There is one simple reason to understand small business financial management and planning in your business - to avoid failure. Eight out of ten new businesses fail primarily because of the lack of good small business finance planning. The books featured in this section will help you to successfully manage the financial aspects of your business. Enjoy!
Effective Cost Reduction Strategies in a Small Business
A Step by Step Guide to Extending Credit and Collection in a Small Business
A Step by Step Guide to Financing a Small Business
A Step by Step Guide to Revenue and Sales Forecasting in a Small Business
Proven Strategies to Increase Revenue and Profits in a Small Business
A Step by Step Guide
A Step by Step Guide
A Step by Step Guide to Budgeting in a Small Business
A Step by Step Guide to Cash Flow Management in a Small Business
A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis
Guide to Self Audit the Bookkeeping and Accounting in a Small Business
Guide to Self Audit of Financial Planning and Loan Proposals in a Small Business
This article looks at the sources of capital that is available to a business.
Types and Sources of Capital
Capital management and capital budgeting to finance a business has two major forms: debt and equity. Creditor money (debt) comes from trade credit, loans made by financial institutions, leasing companies, and customers who have made prepayments on larger-frequently manufactured orders. Equity is money received by the company in exchange for some portion of ownership. Sources include the entrepreneur's own money; money from family, friends, or other non-professional investors; or money from venture capitalists.
Debt capital, depending upon its sources (e.g., trade, bank, leasing company, mortgage company) comes into the business for short or intermediate periods. Owner or equity capital remains in the company for the life of the business (unless replaced by other equity) and is repaid only when and if there is a surplus at liquidation of the business - after all creditors are repaid.
Acquiring such funds depends entirely on the business's ability to repay with interest (debt) or appreciation (equity). Financial performance (reflected in the Financial Statements) and realistic, thorough management planning and control (shown by Pro Formas and Cash Flow Budgets), are the determining factors in whether or not a business can attract the debt and equity funding it needs to operate and expand.
Business capital can be further classified as equity capital, working capital, and growth capital. Equity capital is the cornerstone of the financial structure of any company.
Equity is technically the part of the Balance Sheet reflecting the ownership of the company. It represents the total value of the business, all other financing being debt that must be repaid. Usually, you cannot get equity capital at least not during the early stages of business growth.
Working capital is required to meet the continuing operational needs of the business, such as "carrying" accounts receivable, purchasing inventory, and meeting the payroll. In most businesses, these needs vary during the year, depending on activities (inventory build-up, seasonal hiring or layoffs, etc.) during the business cycle.
Growth capital is not directly related to cyclical aspects of the business. Growth capital is required when the business is expanding or being altered in some significant and costly way that is expected to result in higher and increased cash flow. Lenders of growth capital frequently depend on anticipated increased profit for repayment over an extended period of time, rather than expecting to be repaid from seasonal increases in liquidity as is the case of working capital lenders.
Every growing business needs all three types: equity, working, and growth capital. You should not expect a single financing program maintained for a short period of time to eliminate future needs for additional capital.
As lenders and investors analyze the requirements of your business, they will distinguish between the three types of capital in the following way:
1) fluctuating needs (working capital);
2) needs to be repaid with profits over a period of a few years (growth capital); and
3) permanent needs (equity capital).
If you are asking for a working capital loan, you will be expected to show how the loan can be repaid through cash (liquidity) during the business's next full operating cycle, generally a one year cycle. If you seek growth capital, you will be expected to show how the capital will be used to increase your business enough to be able to repay the loan within several years (usually not more than seven). If you seek equity capital, it must be raised from investors who will take the risk for dividend returns or capital gains, or a specific share of the business.
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