Funding your business
There are many sources to fund your business, it could be your savings, it could be your family, it could be your current income from employment and nowadays you could also look into crowdfunding websites which besides providing you with an initial capital to start up it also allows you to validate your business idea in the crowd.
These are all valid forms of finance to kick start your business however once the idea is validated and you want to grow or scale up, then your business would require a more sizeable funding stream to allow it to grow to another level.
One can classify this second step of funding your business into three funding options (i) Equity (ii) Grants and (iii) Debt Finance.
I. Equity funding - In the case of equity, your business would need to seek an investor or business man who believes in your business idea and would be keen on providing their own funding to acquire a percentage shareholding of your business.
Equity financing could be an option if you see growing your business with this new partner in view of the potential access to new markets which he can provide you. In equity financing you need to be comfortable in sharing the potential increased profits with this new partner. If as a business you are comfortable with sharing knowledge and profits, equity financing may be a valuable financing route for your business.
II. Government or EU funding – The Maltese market has a number of grants and tax credits originating from the Maltese Government either via Malta Enterprise – http://www.maltaenterprise.com/en/support or EU grants via MEUSAC - http://www.meusac.gov.mt/abouteufunding?l=1
These grants are designed to address market gaps (i.e. Start-ups, R&D, Innovation, tapping into new markets) which are useful funding streams to assist businesses overcome specific barriers. However considering their finite nature grants will always be a limited source of finance and need to be seen as part of your financing solutions and not an end in themselves.
III. Debt funding – better known as borrowing from banks is the preferred financing option in the Maltese market as was outlined by over 70% of the respondents in the Survey on Access to Finance for Enterprises (SAFE) compiled by the Central Bank of Malta. Whilst seeking funding from a bank for the first time may prove daunting engaging with a bank to review your business idea may prove to be an opportunity to refine your thinking before financing such a project.
To improve access to finance particularly for SMEs the EU Commission has developed a number of financial instruments for banks across Europe.
Bank of Valletta through its EU representative office has positioned itself as a leader in the field of EU financial instruments and has launched a number of such products in the market which can be accessed via - https://www.bov.com/content/eu-financial-engineering-instruments
The above funding options are not mutually exclusive and every business requires a healthy combination of the above options depending upon its area of operation and size.
Budgeting and Forecasting
Warren Buffet, one of the most successful investors in the world states that ‘Risk comes from not knowing what you are doing’. In business it is imperative to plan ahead, whether you are just starting out, contemplating growth or seeking outside help.
A business plan (see Chapter 01), be it a formal one prepared with the assistance of professional consultants or an informal one, is useful to set out your goals, processes, budgets and marketing plans.
An integral part of the business plan is the budget or forecast through which you will quantify your expectations, in other words what you believe your business will accomplish. It will include a detailed representation of the future results, financial position and cash flows which you expect your business to achieve during a particular period of time.
Budgets may need to be revised periodically especially if there are changes in market circumstances rendering the original targets unachievable. Over time actual results are compared to the budgets and inevitably there will be variances which may be both positive and negative. Variances are investigated and remedial action taken if necessary.
Different budgets may be created to account for diverse situations such as a best or worst case scenario.
Potential equity partners or lending institutions will request budgets or forecasts to assess the business’ financing requirements, future profitability hence prospective returns and repayment feasibility.
Factors for success vs. potential pitfalls
Success is primarily quantified by the value of profits registered, although at the end of the day, the actual measure of success is the net cash that remains in the pockets of the enterprise or its promoters.
All businesses operate differently, however, there are certain common characteristics which one identifies with success.
First and foremost the business needs to be established with an adequate capital base which represents the promoters’ stake in the company. It is important to achieve a good balance between debt and equity. Re-investing at least part of the annual profits in the company also ensures the build-up of a cushion for less favourable times.
The second important element is management, in other words the people who run the business.
Effective management takes measured decisions, plans ahead, sets out objectives and identifies the right strategy to reach the target goals.
A successful enterprise offers a product or service which is in demand by the market and manages to attain a competitive edge over other parties operating in the same industry.
Costs, especially those of a fixed nature, are to be contained as much as possible since these will be incurred whether sales are being registered or not.
It is also imperative, for the successful company to employ people with the required skills and invest in their development through continuous training.
On the other hand, one needs to be aware of the following common pitfalls:
- In small enterprises or family run businesses, it is common not to distinguish between personal and business matters.
- Succession can be an issue especially when the founding member/s are very much involved in the business.
- Overtrading is another common occurrence where a company expands in a rapid manner without ensuring proper funding.
- Barter is a pitfall which impacts negatively the company’s cash flow.
- Undertaking large contracts when the necessary resources be they equipment, manpower, or finance are not available.