Business Library

Financial Strategy

What do you need to know about it?

Strategy

To run a business effectively requires a sound financial strategy. Why?

A business requires cash to operate.
Capital will be required to purchase fixed assets and stock and to pay staff.
Any business that fails to plan its capital requirements is unlikely to last long.

Business Plan

If you are seeking finance, many lenders will want to see your business plan before advancing any funds. Why?

A business plan is a financial summary of the finances of the business.
The plan should include a cash flow statement, showing how the income and expenditure of the business will arise.
The plan should also include predictions of when finance will be required.
Initially it will be difficult to predict the levels of income and expenditure, so until there are some actual figures to base these predictions on it will be necessary to use estimates.
The business plan should identify when funds are required and indicate the levels of finance required.
To complete the business plan effectively it will be necessary to estimate levels of debtors and creditors.
It will also be necessary to estimate the levels of income.

You can request a no-obligation quote for a commercial loan today. If you are looking to fund a start-up business and can use the equity in your home as security, you may wish to get quotes on a personal loan.

Capital Requirements

The amount of capital required to finance a business will depend on a number of different factors, which include:

The amount of capital that is "tied up" in debtors, stock or work in progress.
The cost of assets required to run the business.
Bank overdraft levels.
The length of time taken to pay creditors.
The length of time taken for debtors to pay you - learn about Professional Debt Collection services
The amount of stock held in order to meet day-to-day stock requirements.

Sources of Capital

Raising finance can be the key area to a successful business. There are many sources of finance that can be approached, such as:

Banks
Building societies.
Merchant banks.
Investors.
Family members.
Personal savings.
Grants.
Internet Financial Service Providers.

Profit requirement

So that a business may continue to grow, it is essential that a profit be made. The following are points to bear in mind:

It is common in the early years of a business for losses to be incurred whilst the business is finding its feet and getting itself known.
These losses need to be funded, however, and whilst it is possible to fund losses initially, lenders will need to see positive returns within a reasonably short time scale.
A profit is merely an excess of income over revenue expenditure.
Capital expenditure does not fall within this definition as it is treated as an asset of the business.

Raising capital

Capital is raised in a number of ways, such as:

Companies can raise capital by the issue of shares or debentures.
Unincorporated businesses are dependent upon the proprietors' funds or from bank loans and overdrafts - get a quote on a commercial loan to help fund your business
To raise capital successfully it is necessary to show a lender that the product being marketed is a good one and that a profit will be made.

Forecasting

Forecasting is best done with the benefit of actual figures. This is not always possible, especially when starting up a business. However, generally:

If previous year figures are not available it will be necessary to use estimates.
Estimates are inevitably unreliable as so many unforeseen factors can influence the actual results.
Forecasting is more of an art than an exact science and, as with weather forecasting, you can go spectacularly wrong!
Great care is needed and it is best to exercise a degree of caution when forecasting figures. Play safe by having pessimistic as well as optimistic estimates built into your business plan.

Budgeting contains reference to cash flow statements and also relies on using prior year figures. Additionally:

A budgeted profit and loss account is merely a prediction of the next year's figures by using estimates or allowances for inflation etc.
A budget is a prediction of the income and expenditure for future periods.
The Chancellor of the Exchequer carries out a similar exercise when he prepares his annual Budget.

You can often improve cash flow if you lease rather than buy assets - get no obligation quotes on lease financing

This is a guide. It may be helpful for you to also talk to a professional in finance provision. E&OE.