Choosing the Strategy
Perhaps you are a new entrepreneur about to launch a business or innovation you have been dreaming about for years. Or maybe you have an established business and things are going well, or maybe even too well. In both instances you are going to need capital - the 'oxygen' that every business needs to grow and prosper.
So now you are writing your first business plan or touching up the old one in anticipation of raising capital. Capital can only come into a business in one of two ways.
Capital that is generated internally through positive cash flow from business operations (e.g., selling stuff), or from external funding sources. The new entrepreneur is limited to only one option - external funding sources. The established business is hopefully generating positive cash flow, but may require additional capital.
Which funding option is best? Is it best that the capital come from only one source, or does it make more sense for the capital to come from multiple sources? How do you decide? How you decide to capitalize the business is called your capital formation strategy.
There are undoubtedly a number of other factors to consider depending on your company`s current circumstances, and, quite importantly, where you want your company to go in the next few years.
How do experienced executives determine the best capital formation strategy for their company? First, in considering all of the internal and external factors listed above and, of course, those not listed above, it is time to eliminate those sources of capital that for one reason or another are not available or appropriate at this time.
Next, think about the business plan you`ve just written or updated and then build a financial forecast that includes a balance sheet, income statement, and cash flow statement.
These forecasts should be presented monthly and annually so that you can see how future changes in the business such as increased sales, additional staffing, or seasonality will affect cash flow. Remember, you don`t want to run out of money. Now that you have your capital formation strategy organized and ready to execute, you may want to confer with your stakeholders and advisers and listen carefully to their feedback.
Posted by
Tom Brown
I`m Tom and I own and run Facilis. I am a Chartered Accountant with 23 years post qualification experience.
After qualifying I spent 16 years out in industry as a finance director, with experience across manufacturing, service and distribution sectors, before starting Facilis back in 2005. I always aim to bring a positive approach, an independent mind and look to be your `critical friend` in the development of your business. I have always tried to break away from the dry, dull grey image people get when they think of accountants. You will find me friendly and approachable and what I really enjoy is helping people.
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John Doe
What an informative article! Thanks for sharing!