Sources Of Funding

There are many stages of the business life cycle where additional funding may be required. Start-up, growth or even due to some tough times in the market, funding needs to be sought in order to supplement the cash flow and ensure that business activities can continue during the relevant period.

Fundamentally, there are two main sources of funding, Debt and Equity and both of these have their pro’s and con’s. When determining which is the most appropriate for you, there will be a number of areas you need to consider:

  • Control
  • Ease of application
  • Repayment
  • Providers rate of return

Debt funding, as can be determined from the name, is basically loan funding from any one of a number of different sources, whether they be banks, retailers, suppliers, finance companies or even family and friends. The following are some of the advantages and disadvantages of debt funding.

  • Advantages
    • There is no dissolution of control of your business
    • All profits still flow to you as the business owner
    • Interest paid on the debt is tax deductible
  • Disadvantages
    • You will have to pay the debt and interest back to the lender
    • The interest will mean a reduction of profit in the business
    • New businesses can struggle to find a lender at a reasonable interest rate
    • Non-payment of the debt can lead to your business closing down

Alternatively, Equity funding means that you have been given funds in return for a share in your business. This can also be provided from a number of sources such as yourself, family & friends, private investors and venture capitalists. This also carries a number of advantages & disadvantages

  • Advantages
    • The funds will not need to be repaid
    • Less risk as you don’t owe any money
    • Your investors may be able to assist or advise you in running the business
    • Investors will be likely to put more in once you have shown them a return on their investment
  • Disadvantages
    • You no longer own all the business
    • It isn’t a quick process to get funds from investors who will want to see a range of financial and other information
    • You may not get an investor that is a good fit for the business
    • You could risk relationships if the business fails

Whichever path you decide, ensure you get professional advice before you dive in headfirst and make a decision you may come to regret.


All business owners look to grow their business, especially in the early days. You’ve started out, grinding away until your business is on a stable footing and then look to take things to the next level. You have put a massive amount of effort into sales & marketing, even employing consultants to make sure you get your message to the market and the leads come flying into your sales funnel. You’ve become a conversion machine and the orders are flying in. You start producing, you’ve even had to purchase additional machinery and take on new staff in order to manage the additional work but you are still sleepless on Wednesday nights wondering how on earth you are going to pay the payroll tomorrow.

How could you be in this position when you hadn’t had this problem for quite some time? How come you have all these additional orders but never seem to have any cash? How have you got to a position where you are going to lose your business but you have never been busier?

The answer can be very simple in that you have grown too fast and have overtraded.

Growth in a business is generally a good thing, if it is managed in a controlled manner in line with the financial resources available to the business. If it happens too quickly, without the right level of support, it can be nothing short of disastrous. The are a few basic reasons why this can occur so easily.

  • You may have to make significant capital investment in production capacity in order to meet the new demand. This can take up a great deal of cash if you don’t have other means of payment such as bank funding or lease agreements
  • Sales will tend to be made on credit and customers will generally tend to take longer to pay than expected, and not always just because they tend to. There may be issues with the invoice that mean it is put on hold by the customer until these issues are resolved.
  • You may need to increase your stocks of raw materials, which again need to be paid for. Excess stock is quite simply your cash sitting on the shelf and has to be effectively managed to optimum levels. Too little and you let customers down, too much and you risk stock being written off and your cash along with it.
  • Creditor payment terms can often be shorter than your debtor payment terms. In addition, staff wages etc have to be paid on a regular basis whether you have received payment from your customers or not.

In order to avoid the pitfalls of overtrading the following are some areas that should be managed effectively.

  • Don’t just jump in with both feet when looking to grow. Forecast the impact on the business but don’t just stop with the P&L. The cash flow forecast is of vital importance in this as it will give you an idea of how much you need to fund from cash reserves at any one time.
  • For example if you buy raw materials on day 1 and it takes thirty days to produce the end product, that could sit on a shelf for another thirty days. You then sell it on thirty day payment terms and all of a sudden you are funding 90 days of the total cost of that product before you are likely to see any cash. Take away the likely thirty day terms you will get from your supplier and you are looking at funding sixty days.
  • Minimise how much stock you have sitting on your shelf by managing your production operations effectively so that the finished goods are sent to customers as close to completion as possible.
  • Negotiate better payment terms with customers or even ask for a percentage deposit for large orders.
  • Negotiate longer payment terms with suppliers so that it more closely matches your terms with customers. This can be more difficult with new suppliers but if you have managed your relationships with existing suppliers, especially by paying them on time, they are more likely to work with you.

Product Channel Profitability

Once your business has been up and running for a little while and you have managed to start stepping back and study the performance of your organization, profitability at the business level may no longer be sufficient for your needs.

Product profitability is a means of establishing which of your products are actually driving the profit numbers and which are potentially holding you back. At the Gross Profit level, it is fairly straightforward to do as long as your bookkeeping is on point and you are careful to record your income and costs properly. By using a well-structured chart of accounts, and a little excel, you can monitor the gross profit margins and levels of each of your products in order to determine how each product is performing. To take it a step further you could then structure the analysis around which channels you use to sell your products and determine which of these drive your profit and which make losses.

Effective analysis of the profitability of your channels or products allows you to undertake the following:

  • Make decisions on whether to continue or stop products or product lines
  • Make decisions on whether to continue with each sales channel e.g. physical stores and/or online selling
  • Allow you to focus your sales & marketing efforts to either support well performing products or channels or even shore up products that you feel could perform well if supported better
  • Allow you to make decisions on allocation of scarce resources such as cash, labour hours or raw materials
  • Enable the decision-making process around product pricing
  • Enable the decision-making process around raw material purchasing

While product profitability can be undertaken at a whole profit level, small business owners that may not have the relevant skills or knowledge at their disposal, and don’t have the financial resources would be better served to undertake this at the Gross Profit level. This is a much more-simple means of understanding the profitability of your product lines and takes away the arbitrary guesswork they would need to undertake in order to be able to allocate their more general overheads to product lines and products.

In summary, product profitability doesn’t have to be a complicated process for business owners as long as the fundamentals are set up correctly and they, or their accounting staff are diligent in how they record income and costs. However, the benefit to the business owner when making operational decisions around products and channels of sale can add a great deal of value to the bottom line of their business.

Instant Asset Write Off

After a number of years of stagnation at best in many industries in Western Australia, now may be a time for thinking about the future landscape and how we position ourselves as business owners for any potential uplift in the economy. Organisations with assets that may have been sitting idle for a long period of time, or simply businesses that haven’t had the financial resources available to replace assets which have been utilized long after their normal expected useful life may now wish to look at replacing those assets.

If you are able, now is the time to do so. The Instant Asset Write Off Scheme implemented by the ATO originally gave small businesses the opportunity to write off the asset in the period of purchase, with a few requirements to do so highlighted below.

Even better, is that the assets you purchase aren’t aggregated up to the $30k, but are taken as individual assets. This means that, should you have the financial resources available, you can purchase two assets at $25k each and both can be charged to the P&L in the year of purchase.

One major point of note is that on 1 July 2020, the $30k limit reverts to $1k and so, as it currently stands, organisations have just under six months to get the assets purchased and in place in order to benefit. The following are some of the criteria in order to claim the asset write off:

Be a small business per the requirement of the ATO
The total cost of the asset must cost less than the $30k limit. Be careful of GST as if you are not registered, it is the GST inclusive cost that is applicable. Therefore a $29k plus GST asset falls above the threshold.
The asset must be purchased and used in the year that the write off is claimed.
Depending upon the asset, lead times must be taken into account for both manufacture and commissioning, and in the current climate, the securing of funding for those who don’t have cash reserves available for use can take time, so it is important to leave sufficient time to get the process completed by 30 June 2020.

Made Profit, Where’s The Cash

It’s time for the annual meeting with your tax accountant and he has advised you of a fairly hefty tax bill as you made a pretty decent profit over the course of the financial year. If your first thought is to ask yourself how you are going to pay it then you wouldn’t be the first and will certainly not be the last. Unfortunately, many small business owners are unaware of the difference between profit and cash and so when it comes to the end of the year fail to understand how they could have made a profit but have no cash reserves.

The following will give you an idea of where some of this “missing” cash might be:

Trade Debtors

The main problem here is that too many people think that once the invoice has been sent to the customer, the sales process has finished. In another article we outline the value of ensuring that you have a robust credit control process to ensure you get paid for the work you do.

If your Trade Debtor value is increasing, the gap between your profit and cash balance will also increase. You have spent money in order to be able to deliver the goods or services to the customer and that cash, and the profit that goes with the deal is tied up in that invoice. A robust process to get cash in will allow you to ensure that Trade Debtor balances doesn’t become an issue. Monitor how long, on average, it takes to get paid by your customers and take the necessary steps to reduce it or if that is not possible, plan your business cash flows around those longer payment terms.

Trade Creditors

Conversely to Trade Debtors, a reducing Trade Creditor balance means that cash is leaving the business in order for you to pay those suppliers. In the early days of setting up and growing your business you will have found it difficult to have extended payment terms, you may even be paying up front, but the longer you trade with the supplier the more chance you have of getting more reasonable payment terms.

If, for example, you have to pay on 30 days from the date of the invoice and you pay on 15 you are giving yourself less time to get the cash in from the sale of the goods to offset the out flows. However, if you take advantage of the full terms you have been given, and stick to them as outlined in another blog post, you are reducing the period of time between payment and receipt from your customer, that you have to fund the business for.

Loans and other Finance payments

While these are payments that will have to be made on a regular basis, only the interest element tends to hit the Profit & Loss account. You may have purchased some plant and equipment in a prior year that was subject to the enhanced Instant Asset Write Off scheme and so took the full benefit against profit in that first year. However, if you have a finance lease agreement to pay for that asset over five years, you will be making cash payments with no corresponding impact to the P&L for depreciation.

Dividends and/or Drawings

As the business owner you are entitled to be paid for the work you do but you may not necessarily draw a wage in the same manner that your employees do. There are a number of options available to you but not all of them will have an impact in the Profit & Loss account in the year you pay them. You may decide that you will draw a full wage and be paid on a regular basis, which will reduce profit in line with cash. However, you may decide to pay yourself a minimal salary and then pay “drawings” or directors loans if the business is incorporated, to make up any shortfall you require to meet your personal obligations. Finally, you may decide to only pay yourself out of dividends, which are taken from after tax profits and won’t have an impact on current year profit numbers.

So, the next time you are confused as to where the profit has gone as you can’t see it reflected in the bank account balances, you may have a better idea where to start looking.

Managing Risks

When you first start out in business it seems like there are so many things to do just to try and get up and running. There is a great deal of flying by the seat of your pants, learning and implementing new skills, dealing with issues as and when they arise and fire fighting as and when things occur.

Over time, when you start getting your policies, processes and procedures in place, you will hopefully create time to be able to work on areas of your business which may not necessarily be at the forefront of your mind at first. One of these is how you manage and mitigate risk to your business.

Risk comes in a number of forms such as financial, reputational, strategic and compliance. If not managed effectively, they can individually, or in combination, at worst, result in the closure of your business. The level of risk you are willing to take, known as your “Risk Appetite” will depend upon you as the business owner. There are risks that you may need to take, that are vital to the success of your organisation and there are risks that aren’t vital, but may lead to a higher level of return for you, the business owner.

There is no right or wrong answer to what risk appetite you may have, it will depend upon the circumstances around your business both internally and externally. However, one thing that shouldn’t be left to chance is having an effective risk management plan in place to aid in decision making.

An effective risk management plan will include four important steps in order:

  • Identification
  • Assessment
  • Management
  • Monitoring


It is easy to identify the risks that are blatantly obvious. The power cable trailing along the floor, the bald tyre on the company van etc. What isn’t so obvious are the items which haven’t yet occurred but would cause a major issue should they do so. What if your only skilled machine operator became long term sick? What if the supplier of your raw materials suffered a catastrophic event and closed down? Your computer system was hacked?

As the business owner, you need to take the time to think of the issues that may occur and determine the steps you may need to take in order to minimise the impact of each event.


Each risk will have its own level. The power cable on the floor may cause a trip injury to one person before it is resolved while a complete lack of raw materials could bring the whole company to a grinding halt. In order to assess the level of risk, each event should be given a score calculated by a very simple formula as follows

Likelihood of the Risk X Consequence of the Risk ( you could score each event out of 5 for each and voila)

It is up to the members of the organization making the assessment to value the risks and the business owner or senior management should look to include other staff members as they will have specific knowledge of their area of the business and will assist in a more accurate risk score.


Once the risks have been assessed, it is time to address each one based upon the score it has been given. It may be that there is a quick fix that can be utilized or it could be long term project that will require considerable resources to implement. Cost, personnel and other resources will have to be taken into consideration when determining which of the following strategies to implement:

  • Avoid                                can we change the way we do things?
  • Reduce                             training, maintenance, contingency planning
  • Transfer                           insurance, sub contract of work
  • Accept                              just accept that the risk is there, get on with it and monitor it


This one is pretty self-explanatory but a process should be put in place whereby the risks to the organization should be regularly reviewed and reassessed in order to ensure that you are keeping up with developments and are reassessing risk scores and management steps accordingly.