Playing the Business Strategy Game (BSG), neither company has a lot of money in year 11. The companies need to raise funds using either debt or equity. By financing your business through debt, you accept the risk of bankruptcy. Bankruptcy occurs if you default on your loan for 3 consecutive years. Defaulting on your loan also causes your credit rating and stock price to drop. Equity is the alternative to debt for raising capital through the sale of common stock. Losing stock lowers your return on equity (ROE) ratio and earnings per share (EPS) ratio. The advantage of selling shares is that there is no risk of bankruptcy.
I learned an intriguing strategy from 2 successful industry champions. The strategy is to build a financially strong company and sell shares when the share price is high. Then, after purposefully running a bad fiscal year, buy back the stock when the stock price has tanked. This allows your company to raise large amounts of capital using a “build and sink” strategy for your company on a manipulated stock price. This is terribly risky and quite unethical, but also innovative and catches most companies off guard. It is worth keeping in mind the concept of people buying shares at a low price and selling them at a high price when raising funds through shares.
Raising capital through debt is the traditional way of raising money that completely exposes your company to bankruptcy. However, debt เว็บแทงบอล financing can be cheaper than equity financing with an extremely profitable company because the money can be paid back at a fixed annual rate, while share buybacks can become expensive with a rising share price. The big downside to debt is that it can erode profit margins annually through interest expense, a feature that equity doesn’t have.
Both debt and equity have their advantages and disadvantages when it comes to raising capital. Finding the right debt-to-equity ratio will help your company finance its growth and profitability to win the game of business strategy.