Moving forward in your entrepreneurial struggle, you begin to realize the intricacies of running a business and what exactly helps sustain a business’ long-term operations. As you begin to develop strategies to further expand, you will have to begin looking into ownership structures as well as financial structures.
As your profit increases, it’s only natural that so will the cost on your business operations. If you don’t cater to your growing needs as your business expands, you may start noticing a few drawbacks.
What’s a Financial Structure?
The financial structure of any company is based on equity and debt that is used by a company to run their day-to-day tasks. Your finance department will be dealing with most of the responsibility and coming up with conclusions as to what will be the right combination of equity and debt in order to get a stable financial structure.
Often referred to as Capital Structure, yours will vary based on the type of choices that your business has to make which can either be private or public.
You’ll either be choosing to get debt capital from credit investors that has to be repaid over time or you will be financing yourself through equity where you will be giving the ownership of your company to shareholders who will then receive returns on the basis of the market value of profits.
The idea is to optimize one’s capital structure with just the right balance of debt and equity that will result in a low Weighted Average Cost of Capital (as low as it can get). A company will usually use either more equity or more debt to further invest into acquisitions and new assets, or for recapitalization.
Why is a Viable Financial Structure Important?
Regardless of your business, you have the right to how you want to structure your business. Anything’s good, as long as it isn’t random. Your finances have an impact on how your company is valued, if you don’t have an optimal structure for your business, you will lose value in the market.
Like we just discussed, debt and equity need to be in a state of equilibrium for a business to thrive. Having too much debt could result in more profit, but in the long run can present issues with obligations and fulfillments which can as a result disrupt cash flow.
That’s where a Chief Financial Officer comes in. He/she goes to evaluate what exactly is that the company needs and under what conditions it can optimally operate in order to achieve a decent WACC (Weighted Average Cost of Capital).
Basically, a good WACC means a good valuation for your company and the higher you will be priced in the market.
Analyzing the Capital Structure of a Company
If you’re an investor yourself and need to go about analyzing companies, then you might have to prioritize a balance sheet by looking at their performance, capital structure and working capital.
Like we discussed previously, there isn’t anything definitive when it comes to the ratio that there needs to be between debt and equity. But a general rule is that investors prefer to go for companies that have a lower debt level and higher equity.
Other than that, it would be a good idea to identify the company’s strategy and the quality of the firm’s financial statements and finally their profitability and risk.
All of this gives a deep insight into the company’s detailed infrastructure and how they’ve been managing their assets and if the future projection will be in any way beneficial at all to you as an investor.
Talking from the perspective of ownership, evaluating your capital structure can sometimes help to better understand your own company’s financial position and how you should move forward.
It’s better to have your accounting and finance department take a look at your condition and advise you on how you should further proceed with your business dealings. If anyone, they’ll be the ones who will be able to give you the right advice you need in order to stay safe and minimize costs through a balanced use of equity and debt.
Managing Growth and Finances
If you’ve been doing everything right, then you will most probably be growing your company before you even know it. There comes a point where a business hits a stride and all of a sudden there’s a satisfactory number of clients and a huge amount of potential profit waiting to be tapped into.
Granted that’s absolutely amazing, but if you’re not going to manage your finances in correspondence with your growth, then it might prove to be a tad bit troublesome.
FINANCING YOUR GROWTH
Since your sales are going sky-high, you will need to make sure you maintain the same level of customer service and fulfill your orders like you did before to maintain a good relationship with your new clients both now and in the future.
Adding more staff to your team is the obvious next step to make sure the entire workload is managed without anyone leaving unsatisfied. Hiring employees is a straight-up fixed cost.
Moreover, you’ll need to make sure you have a steady supply of your product ready to go, that means you’ll be spending more with your vendors and suppliers.
It’s a simple rule, if your profit goes up, so does your cost. Everything has to be worked with accordingly or your sudden success can turn into an immediate disaster.
LOOK INTO DIFFERENT OWNERSHIP STRUCTURES
If you still haven’t or aren’t exactly happy with your ownership structure as you progress forward with your company, then it’s best to re-evaluate your foundation while you still can.
Should you feel like there’s another ownership structure that best suits your business, you can freely opt for it. You could even talk to your CFO about the different advantages that different business structures offer and how it can help you in the long-term.
Once you’ve managed to finally keep up with the flow of your business, it’s time to make sure that you never go below this. This is your new high-point, your new benchmark, and you won’t be satisfied by anything that’s below this.
So, to sustain your business you will have to become the best leader and focus on strategies that WORK. Develop a plan and start scaling in a realistic manner; make your vision clear as to where you want to be after 5 years! Your management is the key to your business’ sustenance and growth.
Let’s talk about getting paid on time. While you may be offering your services to everyone, it’s best to have a system in place that makes sure you have the required money in your hands whenever you need it. This is best to avoid any bad debts that might otherwise put you and your company at risk.
Always check the credit worthiness of your new customers and state the credit terms to them. Make sure to always issue invoices and encourage your customers to pay you online.
Private vs. Public
Your company being ‘private’ or ‘public’ is the essential building block of your financial structure. A private company will usually mean that your business is not open to everyone and publicly trading is not possible. Private companies are owned by founders like you, and sometimes a group of investors may even force a public company to go private by buying all the remaining shares.
Which brings us to public companies that are open to the general public. The security of a public company is owned by various investors as they are for sale to everyone. Acquiring capital for operating businesses on a large-scale has become increasingly difficult, which is why when public companies came into play, they had everything they needed to execute their ideas and generate profit, which benefited everyone involved.
While private companies are smaller, and have access to limited funding, public companies have access to a greater magnitude of resources.