The 7 Crucial mistakes business owners make when looking for finance.
And How to Overcome them!
The covid-19 crisis has damaged the trade of many businesses. Quite a few of whom are potentially good enterprises. They need to raise finance to see themselves through the dark days of the virus being played out.
Many have deferred due payments for VAT, income tax, company tax, PAYE etc without any idea of how these costs can be funded, let alone finding the necessary working capital to fund a recovery in business.
In seeking a loan, often using one of the government-sponsored products such as CBILS, many businesses have encountered serious problems. These all stem from a lack of disaster planning, undeveloped management practice and a lack of simple and effective systems, aka management information. This might be called failing to fix the leaky roof in the good times, which of course will always carry on forever.
The 7 major errors are:
1. Raising money is left to the last minute. THE WORST!
This needs no further explanation. One has to be able to explain the business to a lender and how one plans to repay the loan. The thought of conversing with a lender when the creditors are knocking on the door is horrible but not uncommon and often too late.
2. No short-term cash flow forecasting. THE SECOND WORST
They do not have a cash flow forecasting process to manage their suppliers, HMRC and customers in the short and medium term. This is the next 6 months.
3. The business owner has no up to date information to provide to a lender. THE THIRD WORST
The accounting records are good for a vat return if one is lucky. The numbers can lack the Payroll (sitting in the balance sheet, not the P&L). Financing costs will be missing. Depreciation will be missing. The factoring can be a mess. The stock value
may be the same as the last year end. The debtor report will be accepted, months old items included. The supplier report will be missing a host of late items. The Profit & Loss account will be worse than useless and probably fraudulent.
4. The internal accounts are not aligned with the statutory reported accounts and tax returns. GUARANTEED TO DESTROY CREDIBILITY
Anything prepared internally will not fit with publicly available information and may contain potential duplication of costs and revenues, misleading both the business owner and the lender. Imaging double counting the same sales or costs. Items in your statutory accounts may have been accrued or deferred from or to your current records and you do not know this.
5. Inadequate broad-brush measures of Profit. GUARANTEED TO SPRING SURPRISES
Not enough thought has been given about how to measure their business profitability other than the year end accounts prepared for HMRC. One needs to be able to determine profit by profit centre, customer, product or service, whichever is appropriate.
6. No View of the Future. ITS LIKE DRIVING IN THE FOG
Without a business planning mindset to determine or express their view of the business potential and prospects, numerically, how can a business owner sell their business to a lender. For example, many will not appreciate the meaning of a balance sheet or a funds flow report or how trading affects the balance sheet. The latter will be a crucial in raising finance as it shows financial resources necessary for the trading operations in the short and longer term. The business owner will be walking blindfold into insolvency without this.
7. The Wrong Advice LAMB & CO TAX ADVISORS ARE NOT RIGHT FOR YOU IN THESE CIRCUMSTANCES.
They do not have the right advisor engaged to help them put these vital tools in place, to run a forecasting process which helps them relate to and explain the business to the chosen lender.
The traditional accountant is seen as a year end reporter for the tax man, someone who rakes over old leaves, gives you a a report you don’t understand and presents two bills, one for his fee and one from the taxman. This view has some merit, yet this is the person to whom a business owner often turns for help in hard times.
The business lacks an advisor who understands looking forward and can articulate the necessary thinking and process with the business owner and lenders or investors.
The Solution to Avoiding these Mistakes
And Securing a Good Relationship with Lenders & Investors
The answer to avoiding these mistakes is to recognise that the business has reached a stage in its evolution where the owner’s knowledge is not enough to see it through unforeseen disasters such as the Covid-19 crisis and other downturns.
The owner needs help to put in place the management process and mindset that will take them forward, confident that the information they have about their business is up to date, accurate, coherent across the statutory and bookkeeping platforms and a good base on which to make decisions ie measures profits by profit centre.
The business needs to transition from looking backwards to looking forwards. If one is looking in the rear view mirror all the time, how can you see and deal with the potholes, cliff edges and other dramas in the future.
A good advisor will help the owner develop a set of tools that inform on current performance. This will be by profit centre, is relatable to the past and crucially can be projected into the future. Only then will one be able to determine the necessary financial resources needed for business viability and future growth. After all there is no point putting money into a basket case. By adopting a forward-looking attitude in running your business and in your financial management, you will be able to see where rocks are, to make contingency plans and to fund growth in the future. Why would you not want this?
Do you want to put the stress and pain of the last few months behind you?
Do you want to be confident the money is there to pay you, your staff and your suppliers?
Do you want to put your business on a footing that will enable it to grow again?
If the answer to any of these questions is YES, you should give us a call to find out how to do it.
You can find out more information at:
Financial Management for a Successful Business
Contact us at , T: 01438 811771, M: 07712 203393