What’s the difference between short-term money and long-term money?
This isn’t a trick question!
If you’re unsure of the answer, you’re not alone.
Most business owners don’t know how to answer this question.
So I’ll illustrate the difference with an example …
Sandy opened a luxury hotel a few months ago, and business is booming.
Opening just before the seasonal peak will do that!
Now that the quieter season is approaching, Sandy needs to fund the growth of her hotel by keeping it running until business picks up again.
Like most business owners, Sandy thinks getting a loan is her only viable answer.
But if I were the FD to Sandy’s company, I’d advise her against it.
She needs money for a few weeks only, until the hotel is booked up again. Her need is short-term.
So the money she uses has to be short-term as well. That means taking money she already has in the bank from previous profits, or using an overdraft, to get her business through this period.
Short-term money solves immediate challenges, and is paid back in the short-term as well.
Long-term money is to help you grow over the long-term, takes time to get and is paid off over time.
An example of a long-term need for Sandy might be adding a spa to the hotel. This is the kind of investment that will really set her up for growth in the future.
In this case, I’d advise her to opt for a loan from the bank or find an investor. She might have to make the business case to them, and repay it over many years. But she’ll see profits from her spa over many years too, so that’s ok.
Why is it so important to understand this difference?
Over the past few weeks we’ve been talking about the need to invest in your business even when it feels risky and even when money feels tight. But you need to make sure that you get that money from the right places and under the right conditions. And the money should match the need.
If your need is short-term, you don’t want to get stuck paying back a loan with interest over the next 10 years – just like you don’t really want to add a car which you’re going to be driving for the next 2-3 years to your 25-year mortgage…
And if your need is long-term – for example you need to pay for a £100K piece of machinery that will serve your company for the next 20 years – you don’t want to drain every penny in your bank account to pay for it, leaving you with no money for emergencies.
Because you’ll see profits from this investment over 20 years, you can afford to space out the payments for it as well.
As the outsourced finance department, this is the kind of issue we consider when we help you plan your growth.
We want you to take big steps – steps that can help you grow from £1 million or £2 million to £10 million and beyond. But we want to make sure that you are investing the money in the right places, funded in the most sensible way, whilst minimising the risk.
If you are ambitious for your business and want to develop a shrewd financial plan to support your growth, then let’s talk.
Whenever you’re ready… Here are four ways I can help you sort out financial issues in your business:
1. Give your company a financial health check. Make sure there are no nasty surprises lurking in your accounts and that your cash is being handled safely and professionally. Click here to find out more.
2. Grab a copy of my book, Business by Numbers. Discover how to put the right financial foundations in place for your business, so you can grow faster. It’s like having me at your beck-and-call, 24/7, for less than £10. Click here.
3. Work directly with me and my team. If you’d like to work directly with us to make sure you take the very best financial decisions for your business and grow faster, just reply to this message and put “Working directly” in the subject line. Tell me a little bit about your business and what you want to achieve financially, and I’ll get back to you with details.
4. Join our ‘Just One Day’ programme.
We’ll spend a day with you and your directors, putting together a detailed, workable plan to drive your business forwards. Perhaps for the first time, you’ll achieve complete clarity on where you need to take your business – and exactly how to get there. ‘reply’ for more details.
