Securing external financing is often regarded as the most difficult problem facing entrepreneurs and small business owners. The critical issue of creating an optimal capital structure can make or break a business. Should you issue more equity? How much debt can you take on? Those decisions depend heavily on the nature of your business, industry structure, and current strength of your balance sheet.

An area that most small business owners neglect is that of accessibility. Beyond taking a significant amount of time to evaluate and negotiate the best financing deal, too many entrepreneurs go after money that is not appropriate for their venture. Thus, it’s critical for entrepreneurs to first understand what their business growth category is in order to focus their precious time on securing the capital that is available for their business. In general, most entrepreneurial ventures fall under three categories:

Lifestyle Business:
This category consists of new ventures that do not incur the risks associated with high growth and usually only provide a decent living for the founders. They have growth rates below 15% annually, five-year revenue projections below $10 million, and are primarily funded through internal means. Very rarely do lifestyle firms attract external investors. Most equity investors, such as venture capitalists and business angel syndicates, are more interested in businesses with exponential growth potential that fits their investment criteria. Often their objective is to reap the rewards of at least a ten times payout within five years. Realistically, most lifestyle firms need to rely on internal bootstrapping strategies, debt from banks, and love money - family and friends.

Mid-Potential Business:
These firms make up less than 10% of all start-ups and have growth prospects of more than 20% annually. Their five year revenue projections are between $10M and $50M. They are very attractive to business angel investors, but also still depend heavily on bootstrapping to fund growth. Typically, firms in this growth category do not attract venture capitalists since the market opportunity is still too small for that type of investor to make an adequate return. However, business angels play a significant role in this category and should be aggressively pursued.

High Potential Growth Business:
High potential growth businesses are the rare stars that make up less than 1% of all start-up companies. They have the potential to be a $50+ million dollar business within five or six years and tend to be the primary recipients of external equity financing via venture capitalists.

Do all entrepreneurial businesses fall under those categories? External investors use different names for them, but all small businesses will fit in one of those growth categories. As a small business leader, the important thing to remember is that the process of raising capital can take months and be a huge distraction for the management team that might even lead to business failure. Be honest about what you business growth structure is and focus your time on the sources that are truly accessible to your business.

Anyone can start a business, but only a few new ventures manage to last and flourish after a few years. According to recent Industry Canada research, over 50% of small businesses do not survive beyond year three and more than 75% fail within a decade. Regardless of your industry, you can dramatically improve your chances of success by fully understanding that a business relies on two fundamental financial elements: profitability and liquidity.

Everyone knows that a business needs to operate profitability to survive. However, many business owners forget that they must generate sufficient “liquid” cash from operations to provide the fuel to “sustain” growth. There is little benefit if a company is profitable, but has no cash with which to operate. Conversely, a business can have a lot of cash through borrowed funds or selling assets, but might not be profitable. The following are some surefire tips on how improve profitability and liquidity to build a sustainable business.

Finding Hidden Pockets of Profits

Have you ever thought about the amount of unnecessary profits that are lost due to not understanding the financial consequences of your actions? The following are just three examples of hidden pockets of profits that are probably lying dormant in your business right now:

1. Inefficient job scheduling leading to unnecessary overtime
2. Providing discounts when the customer did not ask for them
3. Poor fixed asset management resulting in unnecessary write-offs

By focusing more on how your actions can affect the bottom line, most businesses can easily add on several profit percentage points almost immediately.

Improving Liquidity

Cash is the life blood of any business without which the business cannot function. Thus, many business owners need to carefully monitor accounts receivable days outstanding and inventory levels. High accounts receivables and inventories can drain cash, which can cause a business to fail even when profitable. Also, too much cash tied up in assets impacts the operating profitability through unnecessary interest payments on debt, bad debts from receivables, and redundant inventory. The easiest way to improve your cash flow is by better managing your receivables and payables. Here are just three examples on how to improve cash flow from receivables:

1. Get retainers or deposit payments immediately when a sale is made
2. Do credit checks on new customers who make significant orders
3. Issue and follow-up invoices promptly

In essence, improving liquidity is about delaying your outlays of cash as long as possible while trying to collect cash as fast as possible from the people who owe you money.

Sustainability

As mentioned before, sometimes a business can have cash, be profitable, but cannot sustain growth. For instance, a business might heavily rely on a high margin fad product that only has a product life span of about 12 months. Thus, a key to building business sustainability is to examine the impact on profitability and liquidity when making both short-term and long-term decisions. It might just make the difference in you being in business next year and down the road.