Preparing financial projections for entrepreneurial firms
Entrepreneurial firms generate capital either internally or externally. Internally, firms rely on their own financial resources. If the entrepreneurial firm has been operating for some time and is profitable, it can support its own expansion. If the firm is not profitable, it can manage its working capital in such a way that it pays for liabilities as they come due. External capital can come from numerous sources: banks, venture capital, the government, business angels, public markets, strategic investors, private partners, and so on. Commercial banks traditionally represent the most important source of entrepreneurial financing, and can satisfy up to 80 percent of an entrepreneurial firm’s capital needs. However, obtaining external financing from a bank can be a challenge. Banks do not tolerate risk well, and risks are inherent to the entrepreneurial process. Banks also tend to not be “friendly” towards entrepreneurs – particularly the owners of new firms that want to develop new products, embrace innovation, build new facilities, or develop markets outside of their home territory. In addition, banks require collateral that can exceed the value of the initial loan by two to three times. If entrepreneurial firms experience financial or operational challenges, banks may abandon their involvement altogether or – at best – refer the troubled case to a workout department (often located outside of the entrepreneurial firm’s target region).