Financial literacy basics on asking for finance
When it comes to running a successful business, financial knowledge is the key to making an enterprise more profitable. To start with, being conversant with the way things work on a financial level, helps a business cut down on unnecessary expenses and find additional ways of generating income.
The core aim of financial literacy is to empower people by allowing them to develop an understanding of basic financial concepts. In so doing, people are able to make informed judgements and effective decisions about finance management.
Despite the importance of financial literacy, research into the situation on the ground in Malta and the EU has shown that there’s a knowledge gap - that the Malta Business Bureau has been working hard to address through one of its European projects – INVEST.
“While awareness on the need to have at least a basic understanding of financial concepts has increased throughout the last years, the Maltese business community as a whole possesses limited confidence in dealing with financial issues. It also tends to perceive financial education as relevant only to the world of investment,” according to the Malta Business Bureau (MBB).
This tip, written in collaboration with the MBB, tackles the subject of requesting finance. It provides an outline of some of the critical concepts tackled in the 30 hours of training available through the online INVEST toolkit.
ASKING FOR FINANCE
Business growth is highly dependent on the ability to borrow money. Understanding how lending works enables an entrepreneur to approach banks or lenders with concrete proposals that will, in turn, increase the chances of securing financing.
However, many small and medium-sized businesses find it difficult to obtain bank financing because they do not know how to navigate the process. Taking time to prepare sets your business apart from the competition and helps boost your business' attractiveness to banks.
Two categories of financing resources
Before heading out to ask for finances, you need to be aware of two main categories - debt and equity. Debt involves borrowing money to be repaid, plus interest. Equity involves raising money by selling interests in your company.
Understand risk factors
Another important thing to understand before asking for financing is the risk your business will face - something that banks will delve into as they process your request. Here are some questions to ask yourself:
Industry: How risky is your industry? If it’s a risky industry, do you have a plan to overcome the obstacles that your competition can’t?
Risk analysis: Are your financials sound? How many years have you been operating in business? Do you have outstanding debts or liabilities?
Business plan and model: Will you be able to overcome changes in the economy? Do you have a model that can sustain growth?
Your personal equity: Are you risking any of your own capital for the business? If the business fails will you be able to make good for the loan?
PREPARING FINANCIAL INFORMATION
Before dishing out money a bank or lender will want to evaluate the financial state of your company. Here are some important documents to prepare:
This measures your company’s financial performance over a specific period of time. It is typically generated monthly, quarterly or annually and lists all the relevant revenues, expenses, gains and losses to calculate the company’s net income for the period.
A balance sheet is a statement of the financial position of a business which states the assets, liabilities and owners’ equity at a particular point in time. The balance sheet includes the following components: assets, liabilities and equity. Assets are what the business owns (anything you use to make money). Liabilities are what the business owes (a list of bills that are owed and long-term debts), while equity represents what the business worth (assets less liabilities).
Cash flow statement
This records the amount of cash and cash-equivalent entering and leaving the company. It is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit.
Bonus tip: Consider your alternatives. Securing financing can be difficult and takes time. If you are repeatedly turned down by banks you might want to consider private lenders and investors.
PREPARING YOUR PITCH - BUSINESS PLAN
When you pitch your business to a bank or lender, you need a strong plan. A business plan provides an outline to the framework of your business, declares your visions and showcases the necessary steps to fulfil those goals. It also summarises your business’s history and background and models your core values and mission. A business plan typically includes:
Business concept: A description of the business, its products and the market it intends to serve. It clearly identifies what will be sold, to whom and why the business holds a competitive advantage.
Financial features: Highlights of the important financial elements, such as sales, profits, cash flow and return on investment.
Financial requirements: Identifies the capital needed to start the business and expand. It details how the capital will be used and the equity, if any, that will be provided for funding or the source of collateral for the loan.
Current business position: Details any essential information on the company, such as its legal form of operation, when it was formed, the principal owners and key personnel.
Major achievements: Details any developments within the company that are essential to the success of the business. These could include patents, prototypes, etc
SWOT analysis: This is a structured planning method that evaluates your business’ strengths, weaknesses, opportunities and threats (SWOT).
Writing a business plan
Writing a business plan can take time but it’s an important step in mapping out your company’s path. Apart from helping you get the finances you need, this plan will be your guide and reference point. It will help you stay focused. In order to tackle all the above-mentioned points in a structured way, a business plan can include the following subsections:
Company description: Provide a snapshot of your business. Describe the vision and direction of your company briefly.
Mission statement: A brief description capturing the essence of your business purpose and the philosophy underlying it. For example, Google’s mission statement is: “Organise the world’s information and make it universally accessible and useful”.
Business goals and objectives: List attainable goals and objectives. Examples include: Reduce overall budget cost by 5 per cent by 2020.
Products or services: A brief description of what your business offers and how it benefits customers.
Target market: Identify the different groups you will be marketing your products or services to.
Industry: Describe the industry you will operate in and your position within that industry. Who are your competitors?
Market research: Include research that answers questions about the size and nature of the industry, trends and competition, current and prospective customers, and details about your products or services, such a how they are made. Here you can include your advertising and marketing strategies.
Business/organisational structure: The business structure includes the people involved in the industry - the hierarchy. The organisational structure showcases the people running the business and includes details about their role and involvement, as well as their CV and how their skills and experience complement each other. Here you will also list the board of directors, if applicable, and any business support professionals
Funding request: If you are seeking funding, note the current and future (5 years) running requirements, how the funds will be used and other relevant details plus supporting documents.
Optional appendices: Add anything that strengthens your argument. These can include brochures, maps, contract copies, press coverage etc
Executive summary: This includes a clear, concise snapshot of the content of the document.
Navigating through the business world can be daunting. Basic financial literacy will help make the journey smoother. If you need additional support go ahead and contact one of the Business Consultants listed on Yellow.
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