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WHAT should you do when your new venture is ruining your own finances? Two experts weigh in.
A Fin24 user writes:
I had a passion to one day own my business. In 2007, I tried to get finance to open a shop.
Despite having a good credit record, no bank wanted to fund my venture.
I earn a monthly salary of R45 000 and used part of it to start the business. My shop opened in 2009, and earlier this year I also launched a butchery.
However, in trying to get my business off the ground I fell behind in meeting my own personal financial obligations.
My credit profile is a mess, and I now owe more than R1.1m (bond, car, credit cards, etc).
I now want to apply for debt review so that I won't lose my house and car.
What are my options? Was it a good decision to use creditors' money to fund my business? Will the debt review assist?
The businesses are doing well, but I'll only break even in two years' time.
Adrian Bain, small business analyst for the Rival Pioneers entrepreneur support initiative, responds:
The flat-out answer for using creditors' money to fund your business would be no.
However, many businesses do stretch their creditors to improve cash flow and lower the need to invest in the working capital in the business.
Most business creditors require repayment between 60 and 90 days. However, you seem to be using funds meant for personal creditors and they require payments on a monthly basis. Using this form of funding can be dangerous, as you have very little ability to stretch it.
The only time I would agree with using creditors' funds to finance your business is when you are sure that you will be able to receive payback before you are placed under financial stress.
Your business was undercapitalised from the start and you need to scrutinise the working capital requirements (debtors plus inventory minus creditors) of your business.
You need to ensure on average that you have that amount of working capital invested.
I would also suggest you do some investigation into your debtors' and creditors' days, as this could lower your working capital requirements. If you are extending credit to customers for too long, you could be eating into your cash flow.
Also, how often are you turning your stock over and how long is the stock sitting on the shelf? By implementing a strict stock control system, you could limit your investment in your stock.
You could also consider joining a buyer's group such as the Shield Group. This would give you better prices and probably better payment terms for your stock.
An option you could consider if you own the premises is to let out the business facilities for the business that is eating the most of your cash, and then use the additional cash to reduce the time it takes you to reach break even. Once you are stable, you can consider venturing back into that business.
Your key to a sustainable business is your working capital. You need to ensure you have enough and that you keep investing as your business grows, if you don't want to be in the same position again.
I have little experience in personal finance, but I would suggest you see someone to ensure you don't get blacklisted because that will put further strain on your business.
Here are some tips from from Marc Ashton, Fin24's entrepreneurship editor:
• My experience has been that it takes much longer to reach cash flow and profitability than what you project in your business plan. Don't start trying to rob Peter to pay Paul, until Peter is consistently putting hard cash in your bank.
It sounds trite, but there is a huge difference between putting an invoice out there and getting the money in your account. If you are undercapitalised, you will figure this out very quickly.
• Very, very important - and a lesson I learnt the hard way - is that if you are not going to boot-strap a business and you are going to be raising finance and trying to juggle cash flow off creditor income, you need to set your business up correctly upfront and separate the business entity from the personal entity.
• It's easier said than done for a small business, but you should always be holding at least three months' worth of cash flow to see you through the rough months.
Most small business owners don't plan to fail, so they don't set their business up to make provision for that.
This is a perfect example of when the line between business and personal finances gets crossed, and then small business owners complain about being punished for being entrepreneurial because they sit with black marks against their names.
- Fin24
