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After operating for a year-and-a-half as an interior design company, the owners of Halifax-based Amazing Space Interiors decided to expand into selling furniture in a retail space. So they worked with a local credit union to secure two government-backed loans totalling $95,000.

Then they left the money mostly untouched for two months.

“We spent weeks and weeks just planning – getting quotes on the construction work that needed to be done and figuring out how much we needed to spend on inventory,” recalls Carla MacLellan, who owns Amazing Space Interiors with her daughter, Lynzie Smith.

“We had to decide, where do we cut costs and where do we spend extra to get the most out of this investment? It took a good two months before we finally broke ground.”

For many small-business owners, a sudden infusion of capital can be a heady experience. With this cash on hand, plans that had been put on hold – hiring more staff or buying new equipment, for instance – can finally move forward and drive the business to the next growth stage.

The owners also had to decide how to spend two government-backed loans totalling $95,000. (Paul Darrow for The Globe and Mail)

But this happy circumstance comes with a particular challenge: Given that most small businesses have more than one area of operation in dire need of investment, how can owners ensure they’re making the most of their capital?

Before they spend, entrepreneurs should do as Ms. MacLellan and Ms. Smith did, business experts say: Create a plan detailing how they’ll invest the money, based on the strategic direction they’ve set out for the business.

“Whether you’re getting love capital, a government grant or financing from foreign investors, it’s important to prioritize the investments you want to make in a way that positions your business for growth,” says Omar Allam, chief executive officer and founder of Allam Advisory Group, an Ottawa-based business. “At a high level, this means looking at where your business is at present and determining how you should allocate the money you have now to take you where you want to go.”

It may seem easy enough to take current performance and extrapolate future revenue based on an expanded sales force or an additional product line.

“When I tell people that you can actually predict performance by doing financial modeling, they often say, ‘Wow, I didn’t know you can do that.’”
Bernadeen MacLeod, president and CEO at MentorWorks Ltd., Cambridge, Ont.

“But businesses often have unrealistic expectations in revenue,” Mr. Allam says. “Another problem is that not many small businesses have a cash flow plan, where they break down the structure of their operation and itemize how much they’re spending on the various areas of the business, such as business development and marketing.

“If you don’t know exactly how much you’re spending in specific areas of your business, then how can you decide where you need to spend more to take your business forward?”

It’s also important for business owners to know what product or process improvements would make a notable difference to their customers, Mr. Allam says. For instance, will a new telephone system, or a redesigned product packaging, lead to more sales?

Bernadeen MacLeod, president and CEO at MentorWorks Ltd., a Cambridge, Ont., company that helps businesses win government grants, says entrepreneurs should do some financial modeling before deciding where to allocate funds. Using a spreadsheet program such as Excel, owners can use their business data to create what-if investment scenarios.

The owners also had to decide how to spend two government-backed loans totalling $95,000. (Paul Darrow for The Globe and Mail)

A business looking to hire more sales people, for instance, can build scenarios based on different salary or commission structures, revenue projections per person, as well as costs for new employee training, mobile phones and employment insurance premiums.

“This allows you to see which scenario will give you the best return for your investment,” Ms. MacLeod says. “When I tell people that you can actually predict performance by doing financial modeling, they often say, ‘Wow, I didn’t know you can do that.’”

An inflow of capital can create conflict when business leaders don’t agree on how the money should be spent, notes Armen Bakirtzian, CEO and co-founder of Intellijoint Surgical Inc., a Waterloo, Ont., medical device company that has raised more than $7.5-million in funding since it was founded in 2010. That’s why it’s important to ensure owners and managers have the same mindset about how capital should be invested.

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“It’s very difficult to raise money, but it’s very easy to spend it,” he says. “As part of the culture of our company, we’ve always believed that every dollar we spend should have multiple values in terms of return to the business.”

To ensure Intellijoint’s funds are put to the best possible use, Mr. Bakirtzian says he and his partners consult with two advisory boards: a corporate governance board and a scientific advisory board.

“We’re really trying to focus our spending on things that will deliver value to us in the shortest period of time,” he says. “So even though we’re a research and development company, we are starting to tone down our R&D and starting to shift our spending more toward sales and marketing.”

At Amazing Space Interiors, the $95,000 in loans that Ms. MacLellan and Ms. Smith obtained almost five years ago has led to a significant increase in revenue. The business has grown from a two-person consultancy working out of a home office to a full-service design and retail company with four employees.

With their original loans almost paid off, the pair recently borrowed an additional $50,000 to expand their inventory and buy another business.

This time, they plan to put more money into marketing and advertising.

“That’s one area we fell down on the last time we got capital,” Ms. MacLellan says. “Now we’re going to do it right.”

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