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Doing bankable business plan: The cash flow factor

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By Emeka Anaeto
Your business plan is a blueprint for how your company, or a particular business transaction for which you may be seeking a bank loan, is going to turn out. Write a clear, detailed business plan, and you are over half way into securing a bank loan.

You’ll even be able to use it as a tool to round up non-bank, interest-free funding or grant from international agencies, and may also attract investors.

The flip side, of course, is that a bad or weak business plan will close the door to the second meeting with your bankers for loan let alone any serious funding agency or investor.

The problem with business plans is that entrepreneurs are usually so desperate and or excited to get a loan, and they rush through the planning process and never seek third-party feedback, leaving their business plans, especially the financial aspects, riddled with numerous flaws.

Most early-stage business plans focus almost exclusively on profitability, the ability to generate more revenue than you’re spending in associated costs. But, even more important to consider is the idea of cash flow, which dictates how much cash your business has on hand at any given time. Technically, a business can be “profitable” on paper, but still have cash flow issues; imagine, for example, a scenario in which the bills are piling up and your customers aren’t paying their invoices on time.

Negative cash flow can result in bankruptcy and collapse of, otherwise, a good business.  Every loan officer in every bank know this.   So make sure a cash-flow management strategy is part of your business plan.

How? First, cash flow is the net amount of cash and cash-equivalent moving into and out of your business. Positive cash flow indicates that a company’s liquid (cash or its equivalent) assets are increasing, enabling it to pay its bills, re-invest in its business and provide a buffer against future financial challenges. Negative cash flow indicates that a company’s liquid assets are decreasing. Banks use this to assess the quality of a company’s income, that is, how liquid it is, which can indicate whether the company is positioned to repay its loan.

Consequently your bank will require you to do what they call a “statement of cash flows.” Even without a need for bank loan, any business that wants to avoid sudden death should be regular with cash flow statement.

The cash flow statement indicates whether a company’s income is languishing in the form of unpaid debts or is translating transactions, sales into cash.

It should be easy to know if your business has negative or positive cash flow if you keep proper records, even in basic book-keeping. No bank will touch your loan request if this is not the case with your business.

If you don’t have such process your business already some banks may offer a help by providing you with accounting support services, but they will charge you for this, and obviously this will elongate the loan delivery time.

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