Every operating company eventually needs more capital — to grow, to bridge a cash gap, to acquire, to refinance. The CFO's job is to answer three linked questions: how much do we raise, in what mix of equity and debt, and when. Each decision has consequences that propagate for years. Get them right and the company has runway and optionality. Get them wrong and the company's strategic choices are constrained by its capital structure for a decade.
The three decisions
- How much: enough to fund the plan plus a buffer for downside surprises. The buffer is what separates resilient companies from fragile ones. Most CFOs raise enough for 18-24 months of operations even when 12 would be sufficient.
- What mix: equity dilutes ownership but doesn't have to be repaid; debt preserves ownership but imposes fixed payments and discipline. The right mix depends on cash-flow predictability, growth stage, and the cost of each.
- When: capital markets cycle. Equity is cheap when valuations are high; debt is cheap when rates are low. The best CFOs raise opportunistically — when capital is available — rather than reactively when it's needed.
The CFO's first principle
Raise when you can, not when you have to. By the time you absolutely need capital, the negotiating leverage has shifted to the providers. The price they ask reflects both the risk and your weakness. Companies that raise during good times always pay less than companies that raise during crises. This principle, internalised, is worth more than any specific financing technique.
Why this is consequential
Financing decisions affect: (1) Valuation — too much debt and the cost of equity rises (financial-distress risk); too much equity and dilution per share constrains future raises. (2) Control — bringing in a VC means board seats and reserved matters; bringing in debt means covenants that restrict major decisions. (3) Operational flexibility — debt-service obligations force discipline but constrain pivots; equity gives flexibility but raises expectations. (4) Downside resilience — what survives a 30% revenue decline? Companies with too much fixed debt go under; companies with equity cushion ride it out.
The capital stack — seniority ranking
Most senior (paid first in distress, lowest yield demanded)────────────────────────────────────────────────────────Senior secured debt (bank loans, mortgage debt)Senior unsecured debt (corporate bonds, notes)Subordinated debt (mezzanine, junior notes)Convertible debt (between debt and equity)Preferred equity (preference shares)Common equity (last to be paid, residual claim)────────────────────────────────────────────────────────Least senior (paid last, highest expected return)Every financing instrument fits somewhere on this stack. The stackdetermines pricing (more senior = lower yield) and what gets paid firstin distress.
Exercise
A Kenyan manufacturer with KES 2bn revenue and KES 350m EBITDA wants to raise KES 800m for an expansion. They have KES 500m of existing debt. The CFO is choosing between: (a) all bank debt at 13%; (b) 50/50 equity-debt with new equity at a 5x EBITDA multiple; (c) a convertible bond at 8% coupon convertible at 8x EBITDA. Walk through each option's impact on leverage, dilution, and downside.