Harnessing the Power of Capital

Overview

Few things are more essential in the world of business than capital. It is the lifeblood that fuels growth and innovation. Capital serves as the catalyst that transforms ideas into reality, and it is the crucial tool that enables businesses to seize opportunities and overcome challenges. But for many small and mid-size companies, capital is often a scarce resource, and that scarcity can stifle growth and value creation.

The Capital Conundrum

Most small and mid-size companies are, at least to some extent, capital constrained. This state of affairs is most frequently not a reflection of the potential of a business so much as it is a function of the struggle these companies face in handling their day-to-day business affairs while also driving key strategic initiatives, such as sourcing capital. The reality is that for many companies, capital constraints are self-imposed. Unfortunately, these self-imposed constraints impose a heavy economic cost on business owners, leaders, and other key stakeholders, as these companies find themselves operating on tighter budgets, facing weaker growth prospects, and seeing anemic value creation.

Investment Opportunities

Often, investment in equipment and systems can drive considerable operational efficiencies. These efficiencies, once realized, drive higher profitability and can be substantial drivers of value creation. Unfortunately, investment opportunities are too often deferred or outright rejected by small and mid-sized companies due to their upfront cost. When companies focus on the immediate cost of investment opportunities, and not their long-term benefit, they often find themselves in a vicious cycle of stagnation and declining profitability. However, companies that are able and willing to analyze investment opportunities holistically often find that doing so initiates a virtuous cycle of continuous investment, which yields new efficiencies, resulting in ever higher profitability.

Working Capital

Another critical aspect that many companies overlook is the burden of increased working capital. Working capital is the cash that a company’s operations consume, and it is generally calculated as the sum of current liabilities (less any current debt) less current assets (excluding cash). The result, Net Working Capital, indicates the amount of capital tied up in the operations of a business. Failure to plan for and manage working capital can severely strain a company’s cash flow, inhibit growth, and act as a drag on value. As such, it is critical that companies understand their current and future working capital needs and ensure that they have sufficient capital to support their operations.

The Path Forward

How can companies overcome the challenges posed by capital constraints and unlock their full potential? The answer lies in financial leadership, strategic planning, strong working capital management, and the sourcing of needed capital. The companies that are most successful at driving sizable and consistent value creation are those that understand their current and long-term financial needs, invest the time and effort necessary to determine the optimal mix of financing for their goals, and relentlessly pursue that financing. By understanding their capital needs, exploring various financing options, and making strategic investments, companies can overcome their capital constraints and unlock their growth potential.

No company can be an expert at everything, and small and mid-size companies in particular are frequently extremely talented in their areas of strategic differentiation but have little or no in-house talent outside of those core areas. For many of these companies, finance in general, and sourcing capital in particular, though supportive of value creation, is not a key in-house capability. For that reason, these companies should seek out expert advisory support to ensure that they have the capital needed to reach their full potential.

About the Author

David Johnson is the Founder and Managing Partner of Abraxas Group, a boutique financial advisory firm focused on providing interim leadership to middle market companies in transition. He has served in interim executive, advisory, and board roles for dozens of companies. David is also a thought leader on the topics of business transformation, change management, performance improvement, restructuring, turnaround, and value creation, with numerous articles and speaking engagements to his credit.