Debt and equity management

The principal cause of early stage business failure is the lack of adequate capital, both working capital and permanent capital. The CFO has the responsibility to assess the capital needs of the business and fill those needs.

The projections or Financial Model, described earlier provide the basis for determining the aggregate capital needs of the enterprise. The CFO then selects the quote "best" blend, type and sources of financing.

The types of financing to be considered include short-term debt, long-term debt, leasing or other off-balance sheet financing and various forms of equity. Potential financing sources to be considered include bank, commercial finance companies, individuals, private equity groups, organized venture funds and the public market.

The blend or mix of capital chosen must balance the cost of capital and risk. For example, debt is less expensive than equity in terms of both interest caused an equity dilution. However equity holders do not demand monthly interest payments and they are repaid only upon sale of liquidation of the business. Therefore equity is less risky to the business than debt.

The CFO has the responsibility to develop the required documentation (generally referred to as the "book"), identify the potential sources, conduct the negotiations and close the deals.

The CFO also has the responsibility to manage relationships with capital providers and their representatives. This group includes bank credit and loan officers, investment bankers, stockholders and, if the company is publicly traded, stock analysts and regulatory agencies.

The most critical providers of capital to the business, the trade creditors, should not be ignored by the CFO. We will have more to say on that topic in a future post.