Here, I break down two difficult financial decisions faced by business owners and what they should do to stay afloat.
In the same hour last week, I had two conversations with entrepreneurs at very different stages of their ventures. And while their specific issues were very different, the theme of how to manage and balance cash flow was the same and consistent.
In the first situation, two partners are opening a new retail business and need signage to entice traffic.Their budget allows for $10,000 of signage, but the quote for the electronic sign came in at over $20,000. The vendor then offered them their “next best thing” for $12,000. Or a competing vendor offered a wooden sign for $6,000.
The partners must decide how to allocate their money.There is a lot of uncertainty of a business that has not opened its doors yet.
As I hung up the phone and ended that conversation, the next entrepreneur had a different dilemma.They were in the process of refinancing $1,000,000 of debt and were debating between a five-year note at 6 percent interest or an SBA note at 8 percent that amortized over ten years. Their accountant had crunched the numbers and was strongly advising them to take the lower-priced note, even though their monthly payment would be $10,000 more with that option.
In both situations, the entrepreneur must look forward, and think about what is coming up over the next 12 to 36 months — and make their decisions accordingly.
For the new start-up, while they have a budget of $10,000 for a sign– if they can get a good option for $6,000 — this allows them to put some money into reserve for the unexpected. After all, early-stage forecasts rarely go to plan.
And for the more established entrepreneur– the accountant is technically right from a pure dollars and cents perspective that the shorter-term note is cheaper. But what they are not taking into consideration in that analysis is what happens if the economy flips, or business slows down dramatically. If this happens, they will regret not taking up the cash flow savings from the more extended offer.
So how do you make these decisions? My advice is always to stand on the side of the caution. For the start-up, I would encourage them to take the cheaper sign to start. If things start going gangbusters in their business, they can consider replacing it one day.
And my recommendation to the business owner who is refinancing the debt is to take the longer-term loan. In a good year, they can pay it down. And when they hit a rough spot, as will invariably happen along the way, they have the benefit of the smaller payments.
Ultimately, cash is king. Play your hand accordingly, and you will likely enjoy a long journey.