Strategic Funding – Where To Find The Capital Your Business Needs

Strategic Funding – Where To Find The Capital Your Business Needs

Funding growing businesses is one of the major challenges any entrepreneur and business owner will face, and while there is an increasingly vast array of options available, figuring out how to access these funds can be a very time consuming, frustrating experience, even for the most seasoned business owner.

Whether you need working capital to support your growth, raise funds for a push into a new market, introduce a new product range or even have a requirement to raise funds for a new business venture, figuring out what you need to do and where to go can be difficult. With the advantage of “doing this for a living”, this report summarizes the process and points you in the right direction in terms of funding providers and where to go to get the independent specialist advice you are likely to need.

Highlights

  • Which type of funding will suit your needs?
  • Sources of funding (including advantages and disadvantages of each one).
  • Where to get independent specialist advice on your funding options and presenting your case for the best chance of success.

Introduction
Whether you need $1,000 or $10 million, there are only two kinds of finance: equity, whereby you are raising money in exchange for for ownership of the company, and debt which is borrowed money. The first step in raising capital is to decide between equity or debt. In the SME world, the choice usually depends on the preference of the business owner and stage of the company.

If you want to maintain total control, you are typically going to prefer a debt driven funding route: however if you are less worried about control, bringing in equity funds can often mean you grow faster. This can be a good route, particularly where you have a very clear exit in mind and this exit lines up with other equity providers.

In most SMEs the entrepreneur or business owner is the person who looks for funding the business needs. When raising debt finance, our experience is that banks are still the most frequent form of funding used, but increasingly owners are hearing about and starting to use new forms of finance outside of traditional banks. This so called alternative funding market is growing rapidly, and has more than doubled in size year on year from £267 million in 2012 to £666 million in 2013 to £1.74 billion in 2014, according to the “UK Alternative Finance Industry Report”.¹

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Equity financing can come from individuals, so called angel investors, and traditional venture capital firms. Depending on your ambitions, there is also the option to combine both debt and equity in a funding mix to provide the capital base for long term growth and the working capital to support working capital requirements in the business.

While there is copious advice for those businesses seeking to raise funds for start-ups, this report focuses particularly on the challenges facing mid sized companies who are past start up and need funds to continue to grow (those with annual revenues between £2M and £50M, or employing staff between 10 and 250 employees).

Sources of funding for mid-sized business

Bank Operating Line of Credit

For many businesses the bank operating line of credit remains the traditional form of funding, with relationships formed over many years.

Although lines of credit can be quick to set up, the biggest drawback is that they can be called in by the bank on demand. So when things aren’t going well and you need the facility, that’s just the time when the bank might demand repayment, particularly if you haven’t built a strong relationship with the bank, so they understand what’s going on in your business.

Loans

A bank term loan will have a maturity date and require principal repayments over a fixed period of time (typically 2 – 5 years). As long as you payback the money per the terms of the loan, the advantage is that the bank can’t demand repayment, although typically the business and usually the owner will need to offer strong security for the loan, usually secured on the assets of the business and often the owners personal assets, by way of a personal guarantee.

As with operating lines of credit, the irony is that the more profitable and cash generative your business is, the less likely the bank’s requirements for security.

The principle is straightforward: if your business has performed well over the years and the bank has confidence that performance will be continued, then the easier it is to borrow money against security, or in some cases simply the cash flows of the business.

Invoice Discounting (Factoring)

Invoice discounting, also referred to as factoring, has grown in popularity in recent years. Banks and other specialist invoice discounting firms lend money which is secured by your accounts receivable, so if the company fails, the bank or specialist firm has more security than in the case of a conventional credit line.

With invoice discounting, you effectively sell your outstanding business invoices to a third party. You get the cash flow benefit by receiving a percentage of the money immediately (usually around 80%) and the rest when the money is collected.

Invoice financing can be really beneficial for growing businesses and can help you to bridge the gap between the delivery of goods or services and the payment from your customer.

advantages of invoice discounting disadvantages of invoice discounting

Asset Financing

An important consideration of financing, is the overall mix of funding a company uses. Asset financing can be used for funding fixed assets such as plant and machinery, equipment, computers and vehicles. All the main banks have asset financing arms and there are also many specialist companies in this space. The bank or finance company takes security of the asset as their protection. This form of financing has the benefit that it is pretty easy to arrange, assuming the assets you are buying are standard.

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1 ‘Understanding Alternative Finance: The UK Alternative Industry Report 2014’, Baeck, Peter; Collins, Liam; Zhang, Bryan, Nesta & The University of Cambridge, November 2014

The importance of a business plan and how to create one – Part II

The importance of a business plan and how to create one – Part II

In our previous article, we have highlighted the importance of creating a business plan.  In this article, we will focus on the key elements of a business plan, the sections it should contain and how a part-time CFO can help you to create your business plan and implement it.

The key elements of a business plan

The most important part of your business plan is its financial information. Your financial forecasts should include your cash flow predictions for the next 12 months or more. You’ll also need to provide monthly sales estimates and costs to prove the business has enough working capital or to show that you understand you need to arrange additional financing.

You need to explain all assumptions in the business plan, with best and worst case scenarios. Detail the risks you’re likely to face and how they will be dealt with.

The Business Plan Sections

Executive Summary
The executive summary is usually the first section of any business plan and provides a condensed overview of what the business is and how you intend to reach your goals. If you’re seeking funding, you should detail the terms of the financing and the amount needed. It’s best to leave writing this section until after you’ve completed the rest. It should be less than 1,400 words.

Company description
This is like an extended elevator pitch. You need to explain your company history, business goals and how you satisfy the needs or wants of your market. You will also need to explain your competitive advantage.

Market analysis
You will also need to provide market analysis, size and expected growth as well as, industry participants, distribution patterns, competition and buying patterns, and your main competitors.

Organization and management
In this section, you need to detail your management team (and plans to fill any gaps within that team), your organizational structure, your Board of Directors, as well as a personal plan.

Service or product line
You need to describe your product or service and any associated copyright information or research and development activities.

Marketing and sales
You need to detail your marketing strategy (including pricing, promotion) and your sales strategy (including sales forecasts, programs, and techniques). Your costs, services, and support will also need to be included in this section.

Financial projections
This section outlines what you expect your business to achieve financially over the next three to five years. It needs to include your projected financial statements, expected cash flow and break-even analysis as well as key financial indicators and ratios. Don’t be tempted to overstate your numbers or expectations to obtain financing. It’s likely to harm rather than help you get that funding.

Funding request
If you plan to ask for a loan or capital, you need to include a formal funding request as part of your business plan. You need to include details of how much money you need now and how much you’ll need in the future.

How a part-time CFO can help you to create your business plan and implement it

The CFO Centre will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO. This means you will have:

  1. One of Canada’s leading CFOs, working with you on a part-time basis
  2. A local support team of the highest caliber CFOs
  3. A national and internationally collaborative team of the top CFOs sharing best practice (the power of hundreds) Access to our national and international network of clients and partners

With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.

In particular, your part-time CFO will work closely with you to develop your business plan and your timetable for implementation to:

  • Gain a full understanding of the business and its operating
  • Work through the existing strategic plan with you and make necessary changes to build a plan which clarifies how the company’s objectives can be realistically achieved.
  • Agree on milestones and break down the plan into annual and quarterly targets.
  • Conduct a fresh SWOT (Strengths, Opportunities, Weaknesses, Threats) analysis, bringing the plan up to date.
  • Conduct a new PEST (Political, Economic, Social and Technological) analysis, bringing the plan up to date.
  • Carry out a full competitor analysis to understand in detail what is and isn’t working in the market.
  • Explore opportunities for effective market research to enable innovation and development of new products/ channels to market/operating procedures
  • Identify key players in the business
  • Identify skill gaps in the business
  • Agree financial incentive structures to retain and motivate key members of the team
  • Identify five key metrics for determining what the future course of the business should look like
  • Agree on the exit or succession strategy
  • Develop a clear, coherent message (vision/ mission/purpose) to staff and to customers
  • Work with the senior team to ensure individual department goals are aligned with the big picture strategy
  • Agree on a who/what/when set of objectives for all department heads
  • Implement accountability protocol for every member of staff
  • Determine methodology which allows the senior team to course correct periodically when a change in strategy is required
  • Agree on delegation of authority to department heads to spread responsibility across the business and to free up the CEO/business owners time
  • Create a feedback route so that strategic goals are regularly shared with staff
  • Develop a set of relevant KPIs (Key Performance Indicators) and a system which allows for regular (daily/ weekly/monthly/annual) monitoring and reporting
  • Develop a long-term efficient tax structure for the business and for key employees
  • Identify key outsource suppliers/advisors and, in particular, corporate finance contacts

This process will instill a deep feeling of confidence both within the senior team and throughout the rest of the business.

Conclusion

Installing an up to date business plan or ‘roadmap’ in your business will allow you to experience a sense of control, which may have been absent since the day you started your company.

The business plan (and the methodology for updating the business plan) will remove a significant amount of confusion from your operating procedures. There will always be challenges contained within new projects but you will have a proper framework against which all decision-making can take place.

The plan provides the blueprint for delegating responsibility to your team and allows you to create some space in your own environment to work on growing your business, with your part-time CFO as a constant guide and sounding board.

You will move out of the chaos and into a more serene working environment where each of the gears, which make up the bigger system, is able to move in harmony.

Potential hazards will have been identified in advance and dealt with before they become unmanageable. You will be able to move from a culture of fire-fighting to a culture of fire-prevention and the benefits will be felt by each member of your team and most probably by your customers too.

The business plan is the first key to profitable growth!

 

7 Keys to Profitable Growth

7 Keys to Profitable Growth

Planning for growth is something every business owner will say they do, but not all business owners will do this effectively and with a focus that will generate profitable growth.

Many businesses plan for growth, but not profitable growth.  Some businesses focus on growing sales without a focus on margins while others build infrastructures to support sales and growth that never materialize.

Michael Porter said, “If your goal is anything but profitability – if it’s to be big, or to grow fast, or to become a technology leader – you’ll hit problems.”

A business must focus on profitable, scalable and sustainable activities if it is to grow. Profit and the generation of cash to re-invest in your business must be made a priority, as it is an essential part of the financial strategy and structure of a successful business.  Profit and a clear business plan will create a focus and the alignment of the organization, as well as attract investors and other sources of funds to fuel growth – all of which impacts the underlying business value of the business.

CFO Centre has identified 7 Keys to Profitable Growth:

  1. Define your business goals & objectives
    Produce a formal plan from which you can articulate a vision
  2. Critically review your business
    Identify competitive advantage, scalability & sustainability
  3. Establish a financial plan
    Identify milestones, KPIs & dashboards
  4. Create organizational alignment
    Nurture your culture, hire the right people & communicate the vision
  5. Identify the financial resources required
  6. Support the business with systems & processes to optimize performance
  7. Measure, review, evaluate & course correct
    Be proactive & prepared to be reactive

If you follow these 7 Keys and plan for profitable growth, you will ultimately:

  1. Improve and grow profits
  2. Maximize the scalability of your business
  3. Enhance management team and organizational structure
  4. Attract investors and other sources of funds
  5. Increase business value

To enhance the value of your business and grow successfully, follow the 7 Keys and Plan for Profitable Growth.