Looking for an investor? Understand how the two cycles involved work
One of the best ways to finance your business is with your own money from savings or from selling personal assets, especially during crucial first steps of the business.
The word capital is derived from the Latin word caput, meaning "head,” and in this case, not any other synonym but that part of the body supported by your neck that does all the thinking. The head is the source of all money-making ideas, and good ones get funding quickly whether virgin or already tested in the business environment for a long period of time. So, next time you tell people that you don’t have capital, you might as well be saying that you’re not thinking.
I wish to emphasis that there is enormous difference between the original business which you mooted and the eventual business concept you will have on the ground. The journey in between the two phases is a series of iterations, a topic for another day.
A good idea business idea needs to be presented to the lender or venture capital financier for consideration. We have in the past enumerated diverse ways of raising capital for business, and last week, we discussed which kind of business attracts funding. We introduced you to how to build your credit worthiness to acquire short-term bank credit to support the growth demands of a start-up cash operating cycle.
One of the best ways to finance your business is with your own money from savings or from selling personal assets, especially during crucial first steps of the business where you need to demonstrate that your business experiment has potential. Unfortunately, many owners of small and medium enterprises do not have the financial muscle to raise capital from their own sources. They also lack information on how to go about raising money from external sources funding.
In the eyes of the financier, a business has two components: the cash operating cycle and the capital investment cycle. The cash operating cycle being that of the business where stocks enter as raw material, get processed into finished goods and then sold back to get cash. This, for example, is the case for a business involved in processing or manufacturing. It can be as short as two for a bakery or as long 28 days for a brewery.
In a nutshell, the bread you had for breakfast only took two days to convert from cash used to buy inputs back to cash you paid for it. While the beer in your hands at your local joint in the same evening, took about twenty-eight days to covert from the barley and other ingredients and transport to that joint. When you pay for it, you are completing the conversion of cash used to buy the ingredients and manufacture it back to cash. This cycle in any business is financed by short-term credit in the form of loans and overdrafts, the type you would get in any commercial or microfinance bank.
The capital investment cycle is about the purchase of the fixed assets that are used to produce or support production. The cycle takes longer and is complete when the asset is replaced by a new one. For example, a bakery requires a conveyor belt that moves dough through the furnace, entering one end as dough and leaving the other end as bread. Investment in such a conveyor belt may be required every five years and represents the manufacturing capacity of the business. Financing is through long-term loans and patient capital from investors.
One capital investment cycle should support many profitable cash operating cycles, and when the profit is turned to cash, it is used to pay the loan and expand. Venture capitalists and other providers of patient capital need you to have a good grasp of these two parts of your business, otherwise, you will walk around parading your ego talking badly about banks and wealthy people who do not wish to support your ‘excellent’ business idea.
Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. [email protected].
