A strong vision and proven business performance can still fall short of fulfilling business goals without sufficient capital. Planning capital resources to fund your business plans guides your business success, fuels growth strategies and keeps your business on the path to sustainability.
SunTrust Research1 found that an overwhelming majority of businesses view financial goal setting and planning as a top priority for the company. In fact, many business leaders are optimistic about their capital planning and subsequent results, with more than one-third extremely comfortable that they will be able to invest in future growth or expansion. How can you find the funding resources you need to be more confident in your future capital needs? Follow these three best practices.
Create a Capital Plan
Constructing a clear vision of your business's capital requirements begins with defining short- and long-term business goals to sketch out when and where your business will need capital to operate and/or expand. The plan, while matching your overarching business strategy, should include both a business capital plan as well as projections for ongoing cash flow needs to cover seasonal cash variation, slow-paying customers, contingencies for unexpected expenses, etc. Insight into this type of consolidated capital planning provides a realistic outlook for your existing and future capital needs. A solid capital plan considers:
- Working capital — the cash that is tied up in your day-to-day operations (accounts receivable, inventory and accounts payable)
- Cash flow management — cash planning reflecting the ebb and flow of seasonality or industry volatility to ensure your business has the cash it needs, when it needs it, to operate smoothly
- New capital requirements — the major capital expenditures you expect to make to maintain and enhance technology, buy equipment or secure building/locations to meet future needs
Combining these items into your plan, then referencing it when setting goals — as half of businesses surveyed that have a long-term financial plan do — will be critical in determining the total picture of capital needs to fund your plans. Going even further into the future with a Six-Year Plan will aid in solidifying the resources necessary to achieve your long-term growth potential.
Secure Funding Resources
Almost half of business leaders plan to grow their businesses organically in the next five years, with only 28 percent saying they will maintain their status quo. When growth — in the form of new locations, new equipment or new products or services — is projected to take place, capital needs often expand. Whether your growth plan will require enhanced accounting systems, upgraded technology capabilities or new equipment or additional space to house your operations, a capital plan can help you target the funding you will need to cover the costs of scaling your business. By aggregating your funding needs, you can take a more strategic view of the best capital sources and optimize your funding events to keep transaction costs low while ensuring that you have covered all your funding requirements at each stage of development.
Your plan should consider the most efficient capital sources. While thirty percent of business owners surveyed have enough cash on hand to fund their plans, one-quarter of business leaders plan to obtain a loan from their bank within the next five years to fund business expenses and/or expansion. Another one in five businesses will either reinvest corporate earnings or acquire financing from equity investors.
There are a variety of financing options to explore. Begin with a base review of your existing financing resources and how you may utilize the capital from those sources during planning. Then expand your horizon to include other funding resources aligned with your capital plan.
Keep it Fluid
Keep your capital plan updated and current. Consider changes in the market and industry, and incorporate them into your plan to keep your options aligned with your goals. Evaluating the viability of current capital sources and how these resources may be used to grow the business in the future will provide valuable insight into leveraging existing funding and where you need new sources to cover gaps.
For instance, your existing line of credit may have no draws on it currently — can you use it fund the expanding inventory needed to open a new location? Or, maybe your local real estate market has changed enough to make purchasing a facility with a commercial mortgage loan more sensible than renting space? Is technology improving quickly enough to justify leasing equipment rather than purchasing outright? Incorporate these and other considerations specific to your business into your plans to keep your business advancing towards its goals.