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capitalizing a business

Capitalizing a Business in the Early Stages

By Kevin Marshall, CPA

CFO and Vice President

Global Investment Strategies

Here at Global Investment Strategies we have the pleasure of working with highly successful individuals and businesses.  However, they did not all start out that way.  I went back in time with several of our clients and talked with them about the early stages of their businesses.  More specifically, we talked about capitalizing their business and what they did to make that happen.

Jobs and Wozniak started Apple in a garage.  Gates and Allen sold computers out of their house.  All businesses start somewhere, and most of them start with an idea and some passion.  The idea may or may not be valid.  The level of passion dictates the drive to succeed.  What keeps everything going beyond just an idea is capital.

Every business at some point needs money, whether it is in a start-up mode, or to finance growth or overcome a rough time.  For start-ups, the expectation is that the financing is self-funded.  The transition from self-funding to other people’s money is usually a function of proven capability matched with opportunity.

Many businesses have failed because the owners didn’t know how to predict their capital requirements and didn’t know where to get the money.  So, lack of capital is frequently cited as the cause of a business failure.  If truth be told, it is not the lack of capital that caused the business failure.  Rather, it is usually a poorly advised venture or lack of owner skills that precipitates failure.  The inability to properly capitalize the business is merely a symptom.

To avoid the symptom of poor capitalization, know who you are and where you are going.  Successful business owners have a basic understanding of financial issues and financial planning.  Foundational to this is the business plan and cash flow projections.  These two tools will reflect historical performance (if it’s an existing business), and future projections based on market knowledge.

Whether starting out or whether the capital is needed to finance growth, be clear on the requirements.  Know what the money is intended for, and more importantly, how the money will make the business more successful.  Once you know this, you then can determine how much money you need.

Many small entrepreneurs are looking to “get to the next level”, and many believe that it is a lack of capital that is holding them back.  That may be true.  There are scores, if not hundreds of great ideas that could truly blossom into growing businesses if there were sufficient capital to fund the growth.  If you are in this category, recognize that capital is a tool, and consider the investor’s perspective.

Investors, banks, angels or other sources of capital are not looking to fund an entrepreneur.  They are funding a venture that is mobilized and driven by a capable entrepreneur.  The difference in these scenarios is that funding an entrepreneur is like funding a mortgage payment.  Funding a viable and growing venture is funding an opportunity that offers premium returns on the investment.  The entrepreneur who wants to get to the next level, and believes capital is the key to doing that, needs to prove their case.

If you assume that a “no risk” CD returns 3%-4%, and a moderate risk Money Market Fund returns 8%, then a high risk entrepreneurial investment should return at least 20% or more per year.  That’s the case the entrepreneur needs to prove.

Cash is King.  Proper capitalization can drive growth.  The entrepreneur’s task is to prove that the growth of the business is attainable, sustainable, and profitable.  If that can be done, then there are sources of capital that will help that business “get to the next level”.