Challenge: Capital Requirements Unknown
A broadcast media company believed they needed a significant capital infusion to support their growth plans, but were uncertain when and how much capital would be required.
Generated a detailed 5 year financial projection model. We worked with the company’s management to develop a model that estimated the expected revenues and expenses the company would incur over the next 5 years. These projections incorporated new products and service offerings, as well as additional employee hires.
Identified capital requirements. From the projections we were able to identify all the time periods in which the company’s cash balance would become negative. Additionally, the model was able to calculate the total capital required to avoid running out of cash.
Determined they would require additional capital even after reaching profitability. Often profitability can be achieved prior to the company becoming cash flow positive. This is typical for early-stage companies, or companies in a high growth mode. In order to support their rapid growth plans and not run out of cash, we determined the company would require additional capital to last until they become cash flow positive.
ROI: Required 50% Additional Capital
The financial model identified the company’s capital requirements, which were 50% higher than they had initially anticipated. Knowing the true capital needs allowed the company to raise the appropriate amount of capital required to support their growth plans.
Best Practices for Knowing Capital Requirements
- It is essential to monitor cash flow and analyze cash flow projections if you want your business to succeed.
- 82% of businesses fail due to poor cash flow management / poor understanding of cash flow (according to a study by Jessie Hagen of US Bank).
- Knowing your capital requirements will allow you to maintain a stronger equity position with financial institutions and investors.
- Avoid asking for too much capital, as this will require more equity ownership to be sold to new investors. Alternatively, avoid asking for too little, as raising capital can be time consuming and distract management from their operational responsibilities.
- Plan ahead while there’s still time to make adjustments.
Want to learn more?
If you need help identifying your company’s capital requirements, or want to learn more about Signature Analytics’ outsourced accounting services, contact us today to schedule a free consultation with one of our CFOs.