Entrepreneurial Finance 15-OCT-2015 Govt. Degree College, Puttur Dr. Lokanandha Reddy Irala...
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Transcript of Entrepreneurial Finance 15-OCT-2015 Govt. Degree College, Puttur Dr. Lokanandha Reddy Irala...
Entrepreneurial Finance15-OCT-2015
Govt. Degree College , Puttur
Dr. Lokanandha Reddy IralaDirector-KKC Group of
Institutionswww.irala.orgDr. Lokanandha Reddy Irala (www.irala.org)
1
Dr. Lokanandha Reddy Irala (www.irala.org) 2
Dr. Lokanandha Reddy Irala (www.irala.org) 3
Entrepreneurial
FinanceDr. Lokanandha Reddy Irala (www.irala.org)
4
Learning Objectives
Financing a start-up Business Types of Financial Needs Working capital Management
Dr. Lokanandha Reddy Irala (www.irala.org) 5
Financing a start-up Business
The financial objectives of the company
Nature and size of the business
Growth and expansion plansCapital market trendsGovt. regulations
Types of financial Needs
Fixed CapitalWorking Capital
Dr. Lokanandha Reddy Irala (www.irala.org) 7
Methods of raising Capital
Investment of Own savingsRaising loans form friend and
relativesLoans form commercial banksBorrowing from Financial
Institutions
Dr. Lokanandha Reddy Irala (www.irala.org) 8
Working Capital
ManagementDr. Lokanandha Reddy Irala (www.irala.org)
9
Working Capital-An initial thoughtThe amount of funds, which a
company must have to finance its day-to-day operations.
That proportion of the company’s total capital, which is employed in short term operations
Dr. Irala 10 Working Capital
Working Capital –Static ViewGross Working Capital
Sum total of all Current Assets (including loans & advances)
also known as “Current Capital (or) Circulating Capital”.
Net Working CapitalDifference between the current assets
and Current Liabilities(including provisions)
also known as Net Current Assets
Dr. Irala 11 Working Capital
Working Capital –Static View Current Assets
Convertible into cash with a single accounting period
Current Liabilities Arise in the context of CA and come up for
payment within a single account period
Maintain a current ratio of 2 :1 Company can meet all its current liabilities by
liquidating CA even at half of their recoded value without any financial embarrassment
Dr. Irala 12 Working Capital
Static View-Limitations
CA and CL are Balance sheet dataValid for the day
CA and CL presented in accordance with schedule Vi requirements of the Indian companies ActNot included under CL
Bank borrowings (credit/OD) -shown under secured loans
Public deposits -shown under unsecured loans
Not included under CLMarketable securities such as treasury bills
-shown under Investments
Dr. Irala 13 Working Capital
WCM-Dynamic ViewThe amount of capital required for
smooth and uninterrupted functioning of normal business activities
Dr. Irala 14 Working Capital
Procurement of RM
Realizing Cash
Production of Finished
Goods
Sales
Composition of Working CapitalNature of Business
Manufacturing Vs. Trading Vs. ServicesRaw Material
AvailabilityDomestic Vs ImportsSeasonal Vs Round the year
Carrying costsLead time Shelf -lifePrice sensitivity/InflationBulk Purchases and discountsGovt. Regulation /Quotas
Dr. Irala 15 Working Capital
Composition of Working CapitalNature of Production Process
Pre Production ProcessingWork-In-Progress
Finished GoodsShelf –lifeUtility
Seasonal Accuracy of sales forecastsAbility to meet sudden demandStock out costs
Accounts ReceivablesCompetition
Dr. Irala 16 Working Capital
Interdependence among WC Components
Dr. Irala 17 Working Capital
Procurement of RM
WIPFinished Goods
SalesAccounts
ReceivablesAccounts payables
Cash
Wages & Mfg. Costs
S & DGen. Admn.
Financial Costs
RCP
INVENTORY CONVERSION PERIOD
PDP
Purchase of
Raw Materials
Payment of cash to
raw materials
Sale of finished goods
Cash received for Sales
GROSS OPERATING CYCLE (GOC)
NET OPERATING CYCLE (NOC)
TIME LINE
NOC = GOC - PDP
Operating Cycle
Dr. Irala 18 Working Capital
The operating cycle is the time duration required to convert the resources into inventories, into sales and finally into cash
The OC consists of two periods1) Inventory Conversion Period (ICP)2) Receivables conversion period (RCP)
OC = ICP + RCP
Operating Cycle
Dr. Irala 19 Working Capital
Inventory Conversion Period (ICP)
The ICP is the time required to convert raw materials, into work-in-progress and into finished goods. The ICP is the sum of Raw materials conversion period (RMCP), Work in progress conversion period (WIPCP) and finished goods conversion period.(FGCP)
ICP = RMCP + WIPCP + FGCP
Dr. Irala 20 Working Capital
Inventory Conversion Period (ICP)
Raw Material Conversion PeriodClosing RM Inventory
RMCP =RM Consumption per day
Work –in-progress conversion periodClosing WIP Inventory
WIPCP = Cost of production per day
Finished Goods conversion periodClosing FG Inventory
FGCP = COGS per day
Dr. Irala 21 Working Capital
Receivables conversion period (RCP)
The RCP is the time required to convert the Receivables into cash
Closing Receivables RCP =
Cost of sales per day
Dr. Irala 22 Working Capital
The payables deferral period (PDP)
PDP is the length of time the firm is able to defer payments on various resource purchases
Closing PayablesPDP = Cost of sales per day
Dr. Irala 23 Working Capital
WCM-Objective
Liquidity Vs. ProfitabilityLevel of Working Capital
Pattern of financingSource mix
Dr. Irala 24 Working Capital
Fixed Vs. Variable Working CapitalFixed Working Capital
constant or minimum level, below, which the total investment in current assets does not fall.
Also called as “Fixed “ or “Constant” or “Permanent” working capital.
Variable Working Capital The amount of funds needed over and above the
“Fixed Working Capital” to take care of seasonal and other shifts
Also referred to as “Fluctuating” or “Temporary” Working Capital.
Dr. Irala 25 Working Capital
Sources of Financing Current Assets■Long term financing
Shares, debentures, preference shares, retained earnings and long-term debt from financial institutions
■Short term financing Short-term bank loans, commercial papers, factoring receivables etc.
■Spontaneous financingTrade credit and outstanding expenses
Dr. Irala 26 Financing Current Assets
Approaches to Financing Current Assets
Dr. Irala 27 Financing Current Assets
Matching ApproachConservative ApproachAggressive Approach
VARIABLECURRENT ASSETS
FIXEDCURRENT ASSETS
FIXED ASSETS
LONG
TERM
SOURCES
SHORTTERM
SOURCESFINANCING
TIME
LEVEL
OF
ASSETS
Matching Approach
Dr. Irala 28 Financing Current Assets
Level
of
Assets
VARIABLECURRENT ASSETS
FIXEDCURRENT ASSETS
FIXED ASSETS
LONG
TERM
SOURCES
FINANCING
TIME
S T SOURCES
Conservative Approach
Dr. Irala 29 Financing Current Assets
VARIABLECURRENT ASSETS
FIXEDCURRENT ASSETS
FIXED ASSETS
LONG
TERM
SOURCES
FINANCING
TIME
Level
of
Assets
SHORT
TERM
SOURCES
Dr. Irala 30 Financing Current Assets
Aggressive Approach
Lokanandha Reddy Irala 31 Business Plan
The Epilogue
Entrepreneurs are pillars of strength, symbols of legitimacy, role models
They provide the new ideas and new blood
They create "new combinations out of resources and are therefore creative destroyers and destructive creators"
The distinctive element is that entrepreneurs "act outside the pale of routine"
(Austrian economist, Joseph Schumpeter)
Lokanandha Reddy Irala 32 Business Plan
References
Derek F. Abell(1980), Determining the Business: the Starting Point of Strategic Planning (Englewood Cliffs, N.J.: Prentice-Hall) PP. 17.
http://www.ediindia.org
Lokanandha Reddy Irala 33 Business Plan
Business Plan & Project Analysis Tools
Thank You
Questions?