Capital Management - Playing with Risk

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This presentation will focus on the implied costs of certain types of capital. Both in terms of risk and return. How do you calculate that and organize in such a way that your company is less exposed to risk or default. Although capital is not an asset which contributes to the intrinsic value and core operations of your company, it is the means to some pretty fundamental aspects of your company. A well managed capital structure with an optimal risk and return balance will add to the long-term survival of your company.

Author: Eva Hukshorn

Published in: Business, Economy & Finance
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Capital Management - Playing with Risk

  1. 1. Capital  Management  Playing  with  Risk  Author:  Eva  Hukshorn     1  
  2. 2. EFactor:  An  introduc9on  •  Founders  Adrie  Reinders,  Marion  Freijsen,  Roeland  Reinders  •  Started  OHM  Inc.  in  2004:  Business  Development  for  Fortune  2000  •  Serving  (mainly)  technology  companies  around  the  globe  •  Goal:  assist  emerging  technology  companies  in  selling  their  product  to  Corporates  •  In  2007  they  wrote  a  book:  The  N-­‐Factor   -  How  efficient  networking  can  change  the  dynamics  of  your  business   -  Huge  success:  no  theory,  but  hands-­‐on  9ps  &  tricks  •  Result:  EFactor  -­‐  a  social  plaUorm  for  entrepreneurs   -  Strategic  business  networking  impacts  the  future  of  your  business   -  Goal:  share  knowledge,  increase  sales,  decrease  costs,  find  capital   -  Mission:  increase  success  of  entrepreneurs  to  start-­‐up  or  accelerate  their  organiza9on   -  In  2012  the  new  book  was  launched:  The  E-­‐Factor:  Entrepreneurship  in  the  Social  Media  Age     EFACTOR,          THE  WORLD’S  LARGEST  ONLINE  NETWORK  FOR  ENTREPRENEURS  ON  EARTH       An  online  community  offering  you  a  network,  knowledge,  events,  and  every  business  resources  you  need  to   succeed   2  
  3. 3. Eva  Hukshorn:  An  introduc9on  •  Work  Experience   -  Current:    Partner  EFactor        Board  of  Advisory:  TreFoil  Energy  /  CleanDrinks  /          Global  Thinkers  /  ShowLinq            Coach  Startup:  Bootcamp  Amsterdam  /  New  Venture  McKinsey   -  2009  –  2010:  Dutch  Bou9que  –  Marktlink  Mergers  &  Acquisi9ons,  Amsterdam   -  2007  –  2009:    Royal  Bank  of  Scotland  –  Corporate  Finance,  Amsterdam   -  2004  –  2009:    ABN  AMRO  –  Corporate  Finance  New  York,  Amsterdam   -  2003  –  2004:    Accenture  –  Consul9ng  London,  Amsterdam  •  EducaJon   -  1997  –  2002:  MSc  Economics,  Finance  –  University  of  Groningen,  the  Netherlands   -  2003:      Interna9onal  &  Asian  Studies  –  Na9onal  Sun  Yat-­‐Sen  University,  Taiwan   -  2009  –  2011:    Cer9fied  Management  Accoun9ng  (CMA)  –  Ins9tute  of  Management  Accountants            (IMA),  United  States   -  2009  –  2001:    Colloquium  General  &  Modern  Art  –  Academy  for  History  of  Art,  the  Netherlands   -  2012:    Interna9onal  Financial  Report  Standards  (DipIFRS)  –  Associa9on  of  Chartered  Cer9fied          Accountants  (ACCA),  United  States   3      
  4. 4. FUNDING  TUESDAY,  EVERY  TUESDAY  So  what  can  you  expect  from  us  each  Funding  Tuesday?  1.  Webinars  on  EFactor  on  Finance  &  Funding  related  topics  in  the  EVENT   Sec9on  2.  Blogs  &  interviews  with  informal  investors  and  funded  entrepreneurs   with  9ps  &  tricks  in  the  BLOGS  sec9on  under  NOW  3.  Finance  &  Funding  related  ar9cles  on  NOW  feed  4.  In  the  Finance  &  Funding  GROUP  on  our  website  you  will  find  Q&As  of  the  webinars  under     NETWORK  5.  In  the  KNOWLEDGE  base  you  will  find  more  and  more  presenta9ons  on  Finance  &  Funding   related  topics,  including  the  webinar  presenta9ons  6.  And  if  you  become  a  VIP  MEMBER  you  will  personally  be  supported  on  your  Finance  &  Funding   related  ques9ons   4    
  5. 5. Webinar  Program  Overview  2012  June  19:    Business  Plan  Wri9ng  -­‐  A  Roadmap  to  Success  July  3:      Pitching  &  Presenta9on  -­‐  3  Minutes,  1  Impression  July  17:    Strategy  -­‐  A  Vision  for  the  Future,  A  Strategy  for  Geing  There  July  31:    Budge9ng  &  Forecas9ng  -­‐  Predic9ng  the  Outcome  Aug  14:    Working  Capital  -­‐  An  Unknown  Key  to  Success  Aug.  28:    Capital  Management  -­‐  Playing  with  Risk  Sept  11.:    Funding  &  Investments  -­‐  Some  Sources  are  More  Equal  then  Others  Sept.  25:    Valua9on  -­‐  Art  or  Science  Oct  9:      Exit  Strategy  -­‐  Nice  to  Have  or  Need  to  Have?  Oct.  23:    Bootstrapping  -­‐  An  Alterna9ve  Answer  to  Funding  Nov  6:    Crowdfunding  -­‐  The  Power  of  Friends,  Family  and  Fools  Nov.  20:    Networking  -­‐  Nice  You  have  3000  Friends,  I  have  30  Relevant  Connec9ons  Dec.  4:      Marke9ng  &  (Social)  Media  -­‐  Noise  or  Value?  Dec.  11:    No  Sales,  No  Glory  Dec.  18:    Most  Common  Mistakes  of  Entrepreneurs   5    
  6. 6. Capital  Management:  An  Essen9al  Step  to  Become  Market  Leader   HR  &  People   management   Customer   Risk   recruitment  &   management   management   Strategic   Managing   alliances  &   Finance   transacJons   OperaJonal   effecJveness  There  are  6  focus  areas  for  becoming  a  Market  Leader.  Finance  is  one  of  them!   6  
  7. 7. Capital  Management  contributes  to  the  opera9ng  cycle  •  Short  term  cash  contributes  to  immediate  deprecia9on  of  short  term  loans  •  Short  term  loans  are  quick  way  of  financing  and  launching  short  term  assets   5   1+7   ACCOUNT   ACCOUNT   CASH   PAYABLE   PAYABLE   6   2+3   1   4   EXPENSES   RAW   MATERIALS   2   3   FINISHED  GOODS   WORK-­‐IN-­‐PROGRESS   7  
  8. 8. 4  Dynamics  of  Capital  Management   Preserving   Op9mizing   Capital   Capital   Capital   Management   Raising             Inves9ng         Capital   Capital   8  
  9. 9. 1.  Preserving  Capital  Aspects  of  preserving  capital:  •  Smooth  Opera9ng  Cycle   -  Cash  flow  planning   -  Es9mate  risk   -  Involve  relevant  people  •  Debt  management   -  Covenants   -  Alterna9ves  •  Control  costs   -  Cuing  in  line  with  strategy   -  Remain  value  Source:  2009  DUXNRO  Consul>ng  Services  and  Jack  Heald:  The  Entrepreneur’s  Guide  to  Working  Capital  Requirements     9        
  10. 10. 2.  Op9mizing  Capital  Aspects  of  opJmizing  capital:  •  Focus  on  cash   -  Short  term  liabili9es  vs.  current  assets   -  Turnover  Inventory  &  Account   Receivable  into  cash  •  Benchmark  performance   -  Historically   -  Compe9tors  •  Act  early  &  prepare   -  Plan  &  Involve  •  Ac9ve  aitude  asset  management  Source:  Ernst  &  Young  –  Managing  Capital,  The  essen>al  guide  for  fast-­‐growth  companies   10  
  11. 11. 3.  Inves9ng  Capital  Aspects  of  invesJng  capital:  •  Be  swin   -  Plan  &  prepare   -  Due  diligence   -  Hunt  for  opportuni9es  •  Quality  over  quan9ty  •  Diversify  investments  •  Communica9on   -  Value  proposi9on   -  Focus  on  drivers  that  maoer  Source:  Ernst  &  Young  –  Managing  Capital,  The  essen>al  guide  for  fast-­‐growth  companies   11  
  12. 12. 4.  Raising  Capital  Aspects  of  raising  capital:  •  Prepara9on   -  Future  needs  &  risk   -  Focus  •  Alterna9ves   -  Inform  yourself   -  Improve  nego9a9on  posi9on  •  Local  funding   -  Mature  markets   -  Addi9onal  insights  &  network  Source:  Ernst  &  Young  –  Managing  Capital,  The  essen>al  guide  for  fast-­‐growth  companies   12  
  13. 13. Capital  Management:  Main  items  to  look  aner   WORKING  CAPITAL   -­‐/-­‐   Current  Assets   Current  LiabiliJes  /           Long  term  debt   •  Account  Receivable   Short  term  debt   •  Interest-­‐bearing   •  Inventory   •  Account  Payable   loans   •  Opera9ng  cash   •  Short-­‐term  loans       +   TOTAL  DEBT   13  
  14. 14. Account  Receivable  •  Startups:  30%  of  assets  are  account  receivables    •  Transac9on  has  already  taken  place  =>  customers  owe  you  money  •  Establish  a  policy  around  your  cash  flows:   -  Customer  type   -  Sales  process   -  Invoice  procedure   -  Errors  &  disputes   -  Procedure  around  solving  issues   14  
  15. 15. Account  Receivable  Management  •  Sales  on  credit  policies  should  include:   -  Decisions  on  offering  trade  credit   -  Management  and  monitoring   receivable  balance  •  Reduce  risk  of  non-­‐payment:   -  Advance  payments   -  Offset  amounts  owed  vs.  amounts  due   -  Requiring  a  third-­‐party  guarantee   -  Ownership  when  paid   -  Insurance  •  Bad  debt?   -  nego9ate   -  third-­‐party  collec9on   -  budget  5-­‐10%  write-­‐off  on  Account   Receivables   15  
  16. 16. Inventory  •  Inventory  management  is  last  on  the  to-­‐do  list  of  every   entrepreneur  •  Holding  inventory  is  an  opportunity  costs  and  a  real  cash  out  •  Management  of  inventory  means:   -  Planning   -  Budge9ng   -  Understanding  supply  chain  •  Pareto  rule,  especially  for  start-­‐ups:  20%  of  your  inventory  accounts   for  80%  of  your  revenue   16  
  17. 17. Inventory  Management  •  Different  categories  of  inventory:   -  Produc9on  supply   -  Working-­‐in-­‐progress   -  Finished  goods    •  Inventory  valuaJon:   -  Per  produc9on  category   -  Average  inventory  valua9on   -  Different  models  to  value   -  Seasonal  effect   17  
  18. 18. Account  Payable  Management  •  Account  Payable  –  the  biggest  excuse  in   the  book  •  Accounts  Payable  are  the  reverse  of   Account  Receivable  •  Expensive  source  of  funding  when  not   paid  in  9me  on  year  basis!  •  EXAMPLE         -  Discount  Account  Payable    2%  within  30  days   -  Your  payment          aner  50  days   -  Cost  of  delay          20  days  (50  minus  30  days)  x  2%   -  Cost  of  delay  annualized      [365  days  /  20  days]  x  2%  =  36.5%     18  
  19. 19. Interest  Bearing  Debt  Management  •  Reasons  for  debt:   -  Support  cash  flows  to  keep  opera9ng  cycle  going   -  Opera9onal  growth   -  External  growth    •  Debt  credibility  checks:   -  Debt-­‐to-­‐equity  ra9o:  Long-­‐term  interest  bearing  debt  DIVIDED  BY  Equity   -  Solid  business  strategy   -  Historical  payment  rou9ne   19  
  20. 20. Interest  Bearing  Debt  Covenants   1 AffirmaJve  covenants:    obliga9ons   2 NegaJve  covenants:    limits  on  ac9ons       3 Financial  covenants:      performance  ra9os    •  Advise:   -  Create  plan  for  ac9on  when  breaching  a  covenant     -  Inform  a.s.a.p.  on  breach   -  Renego9ate  when  not  market  conform   -  Create  overview  of  all  covenants  and  update  regularly   20  
  21. 21. Working  Capital,  a  form  of  debt?  •  Debt:    all  outstanding  long-­‐term  interest  bearing  liabili9es  •  Net  Debt:  all  outstanding  long-­‐term  interest  bearing  liabili9es  MINUS  cash  •  If  working  capital  is  cash,  is  it  included  in  net  debt?  January Year 5 – DEAL AGREED March Year 5 – DEAL CLOSED  Fixed Assets 100 Equity 100 Fixed Assets 100 Equity 100Receivable 300 Debt 250 Receivable 500 Debt 350  Cash 50 Payable 100 Cash 50 Payable 200  Total 450 Total 450 Total 650 Total 650  Purchase price for the share: Company Value MINUS net debt = Equity ValueTotal value of the company 2,000 Total value value of the company 2,000Net debt (200) Net debt (300)Purchase price for the shares 1,800 Purchase price for the shares 1,700 21  
  22. 22. Working  Capital:  Net  debt  -­‐  Example  January Year 5 – DEAL AGREED March Year 5 – DEAL CLOSEDWorking capital level of 200 Working capital level of 300  Fixed Assets 100 Equity 100 Fixed Assets 100 Equity 100Receivable 300 Debt 250 Receivable 500 Debt 350  Cash 50 Payable 100 Cash 50 Payable 200  Total 450 Total 450 Total 650 Total 650  No reference made to working capitalTotal value of the company 2,000 Total value value of the company 2,000Net debt (200) Net debt (300)Purchase price for the shares 1,800 Purchase price for the shares 1,700 22  
  23. 23. Working  Capital:  Net  debt  –  Example  including  Working  Capital  January Year 5 – DEAL AGREED March Year 5 – DEAL CLOSEDWorking capital level of 200 Working capital level of 300  Fixed Assets 100 Equity 100 Fixed Assets 100 Equity 100Receivable 300 Debt 250 Receivable 500 Debt 350  Cash 50 Payable 100 Cash 50 Payable 200  Total 450 Total 450 Total 650 Total 650  Average working capital level of 250Total value of the company 2,000 Total value of the company 2,000Net debt (200) Net debt (300)Actual WC -/- reference WC (50) Actual WC -/- reference WC 50Purchase price for the shares 1,750 Purchase price for the shares 1,750 23  
  24. 24. Capital  Management  –  Conclusion    •  Managing  Finance:  one  of  6  core  areas  to  become  Market  Leader  •  4  dynamics  of  Capital  Management:   -  Preserving   -  Op9mizing   -  Inves9ng   -  Raising  •  Working  capital  and  debt  main  items  to  manage  •  Planning,  Policy  &  PreparaJon   6  preparaJon  webinars  so  far:     Business  plan  wriJng,  Pitching  &  PresentaJon,  Strategy,  BudgeJng  &  ForecasJng,   Working  Capital,  Capital  Management.  You  are  now  ready  to  face                                 INVESTORS  –  11  SEPTEMBER  WEBINAR  
  25. 25. Webinar  Program  Overview  2012  June  19:    Business  Plan  Wri9ng  -­‐  A  Roadmap  to  Success  July  3:      Pitching  &  Presenta9on  -­‐  3  Minutes,  1  Impression  July  17:    Strategy  -­‐  A  Vision  for  the  Future,  A  Strategy  for  Geing  There  July  31:    Budge9ng  &  Forecas9ng  -­‐  Predic9ng  the  Outcome  Aug  14:    Working  Capital  -­‐  An  Unknown  Key  to  Success  Aug.  28:    Capital  Management  -­‐  Playing  with  Risk  Sept  11.:    Funding  &  Investments  -­‐  Some  Sources  are  More  Equal  then  Others  Sept.  25:    Valua9on  -­‐  Art  or  Science  Oct  9:      Exit  Strategy  -­‐  Nice  to  Have  or  Need  to  Have?  Oct.  23:    Bootstrapping  -­‐  An  Alterna9ve  Answer  to  Funding  Nov  6:    Crowdfunding  -­‐  The  Power  of  Friends,  Family  and  Fools  Nov.  20:    Networking  -­‐  Nice  You  have  3000  Friends,  I  have  30  Relevant  Connec9ons  Dec.  4:      Marke9ng  &  (Social)  Media  -­‐  Noise  or  Value?  Dec.  11:    No  Sales,  No  Glory  Dec.  18:    Most  Common  Mistakes  of  Entrepreneurs   25    
  26. 26. BECOME  A  VIP  MEMBER  WITHIN  1  WEEK  AND  GET  YOUR  PLAN  CHECKED!  1.  Increased  Business  Exposure  and  Social  Media  IntegraJon  2.  Jay  Abrahams  Business  Maximizer  Manual  3.  Access  To  Exclusive  Expert  Events  Twice  A  Month  4.  "Special  SoluJon"  AcJon-­‐Based  Reports,  at  least  twice  a  month    5.  VIP  Only  Discounts  6.  VIP  Weekly  Newslemer  7.  VIP  Inner  Circle  8.  eProducts  from  the  worlds  largest  library  9.  IN  ADDITION:  If  you  amended  this  workshop  AND  become  a  VIP  Member  of  EFactor  within   ONE  WEEK,  you  can  send  me  you  quesJons  on  working  capital  and  I  will  provide  you  with   assistance:  www.efactor.com/hukshorn         HTTP://WWW.EFACTOR.COM/VIP     26  
  27. 27. Thank  you!    This  document  was  prepared  by  Eva  Hukshorn.  Several  people  and  organizaJons  have  inspired  her  to  write  this  presentaJon,  amongst  which  are,  but  not  limited  to  the  Founders  of  EFactor,   ABN  AMRO/RBS,  University  of  Groningen,  InsJtute  for  Management  Accountants,                                     Ernst  &  Young  

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