Is the loan for business expansion becoming your working capital?

 Yes, I know this can sound a bit confusing to some, but sorry I cannot help it, this is too important of a strategic slip that small businesses make. I guess this all starts from not having something very basic that even a home-run business should have, and that is a Vision and Mission. So just to provide you a gist of this, Mission is answering “Why are we running this business”, and Vision is finding an answer to “Where do we see ourselves in maybe 10 years”.

Often, I have seen businesses starting their operations and then taking loans for business expansion, but eventually using them to fulfil their short-term working capital requirements like maybe paying vendors to keep getting supplies, paying salaries, and taking care of other operational expenses with the same money. Few months down the line, these companies realise that the debt fund raised to expand business has neither created any new asset, nor developed any new business opportunity. In a sense this money has not been able to increase or generate new cash inflow and the business is left with a loan (short-term or long-term) to be repaid along with a hefty interest.

Such mistakes should particularly be avoided during the initial stages of business since they have a potential to put it in a never-ending debt spiral. In this the business is continuously borrowing money to pay off previous debt and is not left with any money for taking care of its working capital needs, or to further invest in expanding operations. One way of beating this is maintaining a healthy debt-to-equity ratio which is the key to controlling dependency on debt especially in the early stages of business where cash inflow can be limited, and operational expenses are on a higher side.

Below are a few key things I did, or rather disciplines I suggest one follows to avoid such mess in the early stages of business:

• Always be strict with the credit period given to the clients for payments. Remember the more days they take in making the payments, you lose on cash needed to drive your operations. 

• Try and ask for advance payments even if it means giving some affordable discounts to the client.

• Maintain a touch base with clients so that they remember you for their requirements, and also so that they don’t forget to pay their dues. 

• Keep your suppliers happy by paying on time. This is especially important in the early years since the suppliers are reluctant to open credit line to new and small businesses. Remember, in business – trust is everything.

• Save money and then strategically invest in expanding business. Even if the expansion is being financed by debt, be sure that your working capital needs are taken care of. Always raise the amount of debt that you are confident the business will be able to pay off.

• Finally, having a strategy for your business goes a long way in ensuring financial discipline. Keep your business strategy aligned with your financial requirements so that there is no overindulgence with debt and a monetary discipline is followed.

I guess this sums up my key concern with most of the small and young businesses, and I hope this helps in forming a good strategy for operating in markets and expanding your business operations. Always remember,

 

Discipline is everything!

 Manan