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

Entrepreneurial

FinanceDr. Lokanandha Reddy Irala (www.irala.org)

4

Learning Objectives

Financing a start-up Business Types of Financial Needs Working capital Management


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


Methods of raising Capital

Investment of Own savingsRaising loans form friend and

relativesLoans form commercial banksBorrowing from Financial

Institutions


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


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


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


WCM-Dynamic ViewThe amount of capital required for

smooth and uninterrupted functioning of normal business activities


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


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


Interdependence among WC Components


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


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


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


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


Receivables conversion period (RCP)

The RCP is the time required to convert the Receivables into cash

Closing Receivables RCP =

Cost of sales per day


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


WCM-Objective

Liquidity Vs. ProfitabilityLevel of Working Capital

Pattern of financingSource mix


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.


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


Matching ApproachConservative ApproachAggressive Approach

VARIABLECURRENT ASSETS

FIXEDCURRENT ASSETS

FIXED ASSETS

LONG

TERM

SOURCES

SHORTTERM

SOURCESFINANCING

TIME

LEVEL

OF

ASSETS

Matching Approach


Level

of

Assets


FIXEDCURRENT ASSETS

FIXED ASSETS

LONG

TERM

SOURCES

FINANCING

TIME

S T SOURCES

Conservative Approach



FIXEDCURRENT ASSETS

FIXED ASSETS

LONG

TERM

SOURCES

FINANCING

TIME

Level

of

Assets

SHORT

TERM

SOURCES


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)


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


Business Plan & Project Analysis Tools

Thank You

Questions?

entrepreneurial finance 15-oct-2015 govt. degree college, puttur dr. lokanandha reddy irala...

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