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Recently in Raising Finance Category

Business failure is a distinct possibility for many businesses, especially for start-ups during the so-called three-year "valley of death". A key to getting through these years is to avoid the obvious mistakes. Generally speaking, businesses fail for significant and substantial reasons which are often very evident to outsiders. Insiders often fail to see them because of their closeness, determination and so on. Areas where failure is most likely to occur include finance. markets/sales, offerings, management and operations. See a detailed listing of possible reasons for business failure.

Clearly, there are very many reasons as to why businesses fail. The key point is that causes are usually very apparent (especially with hindsight) and the trick is to anticipate them by executing appropriate tactics and strategies from the outset. Three examples:

  • Use market research to confirm demand and assess suitability of proposed offerings.
  • Create a management team to offset any gaps in experience or expertise.
  • Raise equity to reduce exposure to interest rate changes, reduce gearing etc.

Given that reasons for failure are often both simple and clear, it should (in theory) be possible to reduce the possibility of failure through prior experience, forethought and effective planning.

For more information, see Devising Business Strategies, Developing a Strategic Business Plan and Writing a Business Plan. Also look at and/or participate in the online poll on Strengths & Weaknesses of Businesses.

When preparing financial projections for a business plan, you may need to consider raising finance from venture capitalists, business angels and/or banks.

Here are some tips. They assume you are using a fully-integrated financial planning tool, like our Exl-Plan range, to prepare projected income statements, cashflows and balance sheets covering a time horizon of 3-5 years or so.

  1. Use "most likely" (highly probable) assumptions to generate initial projections but exclude, for time being, any assumptions about external funding. When the financial model runs without this funding, it should automatically build up a substantial overdraft (cash shortfall) based on projected net cash outflows.
  2. Review the trend in the overdraft and identify its peak month/quarter and value.
  3. Review the desired mix of external funding - overdraft, grants, loans and equity - and inject funding amounting to the peak overdraft into the model.
  4. Rerun the model and check that key ratios - especially debt/equity and quick ratio - look sensible for all months/years. If needs be, adjust the mix of funding to improve these ratios. For example, if the debt/equity ratio is 100%, consider reducing the debt level and increasing the equity content.
  5. Take note of the timing and amounts of proposed external funding.
  6. Undertake sensitivity analyses by running the model with revised projections for sales volumes/prices, costs and/or overheads in order to identify a realistic "worst" case.
  7. Repeat points 2-5 to determine "worst" case funding.
  8. If desired, raise the projections with altered sales volumes/prices, costs and/or overheads to see the "best" case funding and help sell the business's potential to investors.

Base funding needs on the "most likely" projections but take account of higher requirements suggested by the "worst" case. - it may be prudent to seek too much money rather than too little!

For more guidance:

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This page is an archive of recent entries in the Raising Finance category.

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