Funds are critical to business success and raising them can be daunting. But raising funds is part of the puzzle pieces that must be continuously put in place if any entrepreneurial masterpiece is to be created. In business history, limited or even complete lack of funds has only brought out the best of the creative minds and resourcefulness of great entrepreneurs.
The individual that does not make any effort to start a business because they think or believe it will be difficult or impossible to raise required capital displays nothing but their weak motivation and lack of sufficient appetite for going into entrepreneurship.
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When Ross Perot left IBM as a salesman to start EDS in 1962, all he had in savings for the business was $4,000. The amount was so insufficient that they could not afford to fix a door to the office restroom. They made do with a flimsy curtain instead! Twenty-two years later in 1984, Ross Perot sold EDS to General Motors for $2.5 billion!
There are several unrecorded but known similar success stories, even if for different magnitudes, in Nigeria and Africa. Tight funds for start-ups are known to engender creativity and resourcefulness in a budding enterprise whilst excess funds over reasonable estimates of requirements can cause wastefulness and lethargy, both of which are dangerous to the efficiency and overall grit of the business DNA.
Having said that, we know that funds are the lubricants that keep the moving parts of an enterprise going. Raising funds could be easy or challenging depending on several factors such as the individual entrepreneurs’ situation, the quality of the business proposition and other environmental factors. But before we discuss funding options and structures, we need to first understand the broad purposes for which funds may be required in a business. This is crucial because the utilisation to which funds will be put should determine the source, form and structure of the funds to be taken. Some of the purposes are as follows:
Pre-business take-off: Before your business takes off, you will need to conduct feasibility tests involving studies that you could either handle or may have to engage and pay professionals for. After the studies, you will need to draw up your business plan, do some pilot tests etc. You will also need to register your proposed business name with appropriate regulators. After registration, you may need certain approvals-in-principle, permits and/or licences. You may also have to employ some key and initial staff that you need even before you commence production. All these will cost you money and they are called pre-operational expenses.
Business take-off: For your business to take off, you may need to have an office and/or factory space, equipment such as those for production as well as for office administration and logistics; you may also need raw materials and funds for salaries, utilities, marketing, etc. These imply that in addition to covering preoperational expenses, you will also need funds to acquire fixed assets as well as current assets.
Fixed assets refer to assets with more than one year expected life that are used in the production of goods as well as providing auxiliary services. These may include real estate, factory equipment that may be expected to last some fifteen years; motor vehicles that may be depreciated over a period of four years, and indeed even light assets like office desktop computers that may be written-off after some two or three years. On the other hand, your current assets are those that facilitate the day-to-day business operations and are readily convertible into cash within one year. Current assets will include cash, prepaid expenses, accounts receivables, raw materials, etc.
Growth: One of the fundamental goals of all successful entrepreneurs is the continued growth of their businesses. Growth could mean more production output which would require more equipment capacity and more raw materials, with consequential increase in staff salaries and costs of logistics. As opportunities open up, business growth will be a permanent moving target in an enterprise. Planning for the funding of growth is vital to every expansion plan and the seizing of unforeseen opportunities. The successful entrepreneur must be deliberate and wise about planning for growth funds.
Balance sheet management: Sometimes it may be expedient or in the interest of a business to restructure its balance sheet. Common issues in this regard are the consolidation or refinancing of debt. Funds could be raised to restructure existing debts to reduce cost and debt management complications or for other legitimate strategic objectives.
In conclusion, the type of funding required to purchase factory equipment that will last 20 years can be markedly different from the type of funds that will be required for the purchase of raw materials to be used in production and sold within 60 days. For each of the broad requirements above, therefore, the entrepreneur must identify the specific financial needs of the business on an immediate basis as well as a reasonable projection into the future. With this information on hand, the entrepreneur will then begin to identify specific possible source(s) and structure of funding for each purpose. In the second part of this Column next week, we will discuss funding structure and funding sources.