1. Entrepreneurial Finance 15-OCT-2015 Govt. Degree College, Puttur Dr. Lokanandha Reddy Irala Director-KKC Group of Institutions www.irala.org Dr. Lokanandha Reddy Irala (www.irala.org) 1

2. Dr. Lokanandha Reddy Irala (www.irala.org) 2

3. Dr. Lokanandha Reddy Irala (www.irala.org) 3

4. Entrepreneurial Finance Dr. Lokanandha Reddy Irala (www.irala.org) 4

5. Learning Objectives  Financing a start-up Business  Types of Financial Needs  Working capital Management Dr. Lokanandha Reddy Irala (www.irala.org) 5

6. Financing a start-up Business  The financial objectives of the company  Nature and size of the business  Growth and expansion plans  Capital market trends  Govt. regulations

7. Types of financial Needs  Fixed Capital  Working Capital Dr. Lokanandha Reddy Irala (www.irala.org) 7

8. Methods of raising Capital  Investment of Own savings  Raising loans form friend and relatives  Loans form commercial banks  Borrowing from Financial Institutions Dr. Lokanandha Reddy Irala (www.irala.org) 8

9. Working Capital Management Dr. Lokanandha Reddy Irala (www.irala.org) 9

10. Working Capital-An initial thought  The 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

11. Working Capital –Static View  Gross Working Capital Sum total of all Current Assets (including loans & advances) also known as “Current Capital (or) Circulating Capital”.  Net Working Capital Difference between the current assets and Current Liabilities(including provisions) also known as Net Current Assets Dr. Irala 11 Working Capital

12. 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

13. Static View-Limitations  CA and CL are Balance sheet data Valid for the day  CA and CL presented in accordance with schedule Vi requirements of the Indian companies Act Not included under CL  Bank borrowings (credit/OD) -shown under secured loans  Public deposits -shown under unsecured loans Not included under CL  Marketable securities such as treasury bills - shown under Investments Dr. Irala 13 Working Capital

14. WCM-Dynamic View  The 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

15. Composition of Working Capital  Nature of Business Manufacturing Vs. Trading Vs. Services  Raw Material Availability  Domestic Vs Imports  Seasonal Vs Round the year Carrying costs Lead time Shelf -life Price sensitivity/Inflation Bulk Purchases and discounts Govt. Regulation /Quotas Dr. Irala 15 Working Capital

16. Composition of Working Capital  Nature of Production Process Pre Production Processing Work-In-Progress  Finished Goods Shelf –life Utility  Seasonal Accuracy of sales forecasts Ability to meet sudden demand Stock out costs  Accounts Receivables Competition Dr. Irala 16 Working Capital

17. Interdependence among WC Components Dr. Irala 17 Working Capital Procurement of RM WIPFinished Goods Sales Accounts Receivables Accounts payables Cash Wages & Mfg. Costs S & D Gen. Admn. Financial Costs

18. 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

19.  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 periods 1) Inventory Conversion Period (ICP) 2) Receivables conversion period (RCP)  OC=ICP + RCP Operating Cycle Dr. Irala 19 Working Capital

20. 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

21. Inventory Conversion Period (ICP)  Raw Material Conversion Period Closing RM Inventory  RMCP = RM Consumption per day  Work –in-progress conversion period Closing WIP Inventory  WIPCP = Cost of production per day  Finished Goods conversion period Closing FG Inventory  FGCP = COGS per day Dr. Irala 21 Working Capital

22. 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

23. The payables deferral period (PDP) PDP is the length of time the firm is able to defer payments on various resource purchases Closing Payables  PDP = Cost of sales per day Dr. Irala 23 Working Capital

24. WCM-Objective  Liquidity Vs. Profitability Level of Working Capital  Pattern of financing Source mix Dr. Irala 24 Working Capital

25. Fixed Vs. Variable Working Capital  Fixed 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

26. 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 financing Trade credit and outstanding expenses Dr. Irala 26 Financing Current Assets

27. Approaches to Financing Current Assets Dr. Irala 27 Financing Current Assets  Matching Approach  Conservative Approach  Aggressive Approach

28. VARIABLE CURRENT ASSETS FIXED CURRENT ASSETS FIXED ASSETS LONG TERM SOURCES SHORT TERM SOURCES FINANCINGFINANCING TIME LEVELOFASSETSLEVELOFASSETS Matching Approach Dr. Irala 28 Financing Current Assets

29. LevelofAssetsLevelofAssets VARIABLE CURRENT ASSETS FIXED CURRENT ASSETS FIXED ASSETS LONG TERM SOURCES FINANCINGFINANCING TIME S T SOURCES Conservative Approach Dr. Irala 29 Financing Current Assets

30. VARIABLE CURRENT ASSETS FIXED CURRENT ASSETS FIXED ASSETS LONG TERM SOURCES FINANCINGFINANCING TIME LevelofAssetsLevelofAssets SHORT TERM SOURCES Dr. Irala 30 Financing Current Assets Aggressive Approach

31. 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)

32. 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

33. Lokanandha Reddy Irala 33 Business Plan Business Plan & Project Analysis Tools Thank You Questions?