have used that have not yet been converted into sales, revenue, and cash receipts. You may be able to produce based on demand, or take advantage of just-in-time deliveries, for example. If these techniques do not result in any detriment to your sales, you will have gained a savings in your cash flow.

Take advantage of prompt payment discounts on purchases

In some types of businesses that involve a significant amount of purchases, it may be possible to take advantage of cash discounts, such as 2% for payment within 10 days, on vendor invoices. The relative advantage of using these discounts would have to be weighed against the inherent financing involved in 30-day payment terms, as mentioned above. And it may be necessary to keep more cash on hand and not make short-term investments of cash surpluses, as mentioned below. But it is an option that should be taken into consideration, and one that may enhance your relationship with key suppliers.

Invest idle cash balances

If your cash flow forecast shows that you will have surplus cash balances available during certain periods of time, you may want to consider making short-term investments in marketable securities. If your business is consistently generating a cash surplus, you might consider longer-term and higher yield investments. It is probably advisable to maintain a certain level of cash on hand to cover any unforeseen circumstances, or to take advantage of prompt payment discounts, as mentioned above. But unless your bank is paying you interest, a large accumulated balance in your checking account is not at work for your business.

Meet your obligations and protect your credit rating

This may seem obvious, but it is fundamental in managing your finances. Paying on time not only protects your credit rating. It also allows you to maintain good relationships with your vendors and creditors, and builds your reputation as a solid business partner, thereby opening up new opportunities, since your current vendors will be able to give good references to other potential vendors. And, your payment record will be a primary consideration when it comes time to request additional financing for growth and expansion.

Communicate with creditors ahead of time when you find you may not be able to make a payment on time

If in spite of your best cash management efforts, you occasionally find yourself unable to make a payment when it becomes due, you should communicate with your vendor or creditor ahead of time. This gives them time to react and possibly grant you a concession in terms of a grace period or to work out other payment terms, rather than showing your account as delinquent and thus negatively affecting your credit score. Most vendors and creditors can be surprisingly cooperative if they are informed of the situation in advance. It shows your seriousness and your commitment to meeting your obligations.