Organizations with an ideal capital structure have the right debt-to-equity ratio. This ratio maximizes market value while providing the lowest possible cost of capital.
Reaching an optimal capital structure is a foundation for business growth. You need the perfect amount of liquidity to operate, and everyone in the company has to work according to the same business plan to achieve this goal.
If you are just starting a business, and planning your capital structure, here are the top considerations to help you manage it like a boss.
Table of Contents
1. Plan Your Company’s Need For Capital
Your business goals, which include your plan to achieve business growth, will decide what your organization will require for capital. There are a few factors that makeup capital allocation. Here are the areas of the business to analyze.
- Organic growth
- Returning cash to shareholders
To accommodate these areas, the least amount of liquidity is required for business finances. This is a starting point; from here, you can create the company’s balance sheet.
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Calculate what your company needs for liquidity at a basic level. This should include contingent capital access, bank lines, and capital markets. Capital markets refer to commercial paper, convertibles, and term debt.
2. Consider the Risks to Your Business Plans
There are a few ways that your business finances could be at risk. First, it could be the nature of your business, where you cannot predict your cash flow. Another example is a volatile business with a potential competitor threat.
If you are in a “risky” business, you likely want a large cushion for your liquidity.
Further, does your organization have enough cash on hand currently to operate your business? You expect business growth and need enough cash flow to handle the increase. How do you plan to access more funds if this is a challenge?
You need a structure in place to discuss these questions.
3. Creating a Clear and Concise Decision-Making Framework For Liquidity
This will help create discipline in your process. It also helps bring transparency from your treasury to your senior management and board. Further, ensure you follow your business plans.
Decisions are made with thought. No one in the organization is making snap decisions or reacting to changes in the market. Instead, the company operates according to its objectives and capital allocation needs.
Create Your Capital Structure
Here’s how you can get a grip on your business finances. Build your capital structure by planning for capital, considering the risks, and creating a framework. If you can organize these details, you can set your organization up for success!
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