Examining working capital, Davidson says accurate assessment of the company budget at the outset is essential to sustain early stage growth. Attempting to start the operation from an undercapitalized position runs too many risks. Funds raised may be used more rapidly than anticipated, creating cash flow problems. Companies who seek additional investment (from either new or existing investors) to pay off existing liabilities can make the venture appear unattractive, if not unprofitable.

Further, operating solely on sweat equity — in that the business owner leverages personal financial resources and those from angel investors such as family and friends in the hope that hard work will lead to success — may bring similar problems to bear. Working from sweat equity is not a virtue. By constantly scraping funds together to maintain the business, the company is kept in a state of financial struggle, and time and energy diverge from pursuits for growth.

Davidson says preparing cash flow statements at the outset is crucial to determining capital requirements, as the statements provides a snapshot of the company at any certain point in time. Unfortunately, the majority of companies that are facing funding shortages fail to have such timely financial information.

When undertaking a course of remedial action, Davidson says the best way for a company to understand its present financial picture is with a rolling daily cash flow. Mapping the daily use of cash over a six-week period provides management with in-depth understanding of the cash flow cycle in order to identify and avoid spending.

Daily reports will also help the company take note of spending variances, and will aid in its immediate investigation. During this time, management should both centralize chequing and payment systems, and approve all expenses. To complement this action, flash sales reports during this period should be prepared to determine how much actual business is being done. Bank statements should be reconciled as well to confirm that actual in-and-out money is accountable.

Yet cash flow projections require managerial interpretation, including a detailed explanation of what those figures will mean, to be effective when dealing with investors. If expertise from within the company is not present, Davidson says, the owner/entrepreneur should establish a board of directors who can consult in a structured manner. He says ideal candidates for board members should have an understanding of financial statements, industry-specific expertise, a proven track record, general business experience, and personal dedication to the success of the business. "It is very important to receive input from outsiders, and having a good board of directors is necessary," he says. "It is not easy to build up the management side, but if you have committed advisors, you will have people to bounce off ideas."

While finding the right directors may take time, a transitional approach may be informal advisors. Seminar moderator Mark McAlister, development officer of the Canadian Technology Network, says not everyone can make a formal commitment to become a director, but an informal advisor may be an agreeable post, allowing the entrepreneur to consult the person in a sounding board capacity. "Informal advisors can provide advice, leads for sales and supply, and sometimes financing," McAlister says. "This can be of particular benefit when you are still in the very early stages of business development."

McAlister says a good way to find advisors is to actively build your professional network. He says you should network at least once a month. When you have begun to develop rapport with networking acquaintances, explain your needs for professional advice. Many times they will be more than happy to refer you to someone in their network. This will also help build your industry profile.

Introduction & Warning Signs

Do's & Don'ts