We’ve all heard the old adage, “A dollar saved is a dollar earned.” But many of us forget its distant cousin: “A dollar needlessly borrowed is two dollars actually spent.” Remembering the second adage comes in handy when it comes to contemplating financing.

If you’re like most businesses interested in financing, it seems to make the most sense to focus your energies on raising money and figuring out how and where to spend it once it is actually in hand. Not unreasonable, but not the best strategy either. And here’s why:

The result of this pattern – having money in hand without a sound plan for effectively allocating it – is often how businesses find themselves sinking money into unprofitable business areas or unnecessary resources.

So how do your steer a sound course while making the choice that is right for you? Here are three simple principles to guide your thinking when it comes to financing. 

Don’t plug a hole, plant a tree

When it comes to financing, the first question we ask a client is: What do you intend to use the money for? Usually this is answered with alacrity. But it is usually silence that follows our second question: Does spending this money in this way actually further your business objectives? 

Decisions involving money can often be quite emotionally charged, compelling the business to obtain financing to plug a perceived hole.

One client, a large manufacturer, was doing fine, but not close to what they (or we) perceived as their potential. Their growth strategy was to plug a perceived hole: obtain more money to sink into expanding their inventory to offer a broader range of products for their customers. At first blush, not a terrible idea. But when you factor in that one of their primary obstacles to growth was a presently bloated, unmanageable inventory, well….you get the picture.

What we decided to do instead was to plant a tree. We developed a clear and thorough picture of their business. We mapped out their business goals, objectives, needs, growth strategy and resource requirements – capital and otherwise.

Only when we had accurately determined what we were going to need the money for – a new inventory management system – did we begin to explore financing options.

Before you venture outside, take a good look inside

Obtaining capital efficiency in your business before raising money is critical. How this translates in practical terms is having a clear understanding how money moves your business – knowing where, how and why capital flows within your business.

Many of our clients, after a little prompting from us, take a good look inside their operations, and are pleasantly surprised to find ready opportunities to generate more cash through improving sales, increasing inventory turnover, or streamlining business processes. Try it yourself, and like cleaning out the back of the closet and finding a 20 in the pocket of an old jacket, you’ll be glad you made the effort. 

Manage your finances, don’t let them manage you

Whether you are an established business or a start-up, your success will be dependent upon your changing business needs and growth requirements, which in turn are ultimately dependent upon money.

Now there is no question that building realistic financial projections or budgeting plans is hard work. But consider the alternative: pay no attention to things like calculating gross margins, profitability, cash flow, and break-even points, and you’ll soon be in a position where you’ll never have to worry about financing again, because you will no longer be driving a viable business.

Money alone is seldom the answer to problems caused by a lack of money. Financing is much like rain: it’s not inherently good or bad, nor solely responsible for a good harvest. Its real value depends on how much, where, when, and for how long. 

Look closely and objectively at your business, and you may just find that your best growth solutions are not necessarily all capital in nature. And remember that financing is an important business tool – not a strategy – that you can use to strengthen your business’ present and future. After all, the best way to predict the future is to invent it today.

Miin Lim is a senior business advisor at Ascent Group, a firm specializing in optimizing service delivery to generate revenue & create sustainable long-term value. Contact Miin at contact@pushthelimit.com and the team at www.pushthelimit.com.