May 2005

ABCs of Accounting: Women Investing in Business

One of the most serious issues we face as we start our new business is the need for capital. We must have cash to get our dreams off the drawing board and into reality. The sources for this cash can be limited for a start-up company.

The first place to look for capital is to our personal resources. What do we have to invest in our new venture? Savings, rainy day accounts, credit card availability, retirement accounts…each must be evaluated for contributions to the business. This process can be very unsettling, but dreams must have funding to become more than dreams. Do we have a spouse that can support the family while we get our business off the ground? Do we have family that can help with expense savings (for example, a grandmother or aunt or church that can provide no cost or low cost care for our children)?

The next place to look is at our friends and family. Do they have resources that they might be willing to invest or loan to us for our new company? If they wish to invest rather than loan, do they have other skills that they may want to contribute to the new venture? Will that further our plans or inhibit them?

Another source of financing is leasing. By leasing equipment, machinery, vehicles, premises, etc., the cash required today is less than if we purchase them outright and will have less of an impact on our ability to borrow than financing the purchases might.

Lastly is borrowing from a financial institution. I leave this for last because this can be difficult for a new business. Banks will look at your personal credit, how long your business has been in existence and the quality of your business plans and prospects. Many banks find start-ups a little too much to handle. If this is the case, the Small Business Administration can help. The SBA guarantees a part of the loan that the bank makes to you so that the risk the bank assumes is less. This is not a sure thing. The SBA has its own evaluation process that you must meet. The loan process and the forms that must be completed can be found at www.sba.gov. One advantage to this process is that even if you do not receive a loan guarantee from the SBA, going through the paperwork and the process will clarify your goals and how you intend to achieve them.

So we get the capital necessary to start our company. Whew! Now we can relax. No! Small businesses need capital. That is not a surprise to any of us that have started a business. However, we sometimes don’t recognize that the need for capital is just as urgent as our business grows. After we have been in business for a while, we may want to heave a big sigh of relief that the stress of getting our new company off the ground has eased. With that sigh of relief may come the urge to pull some of the profits out of the company for personal expenditures.

The problem is that if we are going to continue to grow our businesses, every dollar we can leave in the company is vital. If our sales are increasing, we must have cash flow to pay for increasing amounts of inventory and accounts receivable. New employees must be hired to handle products, sales and administrative duties.

The fact is that for our business to grow we must have money “up front”. If we cannot acquire inventory, if we cannot extend credit to our customers or if we cannot afford the personnel to meet our customer’s needs, our business will remain static or decline. This means that our sacrifices for our company’s success will extend beyond the start-up period. Dynamic growth can be as challenging to manage as starting the company. It is a problem, but what a good problem.

Our options in providing the liquidity to help this growth along include leaving all or nearly all earnings in the company or obtaining a working capital loan. The first option is the most appealing if you can achieve it since there will not be the additional burden of interest expense. If your business’ cash flow is so cyclical that reinvested earnings just will not meet the needs, a working capital loan is the next option. The working capital loan can help you level out the cash needs and resources.

A working capital loan for a growing business can be easier to qualify for than the loan for the start-up phase of our company, but it will still require planning, patience and time. We must also recognize that certain working capital loans can feel rather invasive. The reporting that the bank may require can be extensive. Weekly or monthly reporting of specific inventory levels, sales prospects, confirmed sales, aged receivables are all part of what the bank may request. However, as with the SBA loan application, by identifying this information for outside parties, we may acquire new views on how our business is doing and what can make it stronger.

There is one additional factor that hasn’t yet been mentioned. It is that during the phases described above, we must always keep a close eye on our expenses. By keeping expenses and costs to the minimum necessary, we create additional equity that can be invested for growth. This is not easily quantifiable but is very real.

The challenges of business ownership are very real. The risks are ours to take but the rewards are ours to receive. And after all, that is what we want when we choose to be self-employed small business owners.