Sometimes, even the best Cash flow managers need to borrow money. The dilemma is: when is borrowing money to finance a business a responsible thing to do? And when is borrowing only going to dig a deeper hole in the cash flow? Here’s my tip to answer that: start by asking yourself these four questions before you make any major purchase:

1. What exactly is needed? Identify clearly on a piece of paper what is required and why. Do you need a means of improving production? Do you need a…something or other… to increase your sales? Or, do you need a little extra to get you through a temporary downturn?
2. How is this purchase going to increase your bottom line? Will the new piece of equipment decrease the production costs? How? Do you expect the new line of inventory to increase your overall sales? How? If it’s an influx of cash, how is it going to help and what strategy will you use to get back on track?  
3. Are there costs involved? I’m talking about costs you would not normally incur, but will be necessary once the deal is made and the financing is in place. For example: will the new piece of equipment require regular maintenance? What are the costs involved? Will the new line of inventory need a special display shelf or special advertising? What are the interest and bank charges associated with the temporary influx of cash? Are there any hidden costs such as downtime, training, utilities, legal fees, or health & safety regulations?
4. What financing alternatives are there? A bank loan isn’t the only alternative as I’m sure most entrepreneurs know. Leasing can be a viable option, but one that needs to be explored carefully. Sometimes, vendors will extend normal payment terms in order to entice you to take on their product line (key here is to negotiate). A line of credit can help smooth over the rough periods. And a credit card, when used wisely, will help in emergencies.

I encourage everyone to write the answer to these four questions in a narrative format first. It helps to clarify in the mind the necessity of the purchase; and helps to eliminate impulse buys. But at some point, you need to transform the story into cold hard numbers. You need to know that your cash flow is going to be able to handle the payment terms or expenses inherent with the new purchase. Your accountant can help you in calculating your return on investment, the effect on cash flow, and which type of financing best suits the purchase you are making.

So when is it NOT a good idea to borrow money?   The simple answer:   if your business has been running in a cash poor situation for a while now and even the best cash flow management system in the world isn’t going to help that situation.   End of story.

Ms. Andrée Cusson is a Certified Management Accountant (CMA), a Sage 50 Accounting Partner, and Intuitive Consultant. She provides controllership services; management consulting; strategic alignment; tax planning; Sage 50 (formerly Simply Accounting) turnkey set up; and “work smarter, not harder” strategies and advice. Her passion for the past 15 years has been to assist entrepreneurs and individuals with fulfilling their financial goals and dreams. Her practice is based in Oakville, Ontario, Canada.