SAP Press - Cash Accounting and Cash Flow Planning With SAP Liquidity Planner 2005
CASH PLANNING (16)
-
Upload
freddy56 -
Category
Economy & Finance
-
view
610 -
download
0
description
Transcript of CASH PLANNING (16)
Growing and Managing
a Small Business
An Entrepreneurial Perspective
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 2
Chapter 16Cash Planning and Start-up Financing
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 3
Learning Outcomes
• Describe the process for calculating how much capital is needed to start the business.
• Explain how to forecast sales and capital expenditures using triangulation.
• Discuss the major sources of capital for a start-up venture.
• Compare and contrast financing with equity and with debt.
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 4
Chapter Outline
• Cash Needs Assessment
• Financing with Equity Sources
• Financing with Debt• Government
Sources of Funding
Getty Images
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 5
Cash Needs Assessment
• Triangulation
Approaching the problem from three different angles:– the entrepreneur’s own knowledge,– the industry and – the market or customer.
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 6
Triangulation
• The six steps:– Prepare a process flow chart– Identify the business’s position on the value
chain – Develop a business timeline – Develop financial premises – Forecast sales and capital expenditures – Calculate start-up capital requirements– Conduct a sensitivity analysis
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 7
Triangulation
Step One: Prepare a Process Flow Chart
• Depicts all the activities of the business
• Illustrates personnel needs and equipment required
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 8
Marketing
Apparel Design
ForwardingServices
One-stop retail shop
Designer(s) (1) Prorotype Material
Outsourced Manufacturing Costs Transportation Costs Travel Expenses US Custom fees
Employee(s) salary (1) Payroll Taxes (1) Beneftis (1) Office supplies and equipment
Employee(s) salaries (1) Payroll Taxes (1) Benefits (1) Direct Mail Costs Advertising Costs Office Supplies
Retail location remodeling and design Sales person(s) salary (2 FT, 3PT) Payroll Taxes for Sales person(s) (4) Benefits (2) Store Supplies and furniture Retail space lease Utilities Insurance Business Taxes Merchant account fees
Forwarder Fees
Purchasing
Cost of goods
Primary Customer
Employee(s) salaries (1) Payroll Taxes (1) Benefits (1) Accounting Software Office Supplies
OutsourcedManufacturing
Third partyproducts
Accounting
The Process Flow Chart
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 9
Triangulation
Step Two: Identify the business’s position in the value chain
• To determine how much the company can charge for its product or service
• To know how much it costs to acquire inventory or raw material.
Getty Images
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 10
Triangulation
Step Three: Develop a business timeline
• Depict the seasonal patterns in the industry
• Mark the key events that affect the business
Getty Images
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 11
Triangulation
Step Four: Develop Financial Premises
• Financial assumptions to carry explanations and justifications
• Make forecasts of sales and demand
Getty Images
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 12
Estimating Demand & Revenue – an illustration
DR. HAPPY TOOTH wants to assess demand for tooth whitening and root canal surgery in Berrien Springs, Mich.
Census Data for Berrien Springs:Population = 12,800
20% - Under 20 yrs old = 2560 people
22% - 21 to 40 yrs old = 2816 people
26% - 41 to 60 yrs old = 3328 people
23% - 61 to 80 yrs old = 2944 people
9% - over 80 years old = 1152 people
Target Markets:
Tooth Whitening > 21 to 40 year olds = 2816 people
Root Canal Surgery > 41 to 80 year olds = 6272 people
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 13
Estimating Demand
Target Markets:
Tooth Whitening > 21 to 40 year olds = 2816 people
Root Canal Surgery > 41 to 80 year olds = 6272 people
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:
Optimistic Pessimistic Most Likely
(5%) (2%) (3.5%)
Tooth Whitening Clients 141 56 99
(3%) (1%) (2%)
Root Canal Procedures 188 63 125
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 14
Estimating Revenue
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):
Optimistic Pessimistic Most Likely
(5%) (2%) (3.5%)
Tooth Whitening Clients 141 56 99
Est . Whitening Revenue $42,300 $16,800 $29,700
(3%) (1%) (2%)
Root Canal Procedures 188 63 125
Est. Root Canal Revenue $94,000 $31,500 $62,500
TOTAL REVENUE $136,300 $48,300 $92,200
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 15
Triangulation
Step Five: Forecast Sales and CapitalExpenditures Three sources of information enable agood estimate of sales:
1. Industry sources - distributors, vendors, and experts
2. Customers3. Like or substitute products
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 16
Triangulation
Step Six: Start-up Capital Requirements
• A cash flow statement is needed to figure start-up capital requirements.
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 17
Triangulation
Step Six: Start-up Capital Requirements
• Hard costs: equipment, furniture etc.
• Soft costs: deposits, training costs etc.
• Working capital: to maintain business until it generates revenue
• Contingency factor: a cushion
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 18
Cash Needs Assessment
Conduct a Sensitivity Analysis -- the seventh step
To identify the critical numbers:
• time to develop sales
• volume of sales
• price maintenance
• costs more than anticipated.
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 19
Finance Sources
• Financing With Equity Sources
• Financing With Debt
• Government Sources Of Funding
• Customers And Suppliers
Getty Images
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 20
Finance Sources
Financing with Equity Sources • Getting an ownership stake• No guaranteed returns• No protection against losses• Appreciation in value through
– growth in earnings and – growth in assets– Takes time to float
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 21
Finance Sources
Financing with Debt
• Using Convertible Debt
• Commercial Banks
Getty Images
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 22
Finance Sources
Using Convertible Debt
• Better returns to lenders
• Lenders get returns from day one
• Possibility to get back the loan amount
• Venture gets immediate use of funds
• Conversion relieves the burden of debt
• Planning the timing is possible
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 23
Finance Sources
Commercial Banks
• Are highly regulated
• Look at the five “C’s”: character, capacity, capital, collateral, conditions
• Favor ventures that can give hard assets as collateral
• Are difficult to get financing from
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 24
Finance Sources
Commercial Banks look at:
• The primary source of repayment of a loan
• The secondary source of repayment
• The character of the parties involved
• Profitability ratios
• Operating margin
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 25
Finance Sources
Commercial finance companies or asset based lenders:
• Are less rigid compared to regular banks
• Often charge a higher rate of interest
• Consider the quality of the assets of the business
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 26
Finance Sources
Government Sources of Funding
1. Small Business Investment Company (SBIC)
2. Venture Capital Institutes and Networks
3. Small Business Administration (SBA) Loans
4. State-Funded Venture Capital
5. Small Business Innovative Research (SBIR)
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 27
Government Finance Sources
Small Business Investment Company (SBIC)
• Provide long-term loans • Provide equity capital• invest in small and growing
businesses • invest over longer periods of time
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 28
Government Finance Sources
Venture Capital Institutes and Networks
• Institutes established on the campuses of major universities
• Act as conduits to bring together the entrepreneurs and investors
• Entrepreneur easily locates interested investor
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 29
Government Finance Sources
Small Business Administration (SBA) Loans • provide aid, counsel, and protection • Many loan programs:• Micro loans-up to $35,000• LowDoc Loans -- up to $150,000• SBA Express loans -- up to $250,000• Guarantees given to intermediaries who
sanction loan
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 30
Government Finance Sources
State-Funded Venture Capital
States give incentives• Tax holidays• Tax exemption and relief• Equity participation• Loan programs• Convertible debt
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 31
Government Finance Sources
Small Business Innovative Research (SBIR)• Federal agencies sanction grants• To carry on research on products• Grants to technology based ventures• Having fewer than 500 employees• Independently owned ventures
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 32
Government Finance Sources
Small Business Innovative Research (SBIR) grants have three levels:
1. Phase I is the project feasibility stage, providing up to $100,000 for initial feasibility to be completed in six month..
2. 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.
3. Phase III brings in private sector funds to commercialize the new technology.
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 33
Finance Sources
Customers and Suppliers
• Understand the entrepreneur’s business
• Have a vested interest
• May grant extended payment terms
• May offer special terms favorable to the business.
Copyright © Houghton Mifflin Company. All rights reserved. 16 | 34
End Chapter 16