Purpose of blog: brief discussion about the dynamics of evaluating financial adequacy and procuring third-party capital.
Background
Capital adequacy – it is also described as financial health or liquidity.
The amount of capital needed to support a business ebbs-and-flows over the ever-changing, dynamic life of a company.
Capital adequacy is a constant concern of leaders of many privately owned businesses.
The expense and time commitment to procure third-party capital is significant. There are not any guarantees that a capital raising project will be successful.
The costs of third-party capital can be substantial.
The two primary sources of outside capital (and their major costs) are:
1. Debt (debt service / leverage)
2. Equity (ownership dilution)
The factors involved with a funding transaction – expenses, time, and uncertainty; along with resulting costs cause many leaders of privately owned businesses to put off capital raising.
Delays in procuring additional capital can result in a more difficult financial situation which usually increases the cost of capital and decreases the chances of a successful funding.
Uncertainty about capital adequacy and capital procurement complexities can result in many privately owned businesses being thinly capitalized or under-capitalized.
Juggling act (and factors involved in capital raising)
Leaders can find themselves in a juggling act as they struggle to have enough capital to support their businesses while minimizing the expense, time, uncertainty, and costs of procuring outside capital.
Companies are more informed and financially sophisticated when they understand and track their financial fundamentals – which includes capital adequacy and the factors involved in capital raising ...value; borrowing capacity; cash flow; operating earnings.
Financial fundamentals need to be succinct and understandable to be useful.
Goldilocks analogy
A business’ optimal capitalization is…
· Not too little
· Not too much
· Just right!
To properly evaluate and manage their capitalization, management needs ongoing, succinct, and understandable financial fundamentals.
As mentioned above, a company’s capital needs ebbs-and-flows with the changing, dynamic factors of a business…each with their own unique circumstances.
Therefore, an adequate capital amount today may not be sufficient tomorrow.
There is a surprisingly simple way for leaders of privately owned businesses to eliminate the uncertainty of capital adequacy (or inadequacy).
To learn more about succinct and understandable financial fundamentals (including capital evaluation, trends, and drivers...and the factors involved in procuring capital), contact Ed Patton.
Edward B. Patton
5701 Broadway, Suite 102
San Antonio, Texas 78209
Phone (210) 822-9977