Financing Growth and Investment of Capital

Financing Growth and Investment of Capital
Monday, October 22nd, 2012 Scott Bossart

                If your business is performing well or even fairly well and you feel you’re ready to grow in size, a key driver could be financing.  Determining how to finance growth can be an extensive exercise processing not only the options available but also the math equations required to ensure new growth is not a dive into an empty pool of dept.  Many options are available to obtain the financial resources required for expansion or growth of an organization; Bank Loan, Private Investor, Personal Investment, Internal Cash, Public Investor, etc.  I won’t focus necessarily on where you seek financial support targeting an injection of cash to grow or expand.  It is the detail of the fiscal plan, how an infusion of cash will be used, and the fiscal forecast (business case) as a result of the increased capital.  This is key to anyone or any organization you are looking towards for the investment of cash into your business.  If you plan to use internal cash, the main concern is the risk of fiscal weakening as potential losses occur until the new program or expansion takes hold and you begin to turn a profit.

                Several considerations the thoughts should go into a need for an expansion or growth.  There are many situations that could exist which would justify consideration for financial investments.  If your customer pipeline is primarily full without any new marketing efforts, could be one example.  This situation could justify growth if calculating an expectation the new marketing efforts would generate new business.  There could also already be extensive marketing efforts going on and the future prospects for new business are looking very good.  Other considerations to think about is an improvement in technology, a consolidation of operations from separate locations into one, an infrastructure enhancement or upgrade, or even simply an upgrade or addition of current or new equipment into the operation.  These ideas are only a small sample of considerations business leaders should be looking at to seek an injection of added financial capital and an expansion for the organization.

                No matter what the reasoning, logic, or business case, one single key component that should be in place prior to executing any financial investment, is the existence of a thorough Financial Plan followed by the formal business case for the investment.  Several times in the past I’ve talked about the importance of a Business Plan regarding how the business is going to be managed and function.  The Financial Plan is an attachment to the Business Plan is the one thing that a financial investor, whether it be a bank or other, will look at for your thoroughness of planning and understanding while using their money.  Even if you don’t seek outside financial capital and select to utilize internal funds, if you have a financial plan you will greatly reduce unknown risks…which could ultimately be the difference in being successful vs. a failure.  With the Financial Plan in place, the business case can be built to identify the financial expectations of capital expenditures.  On a very basic sense, the business case will include assumptions, expectations, and risks.  It will establish milestones and goals starting at the onset of seeking funding through completion of the project.  It should also include the schedule for a return on the investment.  The numbers should be concise and clean.  Depending on the assumptions, the goals and schedule for returns will drive a conservative or aggressive result forecast.

                Obtaining a financial investment of capital is harder these days than ever before.  If going outside, the requirements for justification can be tricky.  The fees tagged onto some loans can also be quite high.  If you expect to have solid footing when approaching an investor or bank, it will be important for you to show them you have done your homework.  It is important to show them you have considered, documented, and calculated the assumptions, expectations, and risks.  The process of proceeding through a formal business case might reveal a flaw in your initial thinking and expose an unexpected failure or shortfall.  This is not to say there will never be un-calculated bumps or adjustments, but if you have performed the research and completed the homework, that risk will be lessoned.  The detail you put into the Business Plan, Financial Plan, and ultimately the business case for your capital investment will go a long way towards obtaining a high level of confidence and support whether infusing capital dollars from internal or external accounts or investors.  There are a lot of resources available to assist you in this endeavor but in the end you and/or your accountant have to have the confidence it was done right.

Stay Well

Scott B.


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