Before you plan to raise the capital, you must ask yourself whether you are using your existing capital efficiently?
Congratulations on embarking on the exciting journey towards an Initial Public Offering (IPO)! As you prepare to raise capital from the public and list your company on the exchange, it’s imperative to assess the efficient utilization of your existing capital. The decisions you make now will not only impact your IPO but also set the stage for long-term wealth creation. Here are key questions to consider:
1. Respect for Capital:
Do you view capital as a scarce, sacred and a strategic asset, hence you use it judiciously, or are you extravagant just because it is available easily?
When capital is available easily (from family, friends, banks etc) businessmen tend to become reckless in spending and careless in investing. In the long-run, such a disrespect for capital costs you an irreparable loss.
2. Financial Literacy:
Beyond sales and profits, do you thoroughly understand your balance sheet and cash flow dynamics?
Do you understand that Profits don’t always translate into cash-in-the-bank? At times it happens that your inventory and receivables suck more cash than you generate via profit, that ultimately lands you in a cash-crunch despite a good profit.
3. Allocation of Capital:
How thoughtfully do you allocate capital?
Are you mindful in deciding what portion of your earnings are reinvested and where? Does the incremental investment bring in overall incremental return? Does this investment sharpen your focus or is it mindless diversification? Do you have a systematic approach to evaluate projects, considering not just potential returns but also the associated risks?
4. CFO Metrics:
What key metrics do your CFO and financial team track regularly?
Do these metrics align with your strategic goals? What plans do you have to optimize these metrics? Ratios like Sales growth, ROCE, FCF, return on incremental investments provide valuable insights.
5. Benchmarking Capital Efficiency:
Are you benchmarking your capital efficiency ratios against industry peers?
Who is the best (for capital efficiency) in your industry and how do you plan to catch up and stay competitive?
6. Stock Market Perception:
Do you understand that the market assigns price-earning multiples (P/E) based on your performance?
Inefficient capital usage can lead to unfavorable P/E ratios, and that will adversely impact your ability to create wealth for investors.
In conclusion, the success of your IPO is not just about presenting impressive numbers but about showcasing a commitment to efficient capital utilization. Investors seek sustainable growth prospects. By addressing these questions and actively working towards capital efficiency, you not only enhance your chances of a successful IPO but also lay a strong foundation for creating lasting value.
