Dependence on Financing


Welcome to this week’s installment on planning and forecasting, and our final post on the series on metrics all small businesses should be monitoring! Head over to our Youtube channel and take a look at this article from FinancialPost.com learn more.

https://youtu.be/1pPOsE0hF28

This week’s topic is about dependence on financing sources, and by this we mean: are you dependent on the use of a line of credit? Are you dependent on an investor? Are you dependent on any other kinds of loans? Are you dependent on one single customer? In our experience, it seems like over half of the businesses we’ve seen got started because they got a deal with one customer. Then they built a company around that. The true entrepreneurs took that opportunity and built real companies, while others, 10-20 years later, are still dependent upon that first company. They remain, essentially, independent contractor employees of that client, and they are completely controlled by that client, thus never able to break out and build a business.

To some point, the question of your dependence on financing sources is: do you have a business or do you just have an arrangement? Because ultimately, a business becomes a stabilized self-regenerating organization, where its revenues keep the engine going. That’s the new gas in the tank, every day or every month, that fuels the engine, and it actually grows. If you’re doing 75%, 80%, 90% of your revenues with one organization, you basically own your own job at that point, but you’re very beholden to the one client, and frankly those situations never end well. They may go on for years and years, but they never end well.

So you need to engage in planning and forecasting and expand the business. There’s nothing evil about these customers, of course, but if you’re dependent upon them, and dependence dictates certain behaviors, then those behaviors will not be indicative of a thriving business. Alternatively, if you are relying upon a particular investor for constant new inflows of capital, or on a line of credit going up and down, these are also situations.

Now, many organizations start out new and have investors come along. If you and the investor are working the plan, and there is a plan for the dependence upon that capital to end at a future date, just say less than two years… work your plan! Especially because you’ve got all these other metrics on customer growth and gross margins, so you can actually anticipate when you will cease to depend upon new investor cash flows.

Lines of credit, alternatively, make you dependent upon that financial institution. The financial institutions, they change over time, and almost always their their intentions change when you least expect it and and when you most need it. We’ve seen situations where lines of credit are canceled, right at the beginning of a financial crisis, so know your financial institution, communicate with them often, and make sure you understand their changing credit policies and how it may impact you.

If you need help looking into any of this, just give us a holler! We’re happy to dig in and help you take a look.

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