If a company is expanding or growing fast then it may be that there is a need to raise finance. Possible areas may be:
- Invest in new equipment e.g. the purchase of land, property or Plant & Machinery, Vans, Tractors, etc.
- Make an acquisition e.g. purchasing another company.
- Finance the initial set up of a business – when setting up a new company there may be an initial need for an injection of capital for the day to day running of the business or for capital expenditure like Equipment, Plant & Machinery & Land.
It may not be possible for the company to finance these areas, especially if a company is just starting up.
Companies will therefore need to consider the option of borrowing or attracting investment from sources other than themselves.
There are a number of different options to consider when contemplating this, finance could be obtained from:
- Hire Purchase & Leasing
- Banks – for short term, Medium & Long Term Loans
- Directors and/or shareholders’ funds
- Equity Investment
It is vital when deciding what path to choose that there is a conscious look at getting a balance between finance raised through debt and finance raised by equity.
The main points to note when looking at the differences between the two are:
- finance through debt, (borrowed money), will incur interest on the amount borrowed and the debt will usually be secured on company or personal assets.
- with finance from equity investment the risk will be shared by the investors like the other shareholders.
Once the need for finance has been discussed and agreed and the specific area where the finance will be allocated to has also been identified then the next step is to put together a business plan.
This is especially important if the goal is to change the fortunes of the company e.g. take a company from loss making to profit making, or if the company is entering a stage of growth .
The plan can include a number of different areas of interest, for example:
- Details of Directors/shareholder and other important managers
- Information relating to sales, Profits, Forecast etc.
- Relevant Markets
- The process of production and supply
- Any relevant laws and statutory requirements which could affect the business
Preparing a business plan is a very good way for managers to identify and clearly communicate their ideas and vision for the company.