Addressing a major challenge of startups; how lack of funds make a business idea useless

Addressing a major challenge of startups; how lack of funds make a business idea useless

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One common piece of advice given to fledgling entrepreneurs is to follow your passion and do what you love.

The idea is that by building a business rooted in something you are already passionate about, it will be easier for you to push through tough challenges and to be successful.

The reality however is that, passion alone will not make a business grow. A business plan is all conceptual until you start filling in the numbers and terms.

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea.

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Unarguably, finance is the most important aspect in business. Money is the blood that keeps businesses in operation.

Not undermining other factors, finance in business is not a want , it is an indispensable need.

Commonly, many potential entrepreneurs underestimate it's power and this affects them in the long run.

I have seen young , exuberant and passionate entrepreneurs with multi million business ideas struggle in business due to the lack of adequate finances. Sooner or later, their business is susceptible to collapse.

Though there are many other factors that account for this , the number one factor is : Financial Insufficiency.

Conceiving a business idea and starting the business is the first and relatively easier part of business, but for many, the headache is in keeping the business running.

Initial money required to operate the business until the business begins to generate its own income is called start-up capital or working capital, without it , doom is invoked.

Due to this factor, research reveals that, a larger portion of companies fail within the first 18 months of operation. Mostly due to liquidity challenges.

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Observationally, it takes two to three years for a business to be profitable on average.

Meaning to keep the business running, entrepreneurs must pay incessant bills , pay workers , pay taxes , and disburse money to sustain the operation of the business ; from personal funds or startup capital.

Consequently, many entrepreneurs who are financially insufficient are unable to implement their business ideas thoroughly.

Before you despair, this article does not seek to discourage you from embarking on your entrepreneurship goals. This article seeks to highlight on the need of adequate financing in business and inform readers on some important source of funds entrepreneurs can rely on to morph their cognitive business ideas to reality.

The next most important step after conceiving the business idea and identifying your market is planning financially.

The financial section of a business plan is one of the most essential components of the plan.

Just as the popular saying goes , "when you fail to plan, you plan to fail".

Most often than not, entrepreneurs do not take into critical account the "financial what's and how's" , for instance, how long will it take to break even and make a profit ? What reliable sources of income can I rely on?

How long can I stay open without making a profit? Financial planning is imperative in business planning.

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In Ghana when you rent a store it is usually for about 3 - 5 years. In conventional terms it can take 2-3 years for a business to start making profits.

Notwithstanding, entrepreneurs are still required to pay rent for that period, especially for "brick-and-mortar" businesses.

If the business is not making enough money yet, they must still pay rent perhaps out of personal savings else face evacuation. One can only begin to imagine the dire consequences of financial insufficiency in business.

The good news is that , there are many means of accumulating funds for a business. As the saying goes "we spend money to make money", for that matter when starting a business, the first source of funding is oneself.

Money that the owner puts into the business is called equity capital.

By so doing, it proves to other investors and bankers that one is committed and is ready to take risks. Why would another person take the risk of investing in your business if you are not prepared to take the risk yourself?

Alternatively, one can obtain funds from friends and family.

Many entrepreneurs prefer this source because the pressure on paying back and interest on such loans are quite low.

People with whom you have close relationships could be reliable if you prove to be competent and convincing.

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According to credible sources, one entrepreneur to use this method is Aliko Dangote of Nigeria.

However, one disadvantage to family or friends financing your business is that you may put the people you love best at risk, when you are unable to make enough revenue to pay back loans.

Consequently, you lose more than money—you lose valuable relationships.

Debt financing is another source for funding a business.

Banks and savings and loans organizations play an indelible role in that.

However, in Ghana, securing loans from banks can be very difficult especially if you are not financially credible.

Many banks are risk averse and have stringent rules about what they can and cannot invest in.

All the same , if one is able to convince them affirmatively they are likely to be offered assistance.

Other alternatives for financial backing may include Angel Investors (wealthy and business people who invest their time and money in high-growth business in exchange for equity) , venture capitals among others.

Obtaining success is a perfect marriage of timing, opportunity and preparedness. Reach for your goals , but prepare financially.

Article written by:

Obeng Silas , The African Panacea.

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