How to Deal with Financial Management in Your Business Plan – Part 1

By now you’ve started to realize that a business plan is more than a few rosy promises in a brochure. The next area in which you should deploy your resources and gather information is financial management

Instructions

Difficulty: Easy

1. Establish a separate business bank account.
   
   We’ll cover the process involved later. This step is essential because you never want to mix your business and personal money. The charges for a business only account are tax deductible. Charges applied to a personal account, even if for your business, are not. It shows professionalism when you invoice in your business’ name and accept checks made out to it.
2. What is your source of equity capital?
   
   Are you paying for your venture out of savings? How much money do you have? This is vital information you need to share with your executive staff. I was hired once as the Vice President of Technology and Marketing for an Internet video start up in the midst of the boom. The president / owner spent lavishly, rented office space, hired a large staff and gave every impression of being well heeled as we chased large television clients to offer them the technology they needed to reach viewers on the web. In just three months, we were suddenly in crisis mode scrambling to make pay checks. He had never told me how much seed money he had.
3. How will you borrow what you need to tide you over the rough spots?
   
   A great source of small business lending is the Small Business Administration that offers guaranteed loans through banks, a major reason why you need to develop a business plan. Venture capital firms can be enticed by a compelling presentation as well. Several of us turned to family and friends. If you borrow there write up the loans formally, with a fair interest as a rate of return and pay them off monthly as you would any other loan. Vague promises to give people a piece of the action to repay the loan will only cause major problems later whether your business succeeds or fails.
   
   Years ago before I had credit established I was desperate for a car loan. Coworkers at the TV company that employed me suggested approaching the owner of the catering truck that supplied us with lunch. He seemed like a friendly guy. He always had wads of bills in an all cash business so I asked for the modest amount I needed. He said that he knew where I worked, liked me and would be happy to give me a loan. He put out his hand to shake on the deal. “Just one thing,” his eyes grew cold as his jaw firmed. “Your collateral is your life.”
   
   I decided to bike to work a while longer. Extralegal funding is the worse way to finance any purchase.
4. Don’t succumb to the temptation of easy borrowing on credit cards.
   
   As soon as you file your DBA (more about that later) the low interest credit card offers will start flooding in. That initial rate is just a tease. Once it expires business credits cards can charge as much as 29.5% per annum. It’s legal usury and when you are just getting started it’s easy to carry a balance. We’ve all heard stories of directors who become great successes after maxing out their credit cards to finance their first feature films. Some of the stories are urban legends, like alligators in the sewers of New York. Don’t do it.