Intro Video Transcript

Most businesses need capital to exist in the exceptions are few in fact unless you can convince your customers to pay you up front for goods or services before you build them or deliver them then your business is going to need capital to survive. Now let's look at the various potential uses of capital. Capital can be used to fund ongoing operations. I've never met an employee who doesn't like to get pay and suppliers a simple ariel capital can also be used to fund capital expenditures to build and maintain plant equipment. Capital can be used for mergers and acquisitions and mergers and acquisition activity allows the company to purchase an incremental or adjacent businesses to accelerate their growth. Capital can be used to fund working capital everything from purchasing raw materials, assembling finished goods and selling goods to customers on credit as incentive to purchase. Capital can be replaced in refinancing opportunities. The idea here is to replace higher costs sources of capital with lower-cost sources of capital replacing equity with debt or higher costs at with lower-cost Debt. Capitalization of the business is another use of capital. Recapitalization covers a variety of circumstances but for example capital can be used to buy out of previous owner or capital could be used to monetize a portion of the shareholders’ investment and finally can be used as a reserve for financial flexibility or to build financial strength. Companies will hold excess capital or strategic purposes either as preventive measures to protect the company from downturns whereas it opportunistic measure to allow it to act quickly when opportunities present themselves. You probably didn't think of all these as potential uses for capital, few people do, most people think of capital all the context of ongoing bills and buying major capital expansions. Capital must serve both shareholder objectives and corporate objectives such as those that are listed on the screen before you. The corporate objectives in the shareholder injectors do not always coincide. For example shareholders may wish to monetize some of their investment by using available debt capacity in the company. At the same time the company may need new capital to fund our growth plan and to explain this just a little further because this is the second time I brought this up. This will be a situation where the company has debt capacity but has chosen not to use it to this point. So the company could raise financing and use those proceeds to pay a special dividend to the shareholders or to buy back shares as a means of modernizing a portion of a shareholder's investment without having the remaining shareholders dilute their interest in the company or having them sell a portion of their investment to realize some cash. Another potential area of conflicting these two objectives between the company and shareholders is a Mounty issue of new equity. The company may wish to pursue growth opportunities but lack the necessary debt capacity or debt funding the shareholder may be on willing to suffer the dilution caused by issuing new equity. And the third example might be Wendy Company may accept new equity or debt financing, however the reporting on the involvement of the new stakeholder closed be detrimental to the business. Some lenders has stringent reporting requirements that cause disruption. Some Private Equity Partners be intrusive to management. Other objectives for the company from those of the present management team or the present shareholder group. Financial strategy must be aligned with the corporate strategy. For the company to be successful, if the corporate strategy demand its growth plan then the capital must be ready and available you can be profitable and go bankrupt if you miss measure financing arrangements. In the corporate strategies to maximize the cash flow for the shareholders in the capital structure should be implemented to optimize its low funds and minimize the audience in cost. Debt financing has been much lower cost than equity financing. So long as the operating cash flows are sufficiently stable to support the debt service costs finding lower-cost funds create value for shareholders. Finally now businesses are enjoying growth their stabilities, some face challenges for many reasons and these companies still need to set up financing strategy to meet the needs of the business. The key priority in these types of situations will be the company's ability to access financing and the flexibility in terms of repayment. Intimately understand your corporate strategy, will position you to seek out these sources of capital that best meet the capital. The types of capital is vary widely on each of these dimensions and in each of the lessons of this course we will look at capital in this context. The availability of the various sources of capital will depend on the nature of the situation and the characteristics of the business. The business does not have to access capital simultaneously. New startup companies are limited in their stores the capital. They typically do not have access to debt financing you rely heavily on equity financing to get started up and get going. On the other hand mature companies are less attractive to growth investors. Typically these companies have assets and cash flows that can be used to raise and maintain and service debt financing. The amount of capital will be constrained by any number of factors such as security you have available to offer, the ability to pay financing costs and the ability to meet financial confidence. Sources of capital can also widely vary. From your own personal savings and perhaps those of family and friends to banks, to pension funds, private equity funds, venture capitalist and perhaps even retail investor someday when you take your company public. The term debt can vary from short-term sources of financing say credit from our suppliers to term loans and such as common shares of preferred shares. The cost dimension of a capital. Some capitals are available for free. Other sources are very expensive, it can cost you 25 percent or more, the conditions associated with maintaining and establishing the financing are important. Some sources don't come with any conditions at all say common shares which makes it harder to get into trouble. Other resources accomplished stringent conditions which have not met could cost you your company. Other factors to consider impacting the availability of capital aside from the company's position in the business lifecycle include the business attributes which include the size of the business, the level of profitability, consistency of historical results, experience of the management team and the company's position in the market the more favorable all these attributes of them were financing alternatives that are going to be available. Different industries have different risk profiles. Some industries are very sinkable. Such as commodity industries which caused profits to fluctuate widely. Industries such as consumer products, utilities are more stable. Factors such as these impact the availability of various sources of financing and regardless of the business in the industry the reality is that the capital markets themselves at their own degree of cyclicality. IPO may be hot one year and not the next. Thanks may landing me to a specific sector 1 year and different one the next, to not at all in the third year. This may be beyond the control of management bur must be a factor into your financing strategy. Keep in mind is sometimes you may raise capital when you can even when you don't need it. So to summarize this model first recognized there probably needs for capital that you may have realized at first blush. Second appreciate the objectives of capital and also recognize that the objectives of the shareholder and the corporation be complete the times. Third realize that strategy is not an isolated plan, its introhook to your overall strategic plan and finally when we go to evaluate the different sources of financing way all the dimensions capital. These images provide you with room to negotiate and make tradeoffs. That’s all for this lesson so until next time don't stop.