The Business Plan: Part 3 - The Money Issue

Back in the 1970’s ski shops and sporting goods businesses were mostly family affairs. Many of the proprietors were former jocks, self-taught entrepreneurs and colourful individualists, to say the least.

In 1979, a start-up that broke the mould, opened on Yonge Street in Toronto; a high rent district if there ever was one. As the story goes, the founder was neither a jock in the traditional sense, nor was he particularly experienced in the sporting goods business. Old-timers might have questioned the entry into a business in which there was, apparently neither expertise nor experience. A key factor was that the entrepreneur had sold some family businesses to a national chain and there was cash available. Before long, the abundance of cash and talent became apparent. The large, beautifully appointed and merchandised store brimmed with all the sought-after ski and sports equipment and clothing. In one motion, it catapulted the business into a new era of glitz, glamour and pizazz. A triumph of bucks and brain, it has been a flagship for the high-end sporting goods business in Canada; a Toronto landmark that has lasted more than 32 years.

The saying, in the industry, at the time was, “Wanna make a million in the ski business? Start with two”.

A less well-known story, also true, involves a hard working sporting goods store owner who struggled through every week. Loved by his customers and employees, he was chronically short of cash and perpetually hounded by his banker. Legend has it that one day, after many years of agony and near-death, he won the Lotto; the BIG one. Upon collecting his cheque, he had the exquisite pleasure of walking into the bank manager’s office, paying off the loan, in full, with a few added words that can only be imagined. He rewarded his long-suffering manager generously and, when last heard from, was enjoying all that the comfortable life can offer.

Somewhere in these two mostly-true stories there is a moral: money changes everything.

If you own a business now, or would like to start one, imagine what a game-changer it would be if you suddenly were handed a large sum of money, with no strings attached. You could pay off debt or avoid incurring it. You could buy more equipment or inventory so you could make those sales that would otherwise, have been lost to your competitors. The business plan you’ve developed for your start-up has only one fatal flaw: you just don’t have the capital. Without adequate capital, all of your bright ideas, your plans and your dreams will never see the light of day.

Whether a business plan involves a start-up, an expansion, downsizing or steady-as-she-goes operations, capital and the flow of money are at its heart. For the rest of this dissertation, we’ll assume that you, like I, will not be the recipients of financial windfall. Our businesses will stand or fall on the funds that we alone can invest, along with what we can borrow.

Investment comes in two forms; equity and debt. That is, you, and perhaps others, invest a certain sum of money in the enterprise and, based on the credit-worthiness of the principals, you may be able to borrow additional funds to stretch the capital base.

There are a few things to remember about investment and debt. First, every investor should understand that he or she could lose everything. This is simply a risk inherent in investing in a business. A lender, on the other hand, is not willing to accept risk. A loan carries with it an undertaking to repay the principal on a certain schedule, along with interest on the principal. A loan carries with it a guarantee that, if the business is unable to repay the loan, under the terms of the agreement, the guarantor is immediately liable for the balance.

Some would-be business owners have the impression that they can take a business plan to a lending institution, with the expectation that loans will be granted on the strength of the presentation and the business concept. It certainly helps if the business concept is sound and the business plan is well presented. But, the sum that the lender will be willing to risk will be based on the personal equity of the borrower and the amount that the entrepreneur will invest in the business.

The context of our discussions is small businesses grossing one million dollars or less, with ten employees or less. This implies a single proprietor or a couple of partners. Financial institutions may lend money to large corporations without personal guarantees but, where small business is concerned, the process is not much different from securing a car loan or a home mortgage.

There are mechanisms such as the Canada Small Business Loans Act that “encourage” lending to small business. The program is delivered through the established consumer banking system, so the criteria still boil down to the net worth of the borrower.

The Business Development Bank of Canada offers loans, venture capital and consulting services to businesses, old and new. Generally, the more buildings and equipment the business owns and the more jobs it will create, the better the chances of securing assistance. At times, sources like the BDC can help when the commercial banks have refused. This kind of “last resort” borrowing usually comes at an interest premium.

The Canadian Youth Business Foundation offers start-up loans and mentoring to young entrepreneurs aged 18 to 34. The loan sums are modest but, the experienced business mentor that comes with the loan can be priceless.

In the rural and semi rural areas, across Canada, the Community Futures Development Corporations aim to grow small business entrepreneurship by providing funding for business plan consulting, loans for business facade improvement and loans for plant development where jobs will be created. The CFDC is a joint undertaking of federal and provincial government and is administered in many one-stop local offices.

One way of leveraging capital is to start a business with a partner or, admit an investor-partner to an ongoing business. If you have $25,000. to invest in a new enterprise and your partner has an equal amount, now you have doubled your capital. You also may now have two families to support and two sets of expectations for the business. And, don’t forget, possibly two sets of spouses who may have ideas of their own about your business. Partnerships can be a successful blend of complementary skill sets and experience. They can also have the potential for endless disagreement on every element of the business. Partnerships, like marriage are not to be entered into lightly and never without a written agreement, drafted with competent legal advice, setting out remedies for every contingency in the relationship.

Whether planning a start-up or an expansion, the entrepreneur should analyze the funds needed to successfully operate the business, in terms of initial capital and operating cash and how the funds will be applied to physical assets, inventory and operating cash, before approaching a lender.

Before any plan can be developed, the business owner needs to get a realistic grip on financial reality and set the level of expectation accordingly. If the scale of the business is unrealistic, given the funds available, perhaps the business can be re-sized to fit the start-up resources. Many successful businesses that have been started on a limited budget have eventually grown to meet, or exceed original expectations.

In a later topic, we’ll discuss the management of growth; a vital skill in sustaining a healthy small business.

Dave Hands


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