Dustin Paisley, ATB Entrepreneur Strategist, and Dennis Agbegha, ATB Manager of Entrepreneurship, helped us answer a few key questions about this essential part of owning a business.
In a startup’s first year, how important is it to have a solid financial plan?
There’s a famous quote from Mike Tyson that goes, “everyone has a plan, until they get punched in the face.'' It's important to understand your numbers, and project a few financial scenarios, but to understand that not everything goes as planned. Especially in your first year. You’re testing a lot of assumptions when you’re brand new to business.
However, the important factors are that you understand your financial model and what you need to do to achieve profitability. Whether it’s in Month 3, or Year 3, you need to plan accordingly with the right financial backing. In some cases, that means both traditional bank lending, and private capital if your personal funds are short.
Are there financial products or services that can have a major impact on an entrepreneur’s journey?
Depending on the type of company, a Revolving Line of Credit is an incredibly useful tool for a business. It helps stabilize cash flow as your receivables grow, and if you’re a product company, can help bridge the gap between paying to produce your products and when you actually get paid. In your first year in business, you’re going to learn a lot about the difference between revenue, and cash flow. A Revolving Line of Credit helps to bridge this cash gap that can often appear.
Here’s a scenario:
It’s Thursday afternoon and your bi-weekly payroll runs tomorrow. You have a few staff members on payroll which means you’re going to have a large sum of money leaving your account. The problem is you paid an even larger sum of money for goods last week, and again this week.
You’re scheduled to receive a payment from a vendor on Monday, but you don’t get paid by your largest customer for their order until next Tuesday. That cheque is great, but it doesn’t solve your problem of not having enough money in the bank today. You’re going to be short on payroll.
As the business owner, this likely means you’re not getting paid tomorrow since you’ll likely pay your employees first. This is a stressful situation every entrepreneur wants to avoid, but ultimately, many will face.
A business line of credit will act as an overdraft, and in the above scenario would allow all payments to come in and out of the account, up to a certain amount, without the owner having to worry. Payroll will run, bills will be paid, and when the vendor cheque comes in next week, the line of credit is paid off and there’s a surplus in the account. It’s business as usual.
The worst time to go to your banker, is when you really NEED money. In the above scenario, going to your bank on the Thursday when payroll is due Friday is not the best time. It’s best to speak to your bank when you don’t need immediate access to this facility. Instead, approach your bank when you’re preparing for some growth and pro-actively work to put something in place for your planned growth ahead. This will ensure that when the time does come to needed a credit facility, it’s in place and ready to be utilized.
In addition, your banker should be one of your best friends in business. The bank is responsible for moving your funds, providing you financing, and ultimately, helping you grow. Much like an investor, you’re more likely to be successful in obtaining funding when you have an existing relationship with that individual. Your banker should be there to assist with, and help you grow your business.
If you don’t currently qualify for funding, work with them to understand how you can get there, and what you can do together to be ready. Just like a business has a relationship with their accountant, lawyer, suppliers, vendors, etc. they should also have a relationship with their banker.
How do banking needs change and evolve from startup to growth?
As companies grow, typically, so does the strain on cash flow. Although your revenue grows, so does your overhead, and more clients can often mean more payment terms that further increases your cash gap.
If you’re a product company, an increase in demand will mean you’re paying more money to produce more products, and in return, as your customer base grows, so does your receivables. This can often mean less cash available at any given time as your receivables list grows. It’s important to avoid buying any fixed assets (vehicles, equipment, etc.) using a revolving facility such as a line of credit as this takes away your working capital.
What is the transition like after the first year of banking?
The first year in business is exciting and full of learning while you bring your dreams to life. Your banker can walk you through the process of what you’ll need to get started, including some beneficial offers like free business banking for startups in 2019.
After the first year of business banking, it’s not likely to be an abrupt change, but rather a smooth transition into your changing needs. Typically, your banker will call you to review your transactions and experience during the year. Through staying connected and having these discussions, you and your banker are able to choose the right accounts and ensure you have the services you need to keep thriving.
You will also be planning for the coming year, and looking at how the bank can help with products such as a line of credit or a term loan, to ensure you are ready to fly.
As an Entrepreneur Strategist, Dustin meets with business owners (like you) to discuss strategy, growth, and everything in between. Having grown a successful venture of his own, Dustin is well versed in the startup world and can help you get started on your planning.
And when you’re ready for Financing, Dennis, a Manager of Entrepreneurship, is ready to help you get that plan into action with your banking and financing needs.