If you had R100,000 to invest and I offered you a risk-free, 15% guaranteed per annum return on an investment option, you would be quite happy to hand over your money to me – wouldn’t you?

After all, you won’t have to work for the money and the capital is guaranteed. Most people who have the capital of their own would be relaxed about investing in something like that.

Why then, do so many people who don’t have the money, go out and borrow it, usually from friends and family, to invest in business ventures that provide no guarantees, either of getting their money back, or of providing them with an income?

And don’t laugh! The business world is full of people like this!

Well, there are a few reasons why someone would do this:

• He might have lost his job and starting up his "own" business means some form of employment security for him.
• He would rather make money for himself than for his former employers, believing he can probably do it better anyway.
• He is confident in his own abilities and technical expertise to make a go of it, or -
• He’s just desperate!

Quite often, then, – its just ‘a wish and a prayer’ thinking that gets them started!

The number of people I have met who sincerely believe that their dreams are reality is staggering.

One lady came in to register a Close Corporation for her new business. When I asked her what her business was, she said that she hadn’t started it yet. (To start with, you don’t go registering corporate entities, at great cost, without first establishing which one is right for your business.) Then she told me that her friends and family had told her that because she was such a great cook, she should start up her own restaurant. That was the basis on which she willing to float her new business!

Many of these sincere dreamers have actually lost touch with reality, and once we unpack all that goes into a business start-up, they come back to earth with a bump!

Now, I don’t want to rain on everyone’s parade, and its certainly not my intention to blow every business idea out of the water, but based on my own experience, and what I have observed over the past 35 years, I believe I have a responsibility to point out some of the problems I see from time to time.

So, – how do we go about it – the right way?

THE FIRST THING!

The first thing we must do is look at the potential venture from an investment point of view. So, using the example I started this chapter with, the question every would-be entrepreneur should ask is this -

- Is this new business I want to start likely to be a good investment? Would I invest in it? Would others?

In other words, I need to be reasonably sure that the return is commensurate with the risk.

In business there are no guarantees – right? So, if the risk is high we will then want a return that is also high – wouldn’t we? What, after all, would be the point of going into a risky business venture where the potential returns are small?

As a general guide therefore, I believe that the potential return on such an investment, before interest on borrowings, and tax, should be equal to at least three times what we would get from a risk-free, interest-bearing investment.

And, – that is after paying ourselves a salary for the work we will do in this business. I say this because very often, business owners don’t bother to separate their investment in the business, from their employment in the business. If you’re going to be working hard, you need to be paid a salary that is commensurate with your skills and the work you produce.

So, – if we could get a 10% per annum return on a risk-free investment, we would expect to generate a return from our business of 30% per annum, or more, on the amount of money we originally invested in it.

Another reasonable test would be to see that the business has the capacity to generate sufficient income to repay your investment within a period of 18 to 36 months. This is called the Payback Period.

These guides are not cast in stone, and not always applicable, but are a simple and quick way of helping you to make a decision.

THE SECOND THING

Once we’ve settled on that yardstick, the second thing to do is put together a well-researched, professional business plan. It is important that we participate fully in the plan ourselves – because it’s our plan!

I do believe, however, that once we have collated all the information we need for the plan, we should use the services of a professional to put it together in a way that we will be able to use on a daily basis.

It needs to be used rather like an instruction manual. The cost will be well worthwhile in the long run and may even save us the loss of all our capital in a venture that may be doomed from the outset! I often tell people that I would rather spend R10,000 on a good business plan, – and never start the business as a result – than lose R300,000 (which I might have borrowed!) on a poorly-planned business venture.

The plan will be used, -

• firstly, – to convince ourselves that we’re on the right track.
• Secondly, it will be invaluable if we decide to borrow funds to buy equipment, and for working capital.
• Thirdly, it will give us an operating budget for at least the first year of trading, that we can monitor against our actual income and expenses, on a regular basis.

It must include absolutely everything we can think about in respect of our potential business – things like,

• where are we going to operate from?
• What are we going to sell?
• Who are we going to sell it to?
• Who is our competition?
• How much labour will we need?
• Is it readily available and sufficiently skilled?
• Where will we get our major supplies?
• What terms will we get? – And many more!

(At Finserv, the coaching and financial management practice that I run, we facilitate workshops to design these Business Plans. We find it’s helpful to have someone who can facilitate this: gather all the thoughts into a meaningful summary of where the business should be headed.)

Even businesses that have been established for a number of years need an updated business plan each year. If for nothing else, it shows that you have been thinking about your business and where it is going. If you’ve never done one, now is the time!

THE THIRD THING!

Once the plan is complete, and we assume that the financial component of the plan tells us that the business is viable, the third thing we must do is determine whether we have access to sufficient capital to get it started.

There are essentially two types of capital in a business -

• own capital and
• borrowed capital.

The ratio of the one type to the other is referred to as ‘gearing’. A business that has borrowed a lot of money; much more than what the owners have invested, is referred to as a highly geared business.

Financial institutions generally do not like to lend more money to a business than the owner is prepared to do. So, – in spite of our sentiments that we can make the business work, we should be guided by the fact that if lenders are not willing to risk the necessary capital, the venture probably has little chance of success. Self-belief sometimes simply will not carry the day, on its own.

Strangely enough, I have also heard a number of business owners complain that the reason their businesses struggle is because the bank won’t advance them any more money! While that is true to a certain extent, it is more than likely that the business started off with insufficient own capital and has never managed to catch up. In addition, it probably means that unless something drastic is done, and soon, the business may not survive anyway. Remember, – banks do have access to all sorts of information which enables them to make reasonably sound lending decisions!

In all honesty, would you be prepared to lend money to someone for an investment, if he is not prepared to match it with a similar amount? After all, if you believe in your business enough – and you’re prepared to back yourself in running it – you should be willing to give everything you’ve got to make it work!

So, if your current business is suffering from under-capitalisation, you need to urgently take steps to improve that situation, preferably using own capital to avoid the increased cost of borrowing. Before you do that, however, you will definitely need to review your operation to make sure you’re not chucking good money after bad!

Some handy tips are explained under the heading of ‘excessive spending’ further on in the book about managing costs. Otherwise, get some wise counsel from a professional!

Paddling upstream against the current all the time, you will soon notice two things – you’re going nowhere, and you’re getting tired. Spending some money on the right counsel could well save you the journey and the exhaustion – and your investment to date as well!

IF I DON’T HAVE ENOUGH CAPITAL OF MY OWN, WHERE CAN I GET SOME?

Well, there are lots of informational web sites which will help you. In South Africa there are also lending institutions like "Business Partners", who specialise in venture capital, even though it does come at a cost. Some links worth investigating are at:

http://www.ventureworthy.com/Grants-for-starting-a-small-business.asp
http://www.southafrica.info/business/trends/newbusiness/credit-060307.htm
http://www.businessowner.co.za/Article.aspx?Page=23&type=30&Item=1850

The last link may prove to be the most helpful, but in case you cant access it, I have copied the pertinent details of "Where to get Finance" in APPENDIX 1, and their "Comprehensive Directory of national small business services" in APPENDIX 2 at the end of this book.

What you must constantly bear in mind though is that lenders will need to be convinced that your business idea is worth backing. If the business plan has been professionally prepared, and the numbers work, they’ll back you!

If you find that the recognized lending institutions are reluctant to fund your new venture, try and avoid going to more dubious sources. It may be that you need to shelve the idea for a time – at least until you have been able to raise some capital of your own.

Whatever you do, DON’T launch your new business without sufficient capital! It will be like trying to run the Comrades Marathon with just a few days training. You won’t make it!

IF I CAN’T RAISE THE CAPITAL, DOES THIS MEAN I’LL NEVER HAVE MY OWN BUSINESS?

Absolutely not!  Some of you might have seen an advert on TV some time back – Rand Merchant Bank – I think it was!  Their aim was to show how like to employ innovative people, so the one they used was a young black who came across a disabled old man in the street, busking for a living.  Starting small, he starts trading various items like apples, cups of coffee and eventually works up towards a wheel chair, which he then presents to the old man.  The ‘moral’ of the story is ‘use what you’ve got’!  The small fruit vendor on the side of the road could eventually own a string of fruit and vegetable shops.

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