On Funding Growth
Posted by Randy Harrod on Apr 3rd, 2011
A company’s lifeblood is the invested capital and operating cash flow that enables it to conduct daily commerce and grow. Funding options vary with a firm’s legal structure, life cycle stage, and goals. Early stage companies focus on getting off to a strong start and surviving the critical first few years. Growing entrepreneurial companies pursue both sustainable operating health and reaching critical mass to earn a leadership position in their field. Established leadership companies seek solid returns, coupled with clear strategic vision and the financial capacity to act on it. Highly mature companies – longtime family businesses or corporate entities ‘past their peak’ – seek ways to ensure continuation and succession in ownership and leadership.
Some of us today are struggling to survive and simply hoping to find a tactic that will enable us to remain solvent and hang on for another year. Others are facing exciting strategic growth possibilities and searching for the wisest way to fund them. These bedrock principles are vital in guiding our growth funding efforts, whether internal (e.g., bootstrapping from operating cash flow) or external (i.e., bringing in fresh capital from lenders or equity investors).
- God owns the business; we’re to be wise and fruitful stewards
- Don’t become yoked in partnership/ownership with non-believers
- Serve others with transparency, excellence, and mutual win/win accountability
- Avoid using the public courts for conflict resolution, especially with believers
- Don’t presume on the Lord by making extravagant or needlessly risky plans
- Be cautious regarding debt and avoid borrowing unnecessarily
- Avoid personal guarantees in collateralizing loans for yourself and others
- Honor contracts and agreements, paying others what you owe before yourself
The most important advice on funding growth is to develop the healthy habits and relationships required to begin raising the necessary capital – whether internally generated or externally recruited – before you need it. This requires clearly communicated business plans that bring mutual understanding, teamwork and trust. This applies internally as you and your team focus on enhancing the company’s internal cash generating capability. It also applies externally as you cultivate banking relationships and build a strong stakeholder community that may be tapped when threats or opportunities confront the business.
Using debt should always give Christian CEOs pause. While there’s no Biblical ban on debt, the warnings and dangers are clearly and frequently described in Scripture. In fact, debt should only be used in light of what we’ll call the debt paradox: One is poised to use debt wisely and strategically only when you currently have little of it! Unless your team has the disciplined mindset of eliminating debt, you’ll lack the periodic strategic capacity to opportunistically use limited debt to accelerate healthy long-term growth. This means always protecting against your worst-case scenario (e.g., sharp sales drop, prices decline, asset values drop, interest rates double) and remembering that debt isn’t a crutch for ongoing operating problems or unprofitability. The most successful companies focus on paying off debt to improve margins and earn the right to later employ a modest amount of debt in funding strategic acquisitions and growth projects. They repeat the cycle every few years while staying within a comfortable debt-to-equity range. Such firms borrow at the most favorable terms and have a built-in incentive to pay-it-down rapidly to create the financial capacity to do it again, effectively ‘bootstrapping’ to enhance their organic growth rate.
Speaking of bootstrapping, it helps to know our internal capacity to fund growth through operating earnings, given our need to fund added working capital and occasional capacity (e.g., fixed assets). Many household names began with less than $1500 in initial capitalization, including Apple, Black & Decker, Dell, Domino’s Pizza, Hallmark Cards, Hewlett-Packard, Gallo, Microsoft, Nike, Roadway Express, and UPS!