In an earlier SME blog I discussed the need to use the correct finance for the task at hand. A reader concurred with me, and asked how to make the decision, in order to make less demands on cash flow.
I suggested at the request of a reader of the blog, that they need a decision system to assist them in decision making, so that they do not make decisions with their hearts, but rather with their minds. Ideally this is better suited to a decision tree. Maybe someone who is reading this can give it back to me in a graphic format which I can paste onto the blog.
1. Is this a recurring cost ie. Is it going to be paid every month or is it a single payment?
2. If a recurring payment then it is to be funded from working capital.
3. If you have insufficient working capital, then you may need to consider an overdraft facility with your bank or a short to medium term (1 to 3 years) loan from your bank if they do not offer overdraft facilities, depending on the country you are in.
4. If a single payment, is the payment amount for an item that will be used for a period longer than three years?
5. If the item is a consumable item, such as tyres for a vehicle, then pay for it out of working capital.
6. If the item is an asset such as a computer, manufacturing machine, vehicle etc, then it must be considered for purchase as an asset and should be considered for purchase using asset based financing.
7. If the bank or an asset based finance house will finance it, then it is quite likely something that should be financedI hope this is of help and welcome questions. It is rather difficult to do something this potentially complex in a short blog.
Rob Smorfitt
Showing posts with label capital. Show all posts
Showing posts with label capital. Show all posts
Thursday, June 5, 2008
Wednesday, June 4, 2008
SMEs - the correct use of finance (2/2007)
One of the common mistakes we make as SMEs, is to use our working capital to purchase fixed assets. I see it happen so often and must admit to having done it myself from time to time.
SMEs tend to ignore the working capital needs of their business, and instead look at their bank balance, when they need to purchase an asset. A month later they cannot pay their bills.
This is linked in a way to a culture of "pay cash" that many older entrepreneurs have. These are the people who lived through the 1930's depression, and avoid credit. They too have had an impact on their children, the baby boomers, who to a lesser degree take a similar approach.
SMEs need to pay more attention to the different financial needs they have, and to then use the correct source of funding. Cash is not always the best answer, just as much as credit is not always the correct answer.
Next time you need an asset, talk to your accountant. There are a lot of factors that influence the decision, such as gearing, cost of capital, opportunity cost. If these terms are strange to you, then talk to your accountant when making the decision.
Rob Smorfitt
SMEs tend to ignore the working capital needs of their business, and instead look at their bank balance, when they need to purchase an asset. A month later they cannot pay their bills.
This is linked in a way to a culture of "pay cash" that many older entrepreneurs have. These are the people who lived through the 1930's depression, and avoid credit. They too have had an impact on their children, the baby boomers, who to a lesser degree take a similar approach.
SMEs need to pay more attention to the different financial needs they have, and to then use the correct source of funding. Cash is not always the best answer, just as much as credit is not always the correct answer.
Next time you need an asset, talk to your accountant. There are a lot of factors that influence the decision, such as gearing, cost of capital, opportunity cost. If these terms are strange to you, then talk to your accountant when making the decision.
Rob Smorfitt
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