Financing expansion and diversification
Any expansion or diversification of the company's activities, whether it involves higher production levels, new products (e.g. species new to aquaculture/new consumer products) or new technology (e.g. state-of-the art equipment) necessitates an injection of cash to accomplish the task, whether for new capital investment, new or increased live stocks or new equipment
The following options are the main ones available for assessment by the business manager:
- Retained Earnings
- Improved Working Capital Management
- Equity Injection
- Bank Borrowings
- Grant Aid
If you do not appraise all the options available to your company you are not likely to make a success of your bid to expand.
Retained Earnings
The retained earnings (profits) of the company are the first source of funds which can be used to finance growth. For this to be achieved, profits have to be kept within the business by agreement with the shareholders.
Improved Working Capital Management
A company's net working capital position is used widely as a measure of investment risk. This helps to assess the probability of encountering short-term financial difficulties such as the inability to pay bills on time. Because a company's working capital position can affect its ability to make timely loan repayments, some banks may require companies to maintain a minimum net working capital position.
Working Capital
The management (and knowledge) of working capital is critical all companies since there must be enough money available to pay bills and other liabilities when they are due. However too much working capital (being ëcash richí) is seen as a cost to the business. This cost is represented by poor money management since surplus cash is not invested in earning profits for the business.
The key is to keep the minimum amount required for working capital and make suitable investments with any remaining money. The ideal working capital ratio (current assets: current liabilities) for any business is 2:1.
Equity Injection
Equity represents the finance that is committed to the company by its owners/shareholders. The level of these funds, particularly when viewed relative to debt (loans), is an important indicator to third parties of the owner(s) commitment to the business.
New finance can obviously be raised through an increase in equity, provided either by existing share-holders or by incorporating new investors.
Many Regions in Europe have specific investment promotion agencies who may be interested in taking an equity stake in good business prospects in their locality. Among the investment conditions of these institutions, the buying back of their shares within a given time period by the original shareholders is usual. Requirements of these agencies for consideration of investment include a good business plan and an appropriate financial forecast.
Bank Borrowing
Bank loans are another way of funding the growth of the company. When reviewing the range of financing arrangements available it is important to consider the mix of short term versus long term debt within the context of the overall level of finance required.
Overdrafts, term loans and commercial mortgages are amongst the options available. It is important to ensure that the correct mix of loans is assembled to meet the needs of the business, in terms of cost, risk and timing.
Grant Aid
Non-repayable cash grants may be obtained, under certain conditions, for aquaculture-based developments. Many of these grants are related directly to operational improvements and conform to national/EU policies_. It is worthwhile investigating the availability of national and EU grant facilities which are relevant to aquaculture and examining whether your objectives fulfil those of the grant conditions.
Some national and regional organisations also have the possibility of providing special financial assistance which normally has to be reimbursed.
In all cases, it is usual that the company obtaining any grant aid (e.g. for the purchase of equipment) has to pre-finance the acquisition, supplying proof of payment before the grant is realised. Short term bridging loans may be required for this purpose.
Questions
Do you remember the details of the financial analysis that you carried out in Part 1, Reviewing your Performance?
If not, return to this section.
Danger Point
It is imperative to be fully in command of all these financial details before making any major financial commitment of taking any major financial decisions. It may be possible to obtain help from your Producer Association or from the Federation of European Aquaculture Producers (FEAP).
Training provision
See checklist for training provision.
Financial Management
- Preparing financial statements
- Budgeting
- Cash-flow forecasting
- Computerised accounts
- Interpreting financial statements
- Business finance and grant aid