Financing Growth

Have you developed a financial plan for growing your business?

Accounting systems provide critical controls over your income and expenditure, as well as meeting specific legal reporting requirements. Speak to your accountant at an early-stage in your commercialisation activities about developing a solid financial plan for growing your business.

You may be able to access financial assistance.  Access the Queensland Business Grants and Assistance Finder: www.qld.gov.au/businessgrants

Financing Growth

Financing Growth is about assuring that money is available to fund the operational growth of the business so that it can achieve its objectives.

There are a number of funding sources available to businesses. Some of these may include seeking equity finance, applying for government or university funding and considering an initial public offering. It is imperative that start-up businesses plan for growth in order to be able to meet their commercial objectives.

Financial success is the major goal of business. In order to achieve this goal, businesses must:

• have realistic financial plans
• monitor and review costs
• gain support of bankers, investors and venture capitalists.

Planning Growth

Planning Growth involves using a range of financial and operational strategies to ensure that the business has the people, funds and resources to achieve its commercial objectives.

At this Start-Up Stage, many businesses make the mistake of buying assets that can be more effective to lease or even borrow. Cash is quickly “burnt-out” on items that are nice to have, but not essential. In brief, here are some useful tips that have emerged from studying firms that have successfully commercialised:

Recruit wisely. Salary costs can be up to 70-80 per cent of business costs. The strategy is to use casual and part-time staff, contractors, trainees and apprentices supported by Government incentives, while the founders of the company accept low salaries themselves.

Don’t buy expensive equipment and office space. There is a wide range of taxation and business reasons for seeking leases on expensive equipment. Money not tied up in expensive equipment can be used to fund the core objectives of the business.

Encourage timely payments. Get customers to pay you quickly. Seek 14 days and not 30 days for payment. Thank and reward customers who pay you quickly. Develop a good relationship with key suppliers. Establish lines of credit and keep them informed about the growing success of the business. They have an interest in seeing you succeed because as you grow, they will also grow.

Seek equity finance. The equity finance business has grown considerably in Australia over the last decade. These individuals or venture capital companies are willing to take equity in companies that they believe will provide a very good rate of return on this investment in three to five years. Business angels are another source of equity finance.

Seek government or university funding. A range of State and Commonwealth funded programs are available to assist in commercialising new technologies and innovations.

Seek strategic alliances. These relationships serve to benefit all partners in the alliance. At an informal level, the alliance could involve the sharing of ideas in informal forums. More formally, companies could jointly fund R & D that is useful to all partners. Many strategic alliances are informal, based on trust, good friendships between key people in the alliance partners, and look to the longer rather than shorter term.

Going public. An initial public offering (IPO), or listing on a stock exchange, is the long-term goal of many start-up businesses. It is a complex, expensive and lengthy process. If the IPO is successful, it provides access to a large amount of interest-free capital to fund business growth. It is also a way for company founders, venture capitalists and investors to harvest some of their investment in a successful enterprise.

Financial Plans.  The following financial documents are necessary and demonstrates a level of competency with potential investors;

• financial objectives of the business
• financial forecasts
• cash flow forecast
• projected profit and loss statements
• projected balance sheets
• capital forecasts
• break-even analysis
• various ratio analyses of performance and liquidity
• investment strategies
• performance measures.

Remember that the financial plan is part of the business plan.

In order to ensure that your financial plan is realistic and appealing to potential investors, it should meet the following guidelines:

• Be realistic. A potential investor and partner will always look at the worst-case scenario. You need to be realistic about the market response to your product or service.
• Be clear about your assumptions and projections. Your financial plan must be based on assumptions that are clear and valid. The financial plan is linked to the marketing plan. The marketing plan with its market research should provide a strong case for the assumptions and projections being made in the financial plan.

Use spreadsheets sparingly. Use a limited number of spreadsheets that add weight to statements about the potential market, and the company’s capabilities to compete successfully over time. If it is highly successful, a new company will take three to five years to reach the sales performance of its best competitors.

Monitor and Review Costs

Monitoring and Reviewing Costs involves establishing a strong focus in the business on estimating sales, forecasting expenditures, and monitoring cash flows.

Many start-up businesses have an accountant or financial officer as part of the management team, or they can access this expertise through networks or advisory committees or an accountancy firm.

Below are several important concepts that you need to know and understand at this Start-Up Stage of the business:

Estimating sales – if the product or service does not currently exist in the market, you need to base estimates on similar or substitute products or services. Estimate sales not on what is sold to your distributor or retailer, but on the level of customer sales. Seeking professional advice on this point will lend credibility to your estimates.

Forecasting expenditures – a lot of company costs are fixed, and it is relatively easy to forecast general and administrative expenses. The bulk of costs will be salaries, rent and marketing budgets.

Start-up costs – are typically under-estimated by businesses. Generate a list, calculate costs then add 15 per cent as a buffer. The list includes furniture and fixtures, equipment, office supplies, initial inventory, employee wages, employee training, deposits for electricity/lease, insurance and accounting/legal fees.

Cash flows – a cash flow statement is critical. It states the cash position of the company at specific points in time. This is important information for everyone, including lenders and investors. As with start-up costs, include a safety margin.

Break-even analysis – the calculation of when the business will make a profit. To break even and to make a profit, the company must generate a volume of sales of its products or services that covers both the fixed and variable costs in running the business.

Ratios – are a useful tool for understanding financial information. Most books on accounting or financial investing in the share market list these ratios. The best known include liquidity ratios (the ability of the company’s assets to be converted into cash); profitability ratios (profit margin, return on assets); and leverage ratio (degree to which the company relies on debt to survive).

Have You Identified Sources of Investment Capital?

Raising the necessary capital to expand commercialisation activities remains one of the biggest hurdles facing Queensland technology companies. However, there is an increasing number of venture capital firms and formal networks of high net-worth individuals willing to invest in new ideas that have the potential for strong returns.

Bankers, Investors and Venture Capitalists

Bankers, Investors and Venture Capitalists are critical sources of financial and business support in the path to commercialisation and expect to see evidence upfront about the projected rate of growth, return on investment, degree of risk and protection of the intellectual property of the business.

A wide range of people will often become an integral part of the success of a business. Often described as professional advisers and investors, they include bankers, lawyers, accountants, insurance agents, venture capitalists and business angels.

Venture Capitalists

Venture capitalists operate either as individuals or most often as venture capital firms. As investors, they are betting that the money they put into your business (generally no less than $500 000) by buying a share of the ownership will increase over time at a higher rate than money invested in the bank or in the share market. They want a reasonably fast return on their funds (two to four years). In particular, they want to see how their investment or original equity is protected.

Business Angels

A business angel is a high net-worth individual who invests directly into entrepreneurial companies for equity (usually between $10,000 to $1 million). It is usually “smart money” where, in addition to capital, expertise adds value to the investee company. In providing “angel financing”, they are not being a charity or pursuing a hobby. They want solid returns on investments either by profits or a share in the ownership of the successfully commercialised business.

All of these professional advisers and investors expect:

• a very solid business plan
• a first-class management team
• your personal financial commitment to use your funds as a major part of the financing
• evidence of prior success in running this business or related businesses
• income statements that show that you are willing to accept a very basic salary or no salary in the initial start-up phase

Accounting

Accounting processes should be established early in the life of a business. They allow you to record the financial transactions of your business and help you to meet various reporting obligations imposed by law.

Numerous systems are available and each system has varying reporting capabilities. In order to work out which one is best for your business, it is important that you consult an accountant as early as possible in the life of your business, to discuss the nature and structure of your business, and to determine appropriate accounting processes.

Your accountant will also provide you with important advice in relation to income tax, GST, Fringe Benefits Tax, Capital Gains Tax and Pay As You Go (PAYG) obligations. You should establish an ongoing relationship with your accountant so that these issues are managed and re-visited throughout the life of your business.

At the same time, you should remember to apply to the Australian Taxation Office (ATO) for an Australian Business Number (ABN). The ABN provides a single identifier for dealings by your Company with the Tax Office. An ABN is also needed to register for the Goods and Services Tax (GST). Most businesses will require an ABN. However, your accountant or the ATO will be able to provide you with further advice.