Corporate Finance Principles for Start Up Success
This article focuses on the nature and purpose of corporate finance, cognisant of the reality that in the present day, businesses must maximize stakeholder value while doing no harm to or enhancing the environment. The focus on shareholder value is because of the focus on corporate finance, not a neglect of other stakeholders. Corporate finance is the area of finance[i] that deals with the sources of funding, and the capital structure of companies, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources[ii]. According to an article on Investopedia, the primary goal of corporate finance is to maximize or increase shareholder value. This includes finding ways to increase profit and thus returns to shareholders.
The responsibility of an organisation’s financial success lies with all branches of a company. Each team must account for process expenditures and strategically allocate resources to projects. For example, at Friends Consult Ltd, the digital marketing team has to produce a spreadsheet stating the financials needed to implement the digital marketing plan quarterly. With regular training on balance sheets and financial statements, each department of the company is kept up to par with the gains sought and needless outflows to be controlled.
The Importance of Corporate Finance for Startups
Startups are often lauded for their innovation, creativity, and risk-taking. But while these qualities are certainly important for any new business, they don’t necessarily mean that a startup will be successful. In fact, many startups fail because they don’t have a solid understanding of corporate finance. Start-up owners should understand suitable ways to raise and use capital, invest it, and use that money to grow and expand. It’s important for startups to understand corporate finance because it can help them make better decisions about how to raise and use capital.
There are a few key concepts in corporate finance that are especially important for startups. First, startups need to understand the difference between equity and debt financing. Equity financing is when a business raises money by selling shares of ownership in the company. This is typically done through venture capitalists or angel investors. Debt financing is when a business borrows money and then repays it with interest. This can be done through loans or bonds.
Startups should also be aware of the different stages of financing. The first stage is called seed financing, which is when a startup raises money to get the business off the ground. The second stage is called venture financing, which is when a startup raises money to help them grow and expand. The third stage is called mezzanine financing, which is when a business raises money to help them buy or invest in other businesses.
Finally, startups need to understand the concept of valuation. This is the process of determining how much a company is worth. This is important because it will determine how much money investors are willing to give a startup equity they will receive in return.
While these are just a few of the key concepts in corporate finance, they are all important for startups to understand. Corporate finance can be complex, but it’s crucial for startups to have a basic understanding of the concepts to make sound financial decisions.
1. Understanding the financial landscape
One of the most important aspects of corporate finance is understanding the financial landscape. This includes understanding the different financial instruments available, how they work, and what their implications are. This knowledge is critical in order to make sound financial decisions for your startup.
2. Access to capital
Another key reason why corporate finance is important for startups is because it provides access to capital. In the early stages of a startup, it can be difficult to obtain funding from traditional sources such as banks or venture capitalists. However, corporate finance can provide access to alternative sources of funding such as private equity or debt financing.
3. Managing risk
Another key aspect of corporate finance is risk management. Startups are inherently risky ventures, and it is important to have a clear understanding of the risks involved in order to make informed decisions. Corporate finance can help you identify and assess risks, as well as develop strategies to mitigate them.
4. Planning for growth
Finally, corporate finance is also important for startups because it can help you plan for growth. In the early stages of a startup, it is important to have a clear vision for the future and a well-defined growth strategy. Corporate finance can help you develop both things by providing financial analysis and planning tools.
Below are the ways to ensure that your startup does well, following the rules of corporate finance.
- Have a Detailed Business Plan
A detailed business plan which includes estimated costs, liabilities, and assets, is essential for any startup business. Accompanying it shut be a value matrix, SWOT analysis, and PESTLE analysis. The mentioned techniques are designed to outline the company’s managerial strategies and forecasted financial performance.
- Keep Personal and Business Finances Separate
When you’re first starting out, it can be tempting to mix personal and business finances. However, its important to keep them separate to maintain a clear financial picture for your business. Open a separate bank account for your business and make sure to only use business funds for business expenses.
- Know Your Operating Costs
In order to run your business effectively, you need to know your operating costs. This includes both fixed costs (such as rent or insurance) and variable costs (such as materials or labour). Knowing your operating costs will help you price your products or services correctly and make informed decisions about where to allocate your resources.
- Understand Your Cash Flow
Cash flow is the lifeblood of any business, so its important to understand how it works. Cash flow is the movement of money in and out of your business, and it can be affected by factors such as sales, expenses, and invoices. Keeping a close eye on your cash flow will help you avoid any nasty surprises down the road.
- Create a Budget
A budget is a critical tool for keeping your startup on track financially. A budget will help you track your income and expenses and ensure that you are staying within your means. Creating a budget is relatively simple all you need is a list of your expected income and expenses for a given period.
- Keep an Eye on Your Credit Score
Your credit score is important not only for personal finance purposes, but for business finance as well. If you ever need to take out a loan for your startup, your credit score will play a big role in determining the interest rate you’ll pay. Additionally, many landlords and suppliers will check your credit score before doing business with you, so its important to keep it in good shape.
- Get Professional Help When Needed
It is well advised to consult a financial advisor where things are not clear. If one finds a grey area in startup finances, then sourcing the expertise of a professional accountant or financial advisor will help them make sound decisions to keep the business on track for success.
Written by Keren Obara FRIENDS Consult Ltd BA (Marketing); MSC (Management).