When communicating your financial strategies or a business plan for a new start-up business or expansion to your existing business you need to keep it SIMPLE. Simple is an acronym for a few key elements that you need to bear in mind when writing your financial strategy paper or business plans.
Solutions to problems: It is important to address business problems in your business plans to demonstrate to the reader that you are prepared for these problems and that their capital will be protected if the problems arise.
Interaction: When preparing your business plan you need to pay attention to the relationships between facts and figures related to your business. Most of these are logic i.e. when you employ more people you would expect running costs to increase, but there are some that are not necessarily logic i.e. you would expect additional cash resources if profits increase but this might not be the case if the cash resources are invested in assets to increase future production or if the cash is used to repay debts. Knowing the interaction between figures in your business plan will help you later to take the right action to correct problems.
Possibilities: When highlighting the possibilities of the business you need to remain realistic and relevant to ensure the reader of the business plan remain interested. The business plan must be realistic in order to convince the reader to invest in the business.
Language: It is important to keep the language in your business plans professional yet understandable. Be aware of technical jargon. While using industry jargon demonstrates your knowledge of the industry it might be wasted on the reader of the business plan. The business plan reader is often a person outside your industry and might not understand all the jargon used in your plan. Make sure jargon is minimised and explained.
Every case is unique: When submitting your business plans it is a good idea to add a cover letter to ensure you add a unique and personal touch to the submission. The cover letter will introduce your business plan to the reader and highlight why you think the business plan will satisfy the finance provider's lending criteria.
The key message is to keep the communication in your business plan simple and factually correct to ensure the reader remain interested. If you need help writing your business plan, why not consider using the coaching service of SA Business Plans.
Saturday, 25 October 2008
Sunday, 12 October 2008
Levarage
Lots of the current bank defaults on the international scene is blamed on these institutions being over geared. I therefore though it will be good to post a note on leverage. Leverage is the generic term used to refer to the ratio between your business' own funding and the funding it gets from external sources.
When we talk about "own" or internal funds we refer to the amount of share capital and profits that a business has. External finance consist of loans and other credit facilities (long term and short term finance).
Getting the ratio right between internal and external funding sources is important. If a business funds all its activities through internal sources it might miss out on opportunities for expansion due to the lack of investment because of the lack of internal generated profits. On the other hand if a business over depend on external sources of it runs the risk of defaulting on the loans and become insolvent.
The industry in which you operate has an influence on the level of gearing that would suite your business. If a business is asset intensive you would normally expect the business to have more finance from external sources to fund the assets, while service based business will have less external finance requirements. These are just general guidelines and leverage requirements differ from business to business.
For a more detailed look at gearing and how the ratio is calculated see the SA Business Plans or my1stBusiness websites.
When we talk about "own" or internal funds we refer to the amount of share capital and profits that a business has. External finance consist of loans and other credit facilities (long term and short term finance).
Getting the ratio right between internal and external funding sources is important. If a business funds all its activities through internal sources it might miss out on opportunities for expansion due to the lack of investment because of the lack of internal generated profits. On the other hand if a business over depend on external sources of it runs the risk of defaulting on the loans and become insolvent.
The industry in which you operate has an influence on the level of gearing that would suite your business. If a business is asset intensive you would normally expect the business to have more finance from external sources to fund the assets, while service based business will have less external finance requirements. These are just general guidelines and leverage requirements differ from business to business.
For a more detailed look at gearing and how the ratio is calculated see the SA Business Plans or my1stBusiness websites.
Sunday, 5 October 2008
Looking for finance from abroad
The lower interest rates in some of the developed world countries in North America and Europe has prompted quite a few clients to ask me to look for finance from abroad for them. The interest rates is tempting as these are often half of what we are able to get in the local market.
Obtaining finance from abroad has certain problems connected to it and the entrepreneur needs to be aware of these before pursuing this option.
The first problem is obtaining the finance in the first place. This is quite difficult as the finance institutions in the foreign country doesn't always have legal representation in South Africa. The financial institution needs legal representation to secure a guarantee against the sum it lends to the entrepreneur. Without the security the recovery of the capital sum of the loan is effectively unsecured and a high risk loan. In finance terms, high risk means high interest and the interest would go up as the risk increases.
If you are able to breach the first problem and your business secure finance from abroad you have to guard against a second issue - that of currency fluctuations. The foreign loan will quite often be granted in a foreign currency. If the Rand looses value against the foreign currency the repayment of the loan principle will become more expensive which could wipe out the benefit obtained from the cheaper interest rate. Fortunately you are able to "hedge" the movement of the Rand to neutralise the effect of any currency fluctuations. The hedge will ensure you repay the same amount you've borrowed regardless of the movements in the Rand against the foreign currency - but these "Hedge" products cost money as it is in effect an insurance against the Rand loosing money.
Other issues that might arise from foreign loans are additional legal and advisory costs, different legal interpretations of terms in the foreign country from that in South Africa and issues around transferring money out of South Africa.
I don't encourage entrepreneurs to look for finance from foreign sources but these are some businesses that succeeded in obtaining this kind of finance and at SA Business Plans there have been business plans written with a view to secure finance from abroad.
Obtaining finance from abroad has certain problems connected to it and the entrepreneur needs to be aware of these before pursuing this option.
The first problem is obtaining the finance in the first place. This is quite difficult as the finance institutions in the foreign country doesn't always have legal representation in South Africa. The financial institution needs legal representation to secure a guarantee against the sum it lends to the entrepreneur. Without the security the recovery of the capital sum of the loan is effectively unsecured and a high risk loan. In finance terms, high risk means high interest and the interest would go up as the risk increases.
If you are able to breach the first problem and your business secure finance from abroad you have to guard against a second issue - that of currency fluctuations. The foreign loan will quite often be granted in a foreign currency. If the Rand looses value against the foreign currency the repayment of the loan principle will become more expensive which could wipe out the benefit obtained from the cheaper interest rate. Fortunately you are able to "hedge" the movement of the Rand to neutralise the effect of any currency fluctuations. The hedge will ensure you repay the same amount you've borrowed regardless of the movements in the Rand against the foreign currency - but these "Hedge" products cost money as it is in effect an insurance against the Rand loosing money.
Other issues that might arise from foreign loans are additional legal and advisory costs, different legal interpretations of terms in the foreign country from that in South Africa and issues around transferring money out of South Africa.
I don't encourage entrepreneurs to look for finance from foreign sources but these are some businesses that succeeded in obtaining this kind of finance and at SA Business Plans there have been business plans written with a view to secure finance from abroad.
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