Page 58 - Initial Public Offering - An Introduction to IPO on Wall Street

reach its own projections of profits and those of the investment community may have a direct
effect on its stock price. Reliable budgeting and forecasting is therefore essential for a good
IPO, as the market leaves no margin for mistakes and punishes businesses for serious failure.

4.3.8 Treasury

IPO readiness demands that organizations create a forward-looking capital structure. When
an IPO starts to be considered by a corporation, the emphasis is always primarily on the
procedure of equity allocation, critical decisions related to this process and the handling of
investor communication and engagement.

Companies would usually also need to consider accessing debt capital markets in order to
finance continuing business investment requirements, obtain growth resources and, in time,
facilitate future acquisitions.

In line with this, organizations should also consider their overall funding plan, including the
target capital structure, the handling of interest rate risk and future plans for shareholder
payments, including dividend policies and share buyback programs.

The issuance of new debt can also demands that organizations register debt securities, to
collaborate with financial intermediaries (commercial and investment banks) and to create
credit ratings.

In summary, while equity capital is the priority for pre-IPO firms, it is likely that further work
will have to be performed to establish a robust capital structure and ensure continued access to
capital and liquidity at a fair cost to finance the company after the IPO.

Another important requirement for aspiring IPOs is to proactively manage financial risks. This
is because external correspondence related to quarterly financial performance indicators (e.g.,
sales, EPS, cash flow, etc.) is a primary priority for newly-public businesses.

Financial risk indicators linked to interest rates, currency exchange rates, and prices of
commodities are among the factors that affect financial output. Pre-IPO businesses can
consider introducing hedging programs and strategies for controlling foreign exchange,
interest rates, and commodity price risks in order to minimize future fluctuations in financial
performance.

Where financial derivatives are generally utilized for hedging, businesses should examine
whether derivatives utilized in current risk management systems might be eligible for hedge
accounting, enabling hedge gains and losses to be delayed to correspond with the timing of
acknowledgement of actual earnings exposures.

It is critical for companies hoping to become IPOs to secure adequate insurance coverage. Most
businesses do have brokerage partnerships and insurance policies for collateral damage,
business disruption, general liability, employer liability, and many other specialist policies
lines relevant to their business risk profile before an IPO.

Although established partnerships and insurance packages may have fulfilled the requirements
of a business for several years, the run-up to an IPO is an important time to reassess the risk
profile of the business and determine whether current levels of coverage and continuity are
sufficient for a public entity.

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