I Raised Capital for My Business, What Should I Do With It?

 

Have you successfully raised money for your business? 

Whether the funds were attained through equity or debt funding, you convinced them that the money was necessary to accelerate your growth and carry out your strategic vision. Now, it is time to put your pitch into action.

So, are you wondering what should I do with investment capital?

Here are some ideas for fund allocation and strategies to consider before you begin spending.  

What Was in Your Business Plan?

In order to attain the money in the first place, there is a strong likelihood that you have already presented investors with a detailed plan that showed them three things:

1. Why you need money
2. How much you required 
3. How you would use the funds

Especially for early-stage financial capital, investors and creditors are not likely willing to simply cut a blank check. Instead, risking their funds is contingent on a clear action plan that convinces them the investment will provide tangible ROI. 

That said, there may be dozens of reasons why a growing business asks for funds. Today, we will review some of the more common requests.

Improving Cash Flow

Even when your budding business may be on the right path, it can still lack the necessary cash flow that operations demand. Artificially increasing cash on hand allows a company to increase its buying power, make bulk purchases, or pay vendors or employees quicker. 

In some cases, equity financing can fund growth for companies that do not yet have positive cash flow. And unlike debt financing, equity does not have an amortization schedule. This gives the business freedom to direct the funds where they are most needed without worrying about repaying the lender by a set time. 

Hire More Employees  

In the early stages of a company’s growth cycle, early team members may need to wear several hats. But, an infusion of cash can enable you to hire someone to take over those specific duties. 

And what are the benefits of a strategic hire? Two major advantages include: 

• The person who takes over the role is likely better suited for the task, especially for a job like accounting or marketing. As a specialist, they should be more capable and instantly add years of experience and industry knowledge—all of which benefit the business going forward. 

• It frees up the person who was originally in charge of handling the tasks, many of which may have been outside of their realm of expertise. Or, a new hire could supplement an existing specialist who is stretched too thin, helping alleviate some of their workload. 

Along these lines, a capital raise could go toward increasing the salaries and benefits for all company employees. In fact, in a competitive business climate, such an action may be necessary to retain talent or convince promising candidates to join your effort. As Harvard Business Review notes, a recent survey found that: 

“Two-thirds of workers would quit their jobs if they did not feel appreciated. Constantly hiring and training new workers to replace those who leave isn’t just expensive. Higher turnover creates a culture dominated by instability and reduces institutional knowledge among employees.”

Strategic Growth Initiatives

Does your website need a revamp? Do you need to turn your marketing and sales valves on? 

These types of growth initiatives usually have hefty upfront costs—not to mention all of the related issues like legal. 

But flush with new funds, you should be able to direct the money to make those engines go. Crucially, however, such endeavors often fail to provide instant ROI. They take significant time, effort, and money to simply get off the ground, let alone make their impact felt. 

Having this cash cushion gives a business the freedom to focus on long-term high-upside initiatives that might otherwise be too costly or risky to justify using the business’ limited cash flow on.   

Purchases for the Business

A modern business will likely require strategic investment in physical capital. How much and what depends on the specific company and its industry. That said, common investments include: 

• Property – Whether renting, leasing, or purchasing, a business may need various types of property to operate. This could be for office space, a factory, warehousing, or any other manner of brick and mortar location.  

• Technology – Especially in a digital economy, businesses rely on a gamut of technologies to optimize their business activities. For instance, you may need to invest in SaaS programs like a CRM, accounting software, purchasing system, or cloud-based services.

• Equipment – Similarly, your business and its employees will likely require equipment to do their job. In some cases, you may need office equipment. Or, perhaps your company also relies on heavy machinery, vehicles, or tools. 

Considerations Before Spending Your Capital

If you have not already, you must determine your company’s burn rate (the investment included) before allocating a cent of your acquired capital. Your burn rate paints a clear picture of how much you are spending and how long you can keep that spending rate up. 

Establishing this timeline enables you to more responsibly plan how to use your funds and grow your future revenue.  

Along these lines, it is vital that you do not use all of your raised capital at once. Reserves give you greater flexibility to invest in strategic opportunities or divert funds as needed in the case of an emergency or unexpected expense. 

In that manner, a portion of your funds can act as a failsafe that protects your business from unexpected market shocks.