How to Effectively Manage Your Borrowings

Poor management is the reason why some owner-managers have trouble when they try to borrow. Those managers often fail to forecast and to plan for cash needs. The resulting business ailment is a "cash crisis."

Sound management must be practiced if loans are to be obtained and used profitably. Such management included: knowing the firm's cash flow, forecasting cash needs, planning to borrow at the appropriate time, and substantiating the firm's payback ability.

This Guide includes examples of the following: a cash budget forecast, a projection of borrowing requirements, and a cash flow schedule for repaying a loan.

In spite of respectable sales volumes, many owners of businesses run into financial trouble. Some get in so deep that they are barely able to pull their heads back above water. Others find themselves only weeks or months away from tacking "out of business" signs on their doors.

Often these owner-managers have three things in common. First, they know their line of business. Their technical ability is first rate. Second, they are poor managers. In many instances, they fail to plan ahead because of their enthusiasm for the operating side of their business. In the third place, most of them feel that additional money will solve their problems. They think that a loan will pull them out of the red.

Lending Officer's Viewpoint

Often a bank lending officer refuses or "declines" that loan request of such manager-owners. It is not that a banker lacks appreciation for the hard work and long hours which these owners put into their businesses. Nor does the bank question their good intentions.

Foremost in the lender's mind is the question: Can the firm pay back the loan? Thus, in many cases, the lender refuses the loan because the owner-manager hastily and haphazardly prepared the loan application under pressuring circumstances. As a result, the lending officer detects an air of instability and lack of planning in the owner-manager's description of his or her affairs. "how is the borrower really going to repay," the lending officer asks, "if the borrower doesn't actually know how much money is needed and how it is going to be used?"

If your request for a loan is turned down, the best bet is to accept the refusal gracefully and look for weaknesses in the presentation, You can correct these weaknesses when applying for a loan in the future.

Pertinent Questions

The lender needs the answers to several pertinent questions to determine whether or not the borrower can repay the loan. One of these questions is: What does the borrower intend to use the money for?

What Kind of Money? When you consider borrowing determine what kind of money you need. A business uses four basic types of money in its operations. Your purpose in borrowing will determine the type.

1.  Trade Credit. This type of "money" is not borrowed. It is money you owe your suppliers who permit you to carry your fast-moving inventory on open account. A good credit experience is proven evidence of your ability to repay borrowed funds.

2.  Short-Term Credit. Banks and other lenders will provide this type of money to carry you in your purchases of inventory for special reasons, such as buying inventory for the next selling season. Such loans are self-liquidating because they generate sales dollars. You repay short-term credit in less than a year.

3.  Long-Term Credit. Such loans - for more than a year - are used for expansion or modernization of your business. They are repaid out of accumulated profits. Usually, the evidence of this type of loan in a business is a mortgage or a promissory note with terms.

4.  Equity Funds. This type of money is never repaid. You get it by relinquishing a part of your profits to an investor. That is you sell an interest in your business.

Many owner-managers fail to recognize the difference between the four types of money. You should keep in mind that money borrowed for a temporary purpose should be used in the profit producing areas of your business and will be repaid out of that operation. Equity funds are those which remain in the business and increase the net worth for the owner.

Are Your Sales Adequate? Are you asking for a loan to bolster sagging sales volume? To buy additional stocks of high-volume merchandise which you feel has even greater potential? To create a new image by an over-all advertising campaign?

What Is Your Receivables Position? Are your accounts going uncollected and getting old? In effect, do you really need money to carry old accounts?

Is Your Profit Margin Adequate? Are you doing a lot of business and showing a lack of profit thus indicating that expenses are not controlled? Or is your market insufficient? What is your break-even point for profits?

What Is Your Plan For Repayment? Do you forecast your cash income and expenditures realistically?

The lender scrutinizes the cash flow of the business to determine whether or not the owner-manager is providing sufficient cash to meet the firm's obligations. The lender also has to make sure that cash needed for working capital is not being absorbed by the business into other areas of equity and thereby reducing liquidity.

Compare your budget occasionally with real operations figures. With powerful records you can do this. Afterward, where
discrepancies appear you can take corrective actions before it's too late. The proper decisions for the ideal corrective action
depends upon your understanding of management methods in buying, pricing, selling, selecting and training staff, and tackling
other management problems.

You probably are thinking you are able to hire a bookkeeper or an Accountant to deal with the record keeping for you. Yes, you
can. But remember two very important facts:

1. Supply the accountant with true input. If You Purchase something And also don't record the amount in your business checkbook,
the accountant can not enter it. If you sell something for money and don't record it, the accountant won't know about it. The
records the accountant prepares will be no better than the information that you provide.

2. Utilize the documents to make decisions. If you moved to a physician And he told you you were ill and wanted certain medicine
to get well, you would follow his guidance. Should you pay an accountant and he informs you that your earnings are down this year,
don't hide your head in the sand and pretend the problem will go away. It won't.

Business Management Roll in Personnel Selection. If your Small Business Will be big enough to require external help, a significant
responsibility will be the choice and training of one or more workers. You may start out with relatives or business partners that
will help you. But when the company grows - as you hope it will - the time will come when you must select and train employees.

Careful selection of personnel is essential. To select the right Employees decide beforehand what you want each one to perform.

Then search for applicants to fill these particular needs. In a small Business you may need flexible employees who can shift from
task to task as needed. Include this in the description of those tasks you wish to fill. At precisely the exact same time, look
ahead and plan your hiring to assure an organization of people capable of accomplishing every crucial role. At a retail store, a
salesperson may likewise do stock-keeping or bookkeeping at the start, but as the company grows you will need sales people,
stock-keepers and bookkeepers.

Once the project descriptions are composed, line up applicants from whom To make a choice. Do not be swayed by customers who may
suggest relatives. In the event the applicant does not succeed, you may lose a customer as well as a worker. Some sources of
possible new employees are:

1. Tips by friends, business acquaintances. 2. Employment agencies. 3. Placement agencies of high schools, business schools, and
colleges. 4. Trade and industrial institutions. 5. Help-wanted advertisements in neighborhood newspapers.

Your next job is to screen want ad answers or application Forms sent by employment agencies. Some applicants will be eliminated
sight unseen. For every one of the others, the application form or letter will serve as a foundation for the interview that ought
to be conducted privately. Put the applicant at ease by describing your business generally and the job particularly. Once you've
done this, encourage the applicant to speak. Picking the proper person is extremely important. Consult your questions carefully to
learn everything about the applicant that's pertinent to this job.

References are crucial, and should be checked prior to making a final decision. Check through an individual visit or a phone call
directly to the applicant's immediate former supervisor, if at all possible. Verify that the advice given you is accurate.
Consider, with judgment, any negative remarks you hear and what isn't said.

Checking references can bring to light significant Details Which may help save you money and future annoyance.

Personnel Training. A well-selected worker is only a possible Asset to your organization. Whether he or she becomes a true asset
depends upon your training. Remember:

To allow sufficient time for training. Not to expect too much from The trainee in too short a time. To allow the employee learn by
doing under real working conditions, together with close oversight. To follow along with your training.

Check the worker's performance after he or she has been in work For a moment. Re-explain key points and short cuts; bring the
employee up to date on new developments and encourage questions. Training is a continuous process which becomes constructive
oversight.

Personnel Supervision. Supervision is the next essential of personnel control. Fantastic oversight will lessen the expense of
operating your company by cutting down on the number of worker mistakes. When mistakes are corrected early, employees will find
more satisfaction from their tasks and perform better.

Motivating Employees. Small businesses sometimes face special Issues in motivating employees. In a large business, a Fantastic
employee can see An chance to progress into management. In a small company, you are the management. 1 thing you may wish to Think
about is to provide great workers a Small share of their proceeds, either via part-ownership or even a profit-sharing plan.
Somebody Who has a"share of this activity" will be more Worried about helping to make a success of the business.

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