CASH PLANNING (16)

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CASH PLANNING (16)

  1. 1. Growing and Managing a Small Business An Entrepreneurial Perspective
  2. 2. Chapter 16 Cash Planning and Start-up Financing
  3. 3. Learning Outcomes <ul><li>Describe the process for calculating how much capital is needed to start the business. </li></ul><ul><li>Explain how to forecast sales and capital expenditures using triangulation. </li></ul><ul><li>Discuss the major sources of capital for a start-up venture. </li></ul><ul><li>Compare and contrast financing with equity and with debt. </li></ul>
  4. 4. Chapter Outline <ul><li>Cash Needs Assessment </li></ul><ul><li>Financing with Equity Sources </li></ul><ul><li>Financing with Debt </li></ul><ul><li>Government Sources of Funding </li></ul>Getty Images
  5. 5. Cash Needs Assessment <ul><li>Triangulation </li></ul><ul><li>Approaching the problem from three different angles: </li></ul><ul><ul><li>the entrepreneur’s own knowledge, </li></ul></ul><ul><ul><li>the industry and </li></ul></ul><ul><ul><li>the market or customer. </li></ul></ul>
  6. 6. Triangulation <ul><li>The six steps: </li></ul><ul><ul><li>Prepare a process flow chart </li></ul></ul><ul><ul><li>Identify the business’s position on the value chain </li></ul></ul><ul><ul><li>Develop a business timeline </li></ul></ul><ul><ul><li>Develop financial premises </li></ul></ul><ul><ul><li>Forecast sales and capital expenditures </li></ul></ul><ul><ul><li>Calculate start-up capital requirements </li></ul></ul><ul><ul><li>Conduct a sensitivity analysis </li></ul></ul>
  7. 7. Triangulation <ul><li>Step One: Prepare a Process Flow Chart </li></ul><ul><li>Depicts all the activities of the business </li></ul><ul><li>Illustrates personnel needs and equipment required </li></ul>
  8. 8. The Process Flow Chart
  9. 9. Triangulation <ul><li>Step Two : Identify the business’s position in the value chain </li></ul><ul><li>To determine how much the company can charge for its product or service </li></ul><ul><li>To know how much it costs to acquire inventory or raw material. </li></ul>Getty Images
  10. 10. Triangulation <ul><li>Step Three: Develop a business timeline </li></ul><ul><li>Depict the seasonal patterns in the industry </li></ul><ul><li>Mark the key events that affect the business </li></ul>Getty Images
  11. 11. Triangulation <ul><li>Step Four: Develop Financial Premises </li></ul><ul><li>Financial assumptions to carry explanations and justifications </li></ul><ul><li>Make forecasts of sales and demand </li></ul>Getty Images
  12. 12. Estimating Demand & Revenue – an illustration <ul><li>DR. HAPPY TOOTH wants to assess demand for tooth whitening and root canal surgery in Berrien Springs, Mich. </li></ul><ul><li>Census Data for Berrien Springs: </li></ul><ul><li>Population = 12,800 </li></ul><ul><li>20% - Under 20 yrs old = 2560 people </li></ul><ul><li>22% - 21 to 40 yrs old = 2816 people </li></ul><ul><li>26% - 41 to 60 yrs old = 3328 people </li></ul><ul><li>23% - 61 to 80 yrs old = 2944 people </li></ul><ul><li>9% - over 80 years old = 1152 people </li></ul><ul><li>Target Markets: </li></ul><ul><li>Tooth Whitening > 21 to 40 year olds = 2816 people </li></ul><ul><li>Root Canal Surgery > 41 to 80 year olds = 6272 people </li></ul>
  13. 13. Estimating Demand <ul><li>Target Markets: </li></ul><ul><li>Tooth Whitening > 21 to 40 year olds = 2816 people </li></ul><ul><li>Root Canal Surgery > 41 to 80 year olds = 6272 people </li></ul><ul><li>Dr. Happy Tooth assumes he can capture between 2 and 5% of the target market for tooth whitening in his first year of operation (due to limited competition for this service). He also assumes he can get between 1 and 3% of the root canal business. Thus, we generate the forecast below, noting optimistic, pessimistic, and most likely scenarios: </li></ul><ul><li>Optimistic Pessimistic Most Likely </li></ul><ul><li>(5%) (2%) (3.5%) </li></ul><ul><li>Tooth Whitening Clients 141 56 99 </li></ul><ul><li>(3%) (1%) (2%) </li></ul><ul><li>Root Canal Procedures 188 63 125 </li></ul>
  14. 14. Estimating Revenue <ul><li>If the standard fee for tooth whitening is $300 and the standard charge for a root canal is $500, Dr. Happy Tooth can use the projected demand figures to estimate the revenues that would be generated under each assumed condition (see revenue estimates in red below): </li></ul><ul><li>Optimistic Pessimistic Most Likely </li></ul><ul><li>(5%) (2%) (3.5%) </li></ul><ul><li>Tooth Whitening Clients 141 56 99 </li></ul><ul><li>Est . Whitening Revenue $42,300 $16,800 $29,700 </li></ul><ul><li>(3%) (1%) (2%) </li></ul><ul><li>Root Canal Procedures 188 63 125 </li></ul><ul><li>Est. Root Canal Revenue $94,000 $31,500 $62,500 </li></ul><ul><li>TOTAL REVENUE $136,300 $48,300 $92,200 </li></ul>
  15. 15. Triangulation <ul><li>Step Five: Forecast Sales and Capital </li></ul><ul><li>Expenditures </li></ul><ul><li>Three sources of information enable a </li></ul><ul><li>good estimate of sales: </li></ul><ul><ul><li>Industry sources - distributors, vendors, and experts </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><ul><li>Like or substitute products </li></ul></ul>
  16. 16. Triangulation <ul><li>Step Six: Start-up Capital Requirements </li></ul><ul><li>A cash flow statement is needed to figure start-up capital requirements. </li></ul>
  17. 17. Triangulation <ul><li>Step Six: Start-up Capital Requirements </li></ul><ul><li>Hard costs: equipment, furniture etc. </li></ul><ul><li>Soft costs: deposits, training costs etc. </li></ul><ul><li>Working capital: to maintain business until it generates revenue </li></ul><ul><li>Contingency factor: a cushion </li></ul>
  18. 18. Cash Needs Assessment <ul><li>Conduct a Sensitivity Analysis -- the seventh step </li></ul><ul><li>To identify the critical numbers: </li></ul><ul><li>time to develop sales </li></ul><ul><li>volume of sales </li></ul><ul><li>price maintenance </li></ul><ul><li>costs more than anticipated. </li></ul>
  19. 19. Finance Sources <ul><li>Financing With Equity Sources </li></ul><ul><li>Financing With Debt </li></ul><ul><li>Government Sources Of Funding </li></ul><ul><li>Customers And Suppliers </li></ul>Getty Images
  20. 20. Finance Sources <ul><li>Financing with Equity Sources </li></ul><ul><li>Getting an ownership stake </li></ul><ul><li>No guaranteed returns </li></ul><ul><li>No protection against losses </li></ul><ul><li>Appreciation in value through </li></ul><ul><ul><li>growth in earnings and </li></ul></ul><ul><ul><li>growth in assets </li></ul></ul><ul><ul><li>Takes time to float </li></ul></ul>
  21. 21. Finance Sources <ul><li>Financing with Debt </li></ul><ul><li>Using Convertible Debt </li></ul><ul><li>Commercial Banks </li></ul>Getty Images
  22. 22. Finance Sources <ul><li>Using Convertible Debt </li></ul><ul><li>Better returns to lenders </li></ul><ul><li>Lenders get returns from day one </li></ul><ul><li>Possibility to get back the loan amount </li></ul><ul><li>Venture gets immediate use of funds </li></ul><ul><li>Conversion relieves the burden of debt </li></ul><ul><li>Planning the timing is possible </li></ul>
  23. 23. Finance Sources <ul><li>Commercial Banks </li></ul><ul><li>Are highly regulated </li></ul><ul><li>Look at the five “C’s”: character, capacity, capital, collateral, conditions </li></ul><ul><li>Favor ventures that can give hard assets as collateral </li></ul><ul><li>Are difficult to get financing from </li></ul>
  24. 24. Finance Sources <ul><li>Commercial Banks look at: </li></ul><ul><li>The primary source of repayment of a loan </li></ul><ul><li>The secondary source of repayment </li></ul><ul><li>The character of the parties involved </li></ul><ul><li>Profitability ratios </li></ul><ul><li>Operating margin </li></ul>
  25. 25. Finance Sources <ul><li>Commercial finance companies or asset based lenders: </li></ul><ul><li>Are less rigid compared to regular banks </li></ul><ul><li>Often charge a higher rate of interest </li></ul><ul><li>Consider the quality of the assets of the business </li></ul>
  26. 26. Finance Sources <ul><li>Government Sources of Funding </li></ul><ul><li>Small Business Investment Company (SBIC) </li></ul><ul><li>Venture Capital Institutes and Networks </li></ul><ul><li>Small Business Administration (SBA) Loans </li></ul><ul><li>State-Funded Venture Capital </li></ul><ul><li>Small Business Innovative Research (SBIR) </li></ul>
  27. 27. Government Finance Sources <ul><li>Small Business Investment Company (SBIC) </li></ul><ul><li>Provide long-term loans </li></ul><ul><li>Provide equity capital </li></ul><ul><li>invest in small and growing businesses </li></ul><ul><li>invest over longer periods of time </li></ul>
  28. 28. Government Finance Sources <ul><li>Venture Capital Institutes and Networks </li></ul><ul><li>Institutes established on the campuses of major universities </li></ul><ul><li>Act as conduits to bring together the entrepreneurs and investors </li></ul><ul><li>Entrepreneur easily locates interested investor </li></ul>
  29. 29. Government Finance Sources <ul><li>Small Business Administration (SBA) Loans </li></ul><ul><li>provide aid, counsel, and protection </li></ul><ul><li>Many loan programs: </li></ul><ul><li>Micro loans-up to $35,000 </li></ul><ul><li>LowDoc Loans -- up to $150,000 </li></ul><ul><li>SBA Express loans -- up to $250,000 </li></ul><ul><li>Guarantees given to intermediaries who sanction loan </li></ul>
  30. 30. Government Finance Sources <ul><li>State-Funded Venture Capital </li></ul><ul><li>States give incentives </li></ul><ul><ul><li>Tax holidays </li></ul></ul><ul><ul><li>Tax exemption and relief </li></ul></ul><ul><ul><li>Equity participation </li></ul></ul><ul><ul><li>Loan programs </li></ul></ul><ul><ul><li>Convertible debt </li></ul></ul>
  31. 31. Government Finance Sources <ul><li>Small Business Innovative Research (SBIR) </li></ul><ul><ul><li>Federal agencies sanction grants </li></ul></ul><ul><ul><li>To carry on research on products </li></ul></ul><ul><ul><li>Grants to technology based ventures </li></ul></ul><ul><ul><li>Having fewer than 500 employees </li></ul></ul><ul><ul><li>Independently owned ventures </li></ul></ul>
  32. 32. Government Finance Sources <ul><li>Small Business Innovative Research (SBIR) grants have three levels: </li></ul><ul><li>Phase I is the project feasibility stage, providing up to $100,000 for initial feasibility to be completed in six month.. </li></ul><ul><li>Phase II provides up to an additional $750,000 for projects that have the most potential after completing Phase I. This funding lasts for two years. </li></ul><ul><li>Phase III brings in private sector funds to commercialize the new technology. </li></ul>
  33. 33. Finance Sources <ul><li>Customers and Suppliers </li></ul><ul><li>Understand the entrepreneur’s business </li></ul><ul><li>Have a vested interest </li></ul><ul><li>May grant extended payment terms </li></ul><ul><li>May offer special terms favorable to the business. </li></ul>
  34. 34. End Chapter 16

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