7. Equity Capital Growth For a business to grow significantly, equity must increase in proportion to other sections of the balance sheet, to prevent the leverage ratio from becoming too high. Of course, earnings kept in the business will increase the equity section of the balance sheet. For moderately growing businesses (sales growth in the 15% to 20% range) with a good net income (1.0% of sales), leverage can be maintained at a relatively consistent level. However, leverage will increase as the growth rate expands and/or the net income margin contracts. Therefore, businesses which expect to have a sales growth rate of more than 20% per year need to plan on acquiring additional capital to support such a growth rate unless leverage is low and the creditors would remain comfortable with higher leverage. Future nimbleness will be dependent on creditors being comfortable with the degree of leverage, as well as with positive trends in other financial measurements. A large proportion of information technology industry resellers have neglected to adequately plan for their equity capital growth. Consequently, these businesses increasingly are discovering that their financing options are more limited than desired. In some cases, significant problems have arisen in these businesses due to inadequate capital to provide the necessary flexibility for maximizing profits – or even remaining profitable!
There are many conflicting priorities of nimbleness. The best technique for managing and ranking the priorities for a business is to have a strategic plan which recognizes the issues and sets forth an action plan and timetable for addressing each pertinent issue for the particular business. Just to list a few of the more common conflicting priorities of nimbleness:
Flexibility vs. infrastructure expense
Data and information management vs. necessity, cost, timeliness, accuracy
Credit capacity vs. capital level
Sales opportunities vs. inventory management
Strong product lines vs. sales levels to attain attractive prices from vendors
Customer terms and credit criteria vs. competition
Timing of capital investment vs. equity ownership dilution
Reactive vs. proactive toward incoming and outgoing challenges
Vulnerabilities vs. safety
Sustainability of Nimbleness vs. profitability
A well prepared Strategic Plan should include sections such as: (i) Mission Statement; (ii) Description of the Industry Segment (iii) Business Opportunities and Threats; (iv) Target customers (general and specific); (v) Competitors (size, advantages & vulnerabilities); (vi) Competitive Position; (vii) Goals (Financial, Productivity, and Service); (viii) Strategies, Tactics; (ix) Key Actions and Major Assumptions; and (x) Financial Projections and Statistical Trends. Even though the Strategic Plan may be shared with people outside the business (investors, lenders, and trade creditors), it is important that it be a candid and honest assessment of the business’s position, strengths and weaknesses.
The primary purpose of the Strategic Plan is to be a blueprint for the business during the next one to three years; its use in persuasion for investors, lenders and other creditors is secondary. Conversely, if the Strategic Plan is not credible or achievable, the audience will soon realize the facts and, no doubt, react accordingly.
The importance of a well-structured financing package is a primary element of a business’s Strategic Plan and success. Flexibility is often essential in achieving goals and in implementing strategies. Growth requires financing and financing requires capital. Rapid growth sometimes results in miss-steps; good financing and capital structure provide the cushion to recover and persevere. ‘Good Financing’ in the Reseller industry is comprised of a combination of inventory financing, accounts receivable financing, capital, and sometimes term debt.