Many small businesses’ applications for loans fail because of their lack of realistic financial goals.  The business plan plays a crucial part in determining the financial needs of a new small business, and the entrepreneur should spend enough time on the business plan to ensure that becomes a valuable tool for strategising, getting funding, attracting investors, and eventually sell the business.  Not only the financial plan is important to determine financial needs, but also the complete business analysis, the market analysis and the type of products that the entrepreneur will supply.  All of these aspects will give a thorough indication of what lies ahead for the business, and how the entrepreneur plans to achieve the financial objectives.

 

Planning ahead will require forecasting of the future financial needs of the business.  The following steps can be helpful for doing this:

• Compile a realistic sales forecast that is based on previous experience or based on industry information.
• Calculate the monthly operating costs and other expenses that may be involved.  Again, this must be done based on solid information.
• Estimate the levels of investment in current and fixed assets that are necessary to sustain the anticipated sales.

 

It is important to keep in mind that budgets and financial plans are merely estimates, and forecasting that is not done properly can lead to harmful financing and investment decisions which can bankrupt the firm.

 

Once the financial needs have been established, the entrepreneur can start thinking about whether financing will be necessary, and if so, what kind of financial support will suit the business best.

Short-term finance: Trade Credit

Trade credit can be obtained by doing a credit application with your suppliers.  The supplier will verify the creditworthiness of the applicant and will also do credit checks with the bank and other trade creditors.  If the credit application is successful, the applicants account will be subjected to credit limits and credit terms (30 days, 60 days or 90 days).

Short-term finance: Bank credit

Bank credit can be obtained in the form of an overdraft facility.  This is regarded as short-term finance because it needs to be renewed once a year.  An application for an overdraft facility will be considered more favourably when it is supported by a business plan.

Medium-term finance: Instalment sale transaction

Instalment sale transactions (also called hire purchases) are a popular means of finance among start-up businesses as well as established business.  This type of financing is typically used to finance machinery, equipment, furniture and vehicles, it is a credit sale in which the agreed upon purchase price has to be paid in instalments.  The seller/supplier will remain the owner until the full purchase price has been paid.