Importance of financing in business startups

By: Samyak Raj Shakya

Finance stands as a root for business startups and financing is a major concern for those who are starting a small business. Capital is a vital part of any new business venture and entrepreneurs find themselves scraping for whatever startup funding they can find. A business without a funding source will flounder under the weight of its own debt. Funding is the fuel on which a business runs. Financing helps in smooth design, production and marketing or a product and also keeps the administrative operations efficient.

There are tons of cases where successful enterprises have been brought down especially due to poor financial management. Despite these, startups fail to take care of their finance which ultimately leads to failure in business operations. A business can take different avenues to attain funding, and more than one option can be used. A company can use either debt or equity financing depending upon the factors which affect their debt credibility and personal financing. An entrepreneur can perform a lot of business model development without funding; but when it comes to building the company, funding is necessary. Startup funding pays for incorporation, business licenses, insurance, facilities, equipment, marketing collateral and the hiring of necessary talent. It funds the manufacture of products and the marketing and distribution of services. It also pays for marketing activities that attract customers.

The other aspect for startups to consider is working capital management. It represents the operating liquidity available to businesses. A company can be endowed with assets and profitability but short of liquidity can create problems in business operations. Positive working capital is required to ensure that a firm is able to continue its operation and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. This management of working capital involves managing inventories, accounts receivables, payables and cash.

Business also tend to lose control during additional financing for business expansion. After a certain proportion of debt and equity financing during the initial stages of business, the business should bring up additional capital with a substantial ratio of equity and debt; which depends on the different levels of cost of capital. Higher debts can increase the financial stress and higher equity can lead to decrease of owners’ shares in the business. For this, an optimal financing structure is essential.

Growth is a tempting factor and every business needs to grow over the course of their operations. However, the business can get better returns only through calculated growth projections. The tendency of business failure increases with random and tenacious growth, as businesses are difficult to operate with higher growth rates. Thus, the operations, working capital, manufacturing, customer base and additional financing needs to be continuously looked upon for better financial management.

Leave a comment

Your email address will not be published. Required fields are marked *