Financing Your Post-Disaster Business
Funding your post-disaster business plan
Once you have developed your business plan, you need to prepare budgets that implement your plan. The two important financial plans for the future of any business is the profit and loss budget and the cashflow forecast.
Such budgets may show that you need additional money to fund your plan, and when you are likely to need that money. This funding can come from your resources, the existing resources of your business, lenders, new investors, or a combination of these.
If your budgets show that it will be difficult to finance your new post-disaster business plan, the plan may need to be modified, completely revised or you may have to consider exiting the business.
These budgets can also be used to analyse the potential future financial health of your business by calculating key financial ratios.
Analysing the financial health of your business through ratios (PDF, see pages 24 and 25)
Checklist on whether you can afford your post-disaster business plan (PDF, see page 27)
Future Profitability – Profit and Loss Budget
It is important to estimate the profitability of your business as part of your planning process. This will help you determine whether your business will be successful in a post-disaster environment and give you the return you are seeking. It is important to note that your budget should be consistent with your business plan.
When developing a profit and loss budget, you will need to factor in the assumptions from your business plan. Assumptions are those key items that if they are not achieved, will make a substantial difference to the profit outcome. If you have not prepared a budget before, you may like to seek assistance from your accountant.
Business Liquidity – Cash-flow Management
Cash-flow planning is also essential for business recovery after a disaster and more broadly for business success. A cash-flow forecast will be fundamental in determining whether your business has the necessary cash to reopen as planned and to sustain ongoing business activities.
If the forecast shows that you do not have adequate cash flow, then you will need to either seek additional finance to cover the shortfall, modify your plan or even consider exiting the business.
Once the forecast is complete, you can run some ‘what if’ scenarios to measure how reactive your cash flow will be to certain changes in events, such as decrease in sales or increase in recovery costs. This will show you how quickly you may run out of cash if any of these events occur. A cash flow forecast may therefore highlight that exiting your business may be preferable in some circumstances.
Download a profit and loss budget and cash flow forecast templates.
Sources of Finance
If your business plan and budgets show you require money, whether due to a cash shortfall or asset purchases, there are several sources of finance. Each have their advantages and disadvantages, and therefore it is recommended that you review all options.
Internal Cash Flow
Funding your business through improved cashflow is one of the most favourable financing methods as there will be no compliance requirements, it does not increase your outgoings (loan repayments) and this will eventually free up time for you to improve other areas of your business.
You can improve your cash flow in several ways including:
- selling damaged stock and assets from the disaster, for example via online selling sites
- selling unnecessary assets
- seeking an extension to the payment times for suppliers
- paying suppliers on time rather than early or
- collecting outstanding debts and implementing improved processes for quicker collection of customer payments
- skewing promotions to products and services that can be turned into cash quickly
- reducing stock levels
- replacing slow-moving and obsolete stock with stock that has a faster turnover
- measuring and rewarding staff behaviour that improves cash flow
- not letting personal drawings from the business get out of hand.
Grants and Government Subsidies
Often after a disaster, governments may offer grants, cheap loans and subsidies that will be available to businesses impacted by a disaster. These grants and subsidies often require completion of documentation and the grant may take some time to be paid to your business, so you should ensure you understand these processes and allow for realistic timeframes to receive such assistance (if you are eligible).
Financing your business from a bank, credit union or other financial institution may be an option to assist in the reopening of your business. You may have an existing debt financing arrangement in place that you can use, or you may consider approaching a financial institution to provide the additional funds required.
Where your business has existing debt financing arrangements you should review these to ensure the finance facility and structure fits the new needs of the business. If you have existing lines of credit you will need to discuss with your lender if these lines of credit are still available following the disaster and if they can be accessed to fund the reopening of your business. You should also be aware that your lender may review your existing finance facility post disaster as your security may no longer exist and/or they have concerns over the viability of your business.
When looking for finance from your bank or other lenders, you will need to be upfront with them on your needs and your post-disaster business plan. It will be necessary to have written documentation to give to a potential lender detailing:
- your business plan
- the estimated costs of your business plan
- any insurance payments you are due as a result of the disaster and a copy of your insurance policies
- details of any government grants or subsidies you will be applying for or have been successful in applying for
- information on any security that can be offered to the lender
- your profit and loss budget
- your cash-flow forecast (including the loan amount and assumptions)
- historical financials (if available)
- detailed description of what the funds will be used for, how long you will need them for, and how much you need to borrow.
Even if you can finance the reopening of the business through existing funds you should still consider if debt funding may be the better option. You should seek the advice of your accountant or bank relationship manager to analyse this.
Other Finance Options
You may consider utilising your own personal funds to finance your business. You will need to carefully assess what funds are available if your personal assets have also been impacted by the disaster. It is important that the funding (for both personal and business needs) does not add to the stresses of recovery.
An alternative may be to consider seeking out new investors to help fill your funding needs. This could be in the form of bringing in a partner or others to help run the business in return for them buying a stake in your business. In some circumstances, potential investors may choose not to be a part of the operations of the business but can provide business mentoring if needed.
If you are considering seeking funds from investors, you should discuss this with your accountant and/or lawyer. An important point to remember is that by bringing in investors, the control of your business will have to be shared.
There may be an opportunity to finance the reopening of your business through a crowd funding campaign. Crowd funding is where a project or venture is funded by raising small amounts of money from a large number of people, typically via the Internet.
To assist in determining what sources of finance are best for you in a post-disaster environment and to step you through the loan application process, visit the Australian Bankers Association website.