How to make Finance Work For You

The above maxims may aptly describe the importance of money
to start a business and more importantly the idea to raise the money. Firstly,
one needs to have an idea to sell it and money follows next. Today, many system
integrators in the country have better opportunities and ideas to expand and
grow their business.

But, not all know the avenues to raise the money to fund
their ideas. In any business, capital expenditure and working capital are the
two crucial things to get started and run a business successfully. Let us see
the various options available to raise the money in both the cases.

What is capital expenditure?

Amount used during a particular period to acquire or improve long-term
assets such as property, plant or equipment is known as capital expenditure or
CAPEX. It is very important to start any business, as most of the business
involve in setting up an office, investing on infrastructure-right from
interiors to furnishing to providing a communication backbone and more.

However, the size of investment under CAPEX head varies from
business to business. Manufacturing oriented industries invest a huge sum on
plant and machinery, while service organizations spend in building
infrastructures.

IT industry has a few classic examples where some of the
service organizations, mainly in the trading and system integration space, got
into business without any investments. Of course, they make it successful in the
market also. But, by and large, finance (investment) is a key component in any
business.

Sources of finance

Finance can be raised through two major routes-Equity and Debt. Equity
finance is a long-term commitment (can vary from one to 10 years or even more),
while debt finance is for a short and specified time (up to one year). Equity
finance can be generated through various measures such as internal accruals,
funding from known sources, venture capital, strategic investments and public
issues.

Internal accruals normally come from directors' / owners'
/entrepreneurs' pocket or even through cash reserves and surpluses (profits)
generated over a period of time in business. Initial investments (to start a
business) by promoters are normally converted into equity in the organization
and they hold shares or stake based on their investment ratio.

Funds from known sources, such as relatives and friends, are
usually generated during the later stage of business where investment is
required to improve the business. This can be just a borrowing on agreed terms
and conditions or even including them in the equity partnership.

Venture capital is a popular term these days and IT industry
took it to the new heights. Venture capitalists (VCs) are those who have and
show interest in investing in other companies. It is a well-managed finance
group who provides capital to either start-up ventures or support small
companies who wish to expand but do not have access to public funding.

VCs are ready to take the risk by investing in start-ups
(usually source of great ideas), at the same time looking for higher returns in
business. They also provide advisory services during the term of their
investment. Normally, VCs look for exit route within specified time frame of
three-five years. Here, the capital raised may be in the form of debt or equity
and may be from private or public sources.

Companies mainly do strategic investments with similar
interest in business. The investing company can look for a joint venture option
or even acquisition mode. Here, it is a win-win situation for both the investor
and the fund seeker as they can look at growing on each other strengths. A case
in point is the recent acquisition of Network Solutions by IBM.

Raising funds through public issues are a quite familiar
concept in business. These funds can be generated through IPO (Initial Public
Offering) and subsequent public issues based on the approved capital.

Debt finance

It is also popularly known as external borrowings. Debt finance is again
generated through various options and agencies. Normally, debt finance is for a
short-term and interest is paid upon the capital borrowed, from banks and other
financial institutions.

Trade credit, finance lease and government grant (special
purpose) are some of the common models. Debentures are also part of debt finance
but, it is for a long-term. Debentures can also be converted into shares, if the
company decides to do so. Debt finance comes in handy for immediate fund
requirements, usually required for projects, and very popular among every one.

In IT services, especially in reselling and system
integration, finance is not a big issue while starting a business. But, when the
companies grow over the years and look for expansion, investments are tough to
get as

expansion programs are bigger in size.

Working capital

Working capital is crucial to run a business without glitches. Today, we
live in the world of credit and business runs only on credit. In this scenario,
it is very important to manage your finance well and work perfectly with
accounts receivable and payable. There are always unforeseen delays in payment
cycle, which would affect the business adversely. It is the duty of finance
manager to meet the situations and handle it well. Regular stocktaking
(inventory) is also very important in the effective management of working
capital.

Some of the tips to manage working capital are: collect
receivables faster, bad debts should be under control, get better credit period
with the supplier and manage inventories effectively (clear stocks soon). And,
do not borrow beyond your requirements, as paying additional interest would
erode your profits.

Finally, business is about bottom line (profitability) and to
achieve it-increase your gross margin, optimize cost structure, attain process
& control excellence and enhance efficiency. But, also remember, more
businesses fail for lack of cash than for want of profit. So, manage your
finance well. Happy doing it!!! 

TG Ramesh is Director (Finance) of Precision Group,
Chennai