add by : Manish ojha

1. Financial Resource
for New Venture
Final-unit

2. Introduction
Financial resource are essential for business, but
particular requirements change as enterprise
grows. Obtaining those resources in the amount
needed and at the time when they are needed can
be difficult for entrepreneurial ventures because
they are generally considered more risky than
established enterprises. As we shall see, financing
means more than merely obtaining money; it is
very much a process of managing assets wisely to
use capital efficiently.

3. The Problem
• Need cash for start-up expenses
• Need cash to fund R&D
• Need to pay for services provided
• But, at startup, the Venture has no revenues

4. Factors influencing financial decision
The critical issue is to assure sufficient cash flow for
operations, as well as to plan financing that
coincides with changes in the enterprise.
Businesses obtain cash through two general
sources, equity or debt, and both can be obtained
from literally hundreds of different sources. We
must introduce ways of acquiring financial
resources for ventures in the start-up and early
development stages. And mostly at first we focus
on asset management, equity funding, venture
capital, debt financing, and government programs.

5. Asset management
Asset management, broadly defined, refers
to any system that monitors and maintains
things of value to an entity or group. It may
apply to both tangible assets such as
buildings and to intangible concepts such as
intellectual property and goodwill. Asset
management is a systematic process of
deploying, operating, maintaining, upgrading,
and disposing of assets cost-effectively.

6. Asset management for the start-up entrepreneur is a
matter of determining what is needed to support sales,
and then gaining access to those assets at the optimum
costs. The term “gaining access” is used because there are
alternatives other than a cash purchase of assets.
Equipment can be leased, for example, and office furniture
can be rented; even pictures and plants can be obtained
through office rental centers. Manufactured products
initially can be subcontracted rather than made, thereby
avoiding the expense of procuring materials, equipment,
and plant facilities. Entrepreneurs, therefore, have choices
about what assets to obtain, when they must be obtained,
and how to gain access to them.

7. Inventory decision
Most retailers and wholesalers must have inventory in their
possession before they can generate sales, and for start-up
enterprises, suppliers normally require cash on
delivery(COD) until entrepreneurs establish themselves as
reliable customers. In many instances, entrepreneurs also
have no choice among suppliers, particularly if the
merchandise is brand-name inventory such as Reebok
shoes or Compaq computers sold through distributors with
protected territories. Consequently, new ventures are faced
with cash outlays in exchange for salable merchandise.
Through careful planning, however, it is possible to plan
inventory purchasing so that stock is acquired and
restocked as cash becomes available.

8. 30 days + 38 days - 22 days = 46 days
Cash-Flow Gap Created by Pattern of Sales
Inventory
Merchandise
is replenished
every 30 days
Inventory
Merchandise
is replenished
every 30 days
Receivables
Sales are fully
converted to
cash in 38 days
Receivables
Sales are fully
converted to
cash in 38 days
Payables
Vendor bills are
paid on average
every 22 days
Payables
Vendor bills are
paid on average
every 22 days
Cash
The cycle of
payments and
receipts yields
cash in 46 days
Cash
The cycle of
payments and
receipts yields
cash in 46 days
Use of assets to
generate cash flow
and receivables
Use of assets to
generate cash flow
and receivables
Cash and credit
sales result in
slightly delayed
collection period
Cash and credit
sales result in
slightly delayed
collection period
COD and credit
for inventory
compasses cash
flow
COD and credit
for inventory
compasses cash
flow
Cycle results in
shortage or cash
for inventory and
monthly bills
Cycle results in
shortage or cash
for inventory and
monthly bills

9. Accounts Receivable decisions
An account receivable is a consumer’s promise
to pay later, and it is an asset owned by the
entrepreneur that can be sold or used as
collateral. The value of a receivable, however,
is no greater than its profitability of being
paid. New ventures without track records
collecting their receivables subsequently find
it difficult to sell or borrow against these
assets; therefore, careful asset management
practices are important.

10. Contd…
In most instances, managing receivables is similar to
managing inventory; decisions about either directly
affect cash flow. Receivables and inventories also
affect on another. Poor purchasing will affect sales and
reduce the value of receivables in two ways: sales can
suffer because of weak merchandise, or the
entrepreneur may resort to careless credit terms to
induce sales, thereby generating doubtful accounts.
The logical answer to both problems is to pursue a
plan whereby inventory is purchased in a timely
manner and consumer credit is coordinated with
supplier credit terms

11. Equipment decisions
Equipment is important to a business because it can
help earn profits, not because it has residual asset
value. A computer system, for example, is a
depreciating asset, and its residual value declines
every day whether it is being used or not. Vehicles,
office machines, furniture, store fixtures, production
machinery, handling equipment, and tools
depreciate systematically. They also become
obsolete, often quite rapidly. Therefore, an
equipment asset standing idle is simply an
unadjusted expense, not an investment. An
efficiently utilized asset contributes to business
earnings.

12. Sources of equity finance
Equity is a capital invested in a business by
its owners, and it is “at risk” on a permanent
basis. Because it is permanent, equity capital
creates no obligation by an entrepreneur to
repay investors, but raising equity requires
sharing ownership. New ventures often have
difficulty attracting equity investors until
they survive the initial start-up stage, but as
they become more firmly established, equity
sources become more accessible.

13. Incremental changes in new ventures
Financial Needs & Equity Sources With Growth
Start-up
Beginning
inventory,
fixtures,
equipment, and
facility
Start-up
Beginning
inventory,
fixtures,
equipment, and
facility
Development
Expanded need
for start-up
items, higher
operating costs
and receivables
Development
Expanded need
for start-up
items, higher
operating costs
and receivables
Increased receivables
& inventory
replenishment, new
equipment ,
expanded facilities
and operations
Increased receivables
& inventory
replenishment, new
equipment ,
expanded facilities
and operations
Expansion
Major expenses
for operations,
equipment, new
facilities, large
inventory and
receivables
Expansion
Major expenses
for operations,
equipment, new
facilities, large
inventory and
receivables
Personal, family,
and informal
investors
Personal, family,
and informal
investors
Informal capital,
limited private
stock placements
Informal capital,
limited private
stock placements
Private stock
placement, informal
investors, formal &
informal venture capital
in rapid- growth period
Private stock
placement, informal
investors, formal &
informal venture capital
in rapid- growth period
Venture capital,
private stock
placement, with
potential for
public offering
Venture capital,
private stock
placement, with
potential for
public offering
Rapid
growth
Rapid
growth
Early
growth
Early
growth
Expanded options for equityExpanded options for equity

14. Personal Sources
Entrepreneurs must look first to individual
resources for start-up capital. These include cash
and personal assets that can be converted to cash
through refinancing, and second mortgages can be
obtained for home equity. Life insurance policies
may also have accumulated equity, and other
assets such as stamp and coin collections have
capital value. These are not unusual sources, but
some assets also can be converted to business use,
including personal trucks or vans, computers,
telephone answering systems, furniture, and tools,
among others.

15. Informal Risk Capital
Beyond family and friends, there are many
wealthy individuals who enjoy investing in
new ventures. Wealthy investors made
typical in investment range in risky ventures
to broaden their portfolios. This equity pool
is called informal risk capital because
investors find entrepreneurs through
personal contacts, and they often invest on
hunches or recommendations; they seldom
engage in complex investment analysis.

16. Venture Capital
Money provided by investors to start-up
firms and small businesses with perceived
long-term growth potential. This is a very
important source of funding for start-ups
that do not have access to capital
markets. It typically requires high risk for
the investor, but it has the potential for
above-average returns.

17. Venture capital can also include managerial and
technical expertise. Most venture capital comes
from a group of wealthy investors, investment
banks and other financial institutions that pool such
investments or partnerships. This form of raising
capital is popular among new companies or
ventures with limited operating history, which
cannot raise funds by issuing debt. The downside
for entrepreneurs is that venture capitalists usually
get a say in company decisions, in addition to a
portion of the equity.

18. Venture capital differs from traditional financing
sources in that venture capital typically:
• Focuses on young, high-growth companies
• Invests equity capital, rather than debt
• Takes higher risks in exchange for potential higher
returns
• Has a longer investment horizon than traditional
financing
• Actively monitors portfolio companies via board
participation, strategic marketing, governance,
and capital structure

19. Source of Debt Financing
Debt financing includes both secured and
unsecured loans. Security involves a form of
collateral as an assurance the loan will be
repaid. If the debtor defaults on the loan, that
collateral is forfeited to satisfy payment of the
debt. Most lenders will ask for some sort of
security on a loan. Few, if any, will lend you
money based on your name or idea alone.

20. • Short-term loans are typically
paid back within six to 18
months.
• Intermediate-term loans are paid
back within three years.
• Long-term loans are paid back
from the cash flow of the
business in five years or less.

21. Solutions
(Typical Funding Sources)
• Equity Investments
– Equity in exchange for Cash
– Equity in exchange for Services
• Debt
– Commercial Bank Debt
• Business Loans
• Lines of Credit
• Credit Cards
– Debentures
– Debt convertible to Equity