Mark Lyttleton is a business mentor and angel investor who specialises in working with companies created to have a positive planetary impact. He is also the founder of Prana Partners, an organisation established to help businesses at all stages of their evolution, providing strategic and thoughtful advice to help them flourish and grow. This article will look at financial structuring and why it is so important for founders to create the right structure and start their business on a sound financial footing.
Before embarking on a long car journey, the driver typically checks over their vehicle, filling the tank with fuel to ensure it will keep running smoothly. After all, without the right supplies and equipment in place, the journey is likely to be a struggle. Similarly, several factors are crucial to the smooth running of a business, chief amongst them financial structure.
Financial structure is a term used to describe the precise mix of debt and equity that fuels a particular organisation. In other words, it is a fine balance of short and long-term liabilities combined with the owner’s or shareholder’s equity as shown on the balance sheet, next to the assets of the business.
The financing of a business is integral to its sustainability and growth. Although many founders focus on the operational side since they find this more exciting, having robust financials in place provides breathing space, freeing up their time for strategic activities and enabling them to concentrate on developing products and nurturing customer relationships.
Financial structure is critical to the viability of any business. It is an indicator of a company’s ability to run efficiently and smoothly, without the risk of burning out. Achieving the right balance helps a business to avoid incurring unnecessary costs or risks. Where the financial structure of a business becomes lopsided, inhibiting the founder’s ability to achieve their goals, they need to take action and fix it.
To develop a sound financial structure, financial executives need to weigh up various aspects of a business to decide what is most appropriate for it. They must strike a balance between assets and liabilities on the balance sheet, from traditional equity and debt to other types of liabilities such as tax obligations, accrued expenses and unearned revenue.
To achieve this, business leaders need to assess what their goals are for their business. Are they aiming to grow the enterprise as quickly as possible or is their focus on generating a comfortable income for the founders, enabling them and their employees to live comfortably? Do they wish to build a business empire, buying out other companies, or is the business already in distress? Do they simply seek a means to ensure its survival?
There is a significant difference between equity and debt financing, and this will have a huge impact on a company’s financial structure. While equity financing involves an investor providing financing in return for a slice of equity in a company, debt financing is borrowed money that is repaid over time with interest. Both types of funding can help to improve a business’s cash flow. However, the effort, cost and risk involved in obtaining funds and managing ongoing relationships will vary considerably depending on the source of capital the founder pursues.
Achieving an optimal balance of cash, equity, debt and other instruments provides businesses with more flexibility. To this end, Prana Partners assists companies in a variety of different ways, applying for government and international grants, and reclaiming research and development tax credits in as little as four weeks. Prana Partners collaborates with a specialist grant application company to ensure that claims are dealt with quickly and efficiently.
Many founders are motivated to launch their business by a desire to find and delight customers with innovative market offerings that make a real difference in people’s lives. The less glamorous side of entrepreneurship is money management, and as a result, this is often pushed down the list until the it suddenly becomes an urgent priority to fulfil an order or to ensure that the business stays operational.
Prana Partners reviews the overall capital requirements of the businesses it serves, suggesting ways to ensure that capital is not a constraint as far as possible. For founders, capital discipline is vital, ensuring that every spending decision is carefully considered.
The blend of debt, equity, and other forms of capital is important to all enterprises, and particularly to those undergoing rapid growth. In the early stages of growth, founders need to be agile to ensure their stake is not diluted too quickly.
With a network of business angels at hand, Prana Partners helps clients to present their companies in a way that maximises their chances of attracting the capital they need. Valuing early stage ventures is an art as much as a science, with many inexperienced entrepreneurs falling into the trap of undervaluing or overvaluing their business. Prana Partners helps clients to negotiate this tricky area, realistically assessing each enterprise’s financial prospects.
