Capital Management - Playing with Risk

1. Capital Management Playing with Risk Author: Eva Hukshorn 1

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. 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. 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. 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. 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. 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. 4 Dynamics of Capital Management Preserving Op9mizing Capital Capital Capital Management Raising Inves9ng Capital Capital 8

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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