Fighting Financial Squeeze

In one of the preceding chapters, we covered the “financial planning” for the mature enterprise. Even there the financial planning and strategy is a function of high importance. Here, we talk about financing the young enterprise in the first half of the first generation. In this phase, financing is of utmost importance: Financing can be decisive for survival. Why? The overriding phenomenon during the first generation is growth. The founder started a small business, a very small one. It can grow and has to grow at a high rate. Otherwise, it will not be sustainable over the generations—and then there is nothing left to analyze. To be able to grow at high rates of more than 10%—up to even 20 or 30%—one needs a high growth of the equity. In a family enterprise which wants to maintain its independence, this growth of equity can only be sourced from retained earnings. And for high retained earnings, one needs high profit rates to start with. For a 20% growth rate, one should have around 15% on sales. But this is only the basis for being able to raise loans at the rate of the growth rates—year on year. No easy task. To cut a long story short: Almost each and every founder of a business is in a constant financial squeeze. Therefore, financing is a topic which has priority on the agenda of a board for a first-generation business.