I have been living in our dorp — term for a South African small village or town — on the coast for over 14 years now. At its heart is the business center which contains approximately thirty small and medium sized businesses.
Of these businesses, only half have been in existence the entire time that I have lived here. The remaining business premises see new businesses come and go every year or so.
Why is this?
It’s mainly for two reasons. One, it’s because the business owners that arrive and only last a year have just tried to copy a successful business in the area and have failed. Or, two, they have not done their math and have been unable to get past the break-even point before their capital has run dry.
“Funding Your Business without Selling Your Soul,” by Stephanie Sims, deals with the second problem, and aims to educate and teach both new and would be entrepreneurs about understanding and managing the finances of a business.
The book also contains information on the options available to fund a business when more capital than the business owner can themselves contribute is required.
Many new businesses are started when the owner has recently had a windfall. They use the money to start a business so that they no longer need to work that 9-to-5 job which they have been working as a means to earn an income.
By having the money to open up a business of their own, they believe that through hard work alone they can make a good living doing something that they want to do.
Additionally, they see that with this comes the benefit and freedom of being their own boss.
Unfortunately, a large majority of these new businesses fail because the owner simply did not do their homework and, in particular, their math.
In the first part of “Fund Your Business without Selling Your Soul,” the author outlines the need to keep your business separate from your personal finances. Basic accounting principals are covered, as is the reason why it is important to determine how much money your business venture will actually need.
As the author points out:
“Knowing what you need to survive is critical.”
These basic accounting principles include the use of income statements, balance sheets and cash flow statements which can be used to determine your progress.
However, in my opinion, the most important area covered, and which many a novice entrepreneur fails to understand, is the need for working capital and how to calculate the amount that will be required.
Failure to do this can be devastating as it often leads to entrepreneurs either dipping into more of their ever depleting personal finances, or simply having to close down their business due to a lack of funds.
As Sims states:
“Many experts agree that one of the biggest reasons for business failure is lack of sufficient operating capital.”
Once these basics have been covered, “Fund Your Business without Selling Your Soul” goes on to discuss the various options that are available when in need of funding for your business.
Options such as taking out a bank loan, borrowing money from friends and family, taking on a partner, and finding an investor are all discussed.
However, before seeking funding, the author points out the need to first understand the worth of the business and your time and how this can be calculated.
This is an important factor because if you do not understand the value of your own business and how you aim to increase its value, it is highly unlikely that you will be able to convince any type of investor to invest in your business.
As there are a variety of options when seeking funding, the author spends much time discussing these different options. She points out the pros and cons of each which will be dependent on circumstances and future goals.
Understanding your needs and future plans for the business and the motivators for each type of investor enables you to make an informed decision as to which type of funding to seek. It is not a good idea to simply take the first money that is offered as it may turn out to be a decision you come to regret later on.
Sims points out that for the investor, risk is an important factor, and one that any investor will have at the top of their list of considerations when deciding whether to invest in a business or not.
What many small business owners fail to realize is that if the business is unable to function without the presence of the owner, then that is a high risk. Yet, a common failing of many a new entrepreneur is to try to do everything themselves, believing that in doing so they are saving money.
What they are actually doing is hampering growth, putting themselves under enormous pressure, and reducing any hope of external financing should they ever need it.
For the novice entrepreneur seeking guidance about how to meet and manage the financial needs of their proposed new venture, “Fund Your Business without Selling Your Soul” provides a good insight as to what should be considered. Furthermore, by providing an insight into the various options of acquiring financing, it should give the reader plenty of food for thought, and hopefully help prevent them taking out the wrong type of financing should financing be needed.
About the Author
Stephanie Sims (@Finance_Ability) possesses twenty-five years of investment banking experience having worked with the likes of Goldman Sachs, CSFB and Lehman Brothers. In 2009, she founded Rimalu Ventures, a consulting firm aimed at helping small businesses with their financing.
For more information about the author, visit her website.