Financing for business growth
Introduction to financial planning for growth, including equity, venture capital and funding from business angels.
Sound financial planning is the foundation of any business growth strategy. Firstly, you should establish:
- how much investment you will need to fund the venture
- when you will need it
- when it will be available
- how soon you will be able to repay the capital
It's important to detail all the costs incurred in getting your growth option underway and compare them against the anticipated profits. You must be realistic and practical when setting business growth objectives.
Financial forecasts
A detailed cashflow forecast is essential, not least because outgoings are almost certainly going to rise sooner and faster than revenues. You must have enough money in the pot to keep the core business running. It's a good idea to build in some surplus too, since projects of this nature often run over.
As well as cashflow, you may need to draw up detailed forecasts regarding sales, working capital and sources of seed funding, or any subsequent funding. See how to tailor your business plan to secure funding.
Financial investment
Apart from bank finance, businesses looking for capital investment have three main sources:
- Equity finance is money invested in a business that is not directly repayable. It could be your own, most likely raised through remortgaging a property, or money from others taking a share in the ownership of the business.
- Venture capital is also known as private equity finance. Unlike business angels, venture capitalists look to invest large sums of money in return for equity in (ie a share in the ownership of) your business.
- Business angels are private investors taking a minority or majority stake in a business, often contributing valuable business experience in the form of advice and contacts.
There may also be some development or enterprise grants or loans available in your area.
Return on investment for growth
A common way of measuring the profitability of a business is by calculating the return on investment or ROI. This ratio tells you what percentage of return you can expect to get over a specified time. Many expanding businesses use three to five year timescales.
To determine your ROI, you should take the total investment figure, work out the increased sales for each year and the resulting net profit, and calculate that as a percentage of the investment.
For example, suppose a business wants to add a new product line. It will require an investment totalling 拢200,000 in development costs, plant, marketing and promotion. The new line should generate 拢400,000 in sales and 拢40,000 in net profit each year. The table below explains how to work out the growth ROI:
| Timescale | Additional net profit in period | ROI calculation (net profit/investment x 100) | ROI (%) |
|---|---|---|---|
| One year | 拢40办 | 40k/200k x 100 | 20 |
| Three years | 拢120办 | 120k/200k x 100 | 60 |
| Five years | 拢200办 | 200k/200k x 100 | 100 |
It's a good idea to test the ROI with a number of different sales figures. While you may think additional sales could reach 拢400,000 a year, a number of factors - such as development problems, delays or sales and marketing issues - may result in lower sales in the early stages. You may also wish to adjust your calculation to allow for annual inflation.
See also how to measure your financial performance.