Identified Actual Capital Requirements
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. It is not uncommon for a company to run into this issue if they do not have a strategic business plan and budget in place that forces them to set, measure, and reach their goals.
Signature Analytics’ Solution:
We generated a detailed five-year financial projection model. After developing a strategic business plan and budget, we worked with the company’s management to create a financial model that estimated the expected revenues and expenses the company would incur over the next five years. These projections incorporated new products and service offerings, as well as additional employee hires.
We then identified capital requirements. From the projections, we were able to identify all the 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.
We determined they would require additional capital even after reaching profitability. Often profitability can be achieved before the company becomes cash flow positive. This is a common occurrence for many early-stage companies or companies in a hypergrowth mode. 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 Than They Initially Anticipated
The financial model and projections identified the company’s capital requirements, which was 50% higher than they had initially anticipated. Knowing the company’s actual capital needs gave the owners the correct figure to use when raising the capital required to support their growth goals.
Without an accurate projection, the company would have faced some very trying times and may have had to make tough decisions. This probable outcome would have inevitably changed the course of their business, and their ability to grow and reach their goals, or worse, would have caused them to closed their doors.
Best Practices for Knowing your 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.
- Cash flow is the lifeblood of any small business, be sure you have reliable cash flow management and reporting in place.