The Link Between Strategy, Finance and Financing

It probably won’t surprise you that we at Trek believe in thinking about strategy before money and finance. But, not to worry, there really is a good economic reason for this!

Strategic planning is the ultimate efficiency play. It helps you spend less and make more. Why is this? Three main reasons—focus, resources, and results. If you think and prepare strategically for the future of your business, you will know exactly where you want to go, what resources you will need to get there, as well as what results you can expect and how to measure them. Everything else falls into place after that. By thinking before taking action, you invest wisely in the future of your business—avoiding costly mistakes and yielding a better bottom line.

When you have a clear strategy, accounting and finance become tools that allow you to put dollar amounts to your operational plans. This approach will force you to evaluate your strategic action plans, making sure you can afford the resources you need and get the profits you expect. This is a great reality check on your vision. It also will help you understand whether you have sufficient internal cash to fund your plans. If not, you may have to seek outside financing of some kind.

If you are considering outside financing, there are several factors that you should weigh in your decision:

Speed – This is the ultimate advantage of outside financing: it enables you to make investments in your business that might otherwise take years to fund internally. Make sure you understand whether this speed will truly give you the advantage you want, because it comes at a cost.

Cost – Using outside financing will make your plans more costly. Make sure you have the margins to cover this cost.

Control – You give up a degree of flexibility when you bring in a financing partner. The money you receive puts you into a new “vendor” relationship. That is, the financing partner will have a direct or indirect control over a lot of what you do. Make sure you think through how this will affect your ability to manage your company and fulfill your plans.

Risk – The increased cost and the loss of some degree of control that comes with outside financing “ups the ante” of your strategy. This risk will force you to work faster and smarter. This pressure can be a good thing, but it also decreases your margin of error. Make sure you have the margin to spare.

If you weigh all these factors and decide to move forward with external financing, you want to be sure that you pursue the right type of lender or investor. A very clear explanation of the different alternatives available is in Where’s the Money? by Art Beroff and Dwayne Moyers. Their detailed table of contents will give you a feel for the nineteen major categories of equity and debt financing reviewed in this book.

-Mary Adams (adams@trekconsulting.com)

• Share your vision for the direction of your business
• Establish a strong relationship with your financing partner
• Speed the approval process
• Reduce the perceived risk of your company and your plans
• Lower your financing costs

What do outside financing sources want to see in your financing request? Basically, all financiers look to answer three questions:

Use of Proceeds: How will the company use the money? Examples of this may include working capital, growth financing for expansion, acquisitions, or seasonal needs.

Source of Repayment: How will the company repay the money? Your repayment sources could come from the conversion of inventory or sale of assets. Investors will often look to an IPO or M&A.

Fallback: If the primary repayment source doesn’t work out, how will you repay it? A banker may look for personal guarantees, or other collateral such as company real estate or fixed assets. Equity holders look for acceleration and other preferential rights.

You should be ready to say how much you will need (make sure it’s enough the first time) and by what date. Bankers and investors hate surprises, so be open with your knowledge and have plans to address any shortcomings. As you answer these questions, you will paint the picture of your business. The more complete this picture is at the time you submit your financing request, the fewer times you’ll hear your lender say that the bank needs more information before an answer can be given.

What should you provide to your lender? A complete explanation of your company, its business model, industry, competition and financials. This is often referred to as a business plan. Like any compelling document, a good business plan tells a story. It sets the stage with a good explanation of past successes (and failures) and creates excitement about the company’s future prospects. The better your plan, the easier your approval process should be.

To learn more about what goes into a successful business plan, read this detailed outline.

- Michael Oleksak (oleksak@trekconsulting.com)

Finance

It seems appropriate to talk about the finance industry this month. There is a huge range of potential financing partners, such as banks, leasing companies, finance companies and venture capitalists. Each focuses on different markets and has many unique characteristics.

However, there are some basic drivers of the financing business that affect all lenders and/or investors.

• Financiers use other people’s money, which means that they are subject to limitations on the purpose, structure and amount of any financing.
• Every financing institution uses a specific set of lending/investment criteria—this if often referred to as being “in the box”. No matter what your relationship is with this entity, if you aren’t in the box, they more than likely will not be able to help you.
• As stated above, three basic questions drive financier’s decisions about a company—use, payback, and fallback.
• Pricing is set primarily by comparing one business’ credit to similar credit information in that market and based on the relative risk and reward represented by the company’s type of business.
• Their focus on risk and reward is an extremely critical component of the their decision making process—financing is a low-margin business.
• The more quality information they have to assess a company, a market and the resulting risk/reward ratio, the better the chances of getting positive results.

You can read a more detailed explanation of how this market works in an article called “Financing Growth” in Executive Excellence magazine.

This book focuses on the role of CEOs. While much of the focus is on large, public companies, the wisdom and knowledge shared is relevant to CEO’s of all companies. The CEO’s influence in today’s corporation is broad; it extends to customers, employees, management, the media, suppliers, shareholders, other investors, lenders, and other stakeholders. Ms. Gaines-Ross addresses how to cultivate that influence to increase the success of the company.

This book is very applicable to this month’s discussion of financing. Every financing partner will look hard at a company’s management before deciding to make funds available. A lender, for example, will look at the experience of the CEO, in this industry or related fields. The bank, or venture capital fund, or angel, will also look at depth of management, to prepare for growth, but also as an indication of the CEO’s management style. A deep team that shares responsibilities and duties relieves the CEO from day-to-day operating decisions and frees him or her up to work on strategy and build relationships outside the company. The lessons outlined in this book will help you put that all in perspective.

You can find out more about this book at www.ceogo.com/CEOCAPITAL/ABOUTTHEBOOK