Unit 5

Rraising start-up requires careful planning.

The entrepenur needs to decide:

How much finance is required? How long finance is needed for? Can he give up some control?

The finance needs of a start-up should take acccount of teh key areas:

Set up vosts, starting investment, wokring capital, growth and evelopment

Internal: 

Personal sources

Retrained profits: cash generated by the bsuiness when it trades profitably. They can generate cash the moment trade has begun.

Share capital: investment made by the entrepreneur so he can keep 100% control of company.

External:

Bank loan: long term finance, where bank lends you set amount of money and you pay back with added interest

Bank overdraft: short term finance, bank lets the business owe it money whigh higher interst rate

share capital: outisde invetsors

Business angels: professional investors.

Savings: your own personal money, It is a cheap form of inance and readily avaiable

Borrwowing from friends an family: they provide moeny either directly to the entrepreneur or inot the bsuiness. It can be quicker and the interst may be lower and more flexible.

Creit cards: each month, the entrepreneur pays for various business-related expenses on a credit card. 15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period. The effect is that the business gets access to a free credit period of around 30-45 days

Cash flow operating Cycle = time goods are in stock + time debtors take to pay back - period of credit recieved by suppliers.

Working capital cycle can be shortened by: reducing the stock level and speeding up the rate od debtor collection. The shorter the cycle the lower the value of wokring cpaital to be financed by other sources.

Causes of cash flow problems:

Low profits (evenyually a loss making business will run out of cash), over inevstment (spending to much on fixed assets. Made worse if ST finance is used), to much stock (excess stock ties up cash, increased risk stock becomes obselete), allowing to much credit ( offer credit = good way of building sales. But late payment is common), overtrtading ( where a businesss expands quickly and puts pressure on ST finance. Symptoms: higher trade debtor figure, cash running out, withholding suppliers payments. Actions: reduce business activity, introduce new share capital), seasonal dmeand (production or purchasing usually in advance of season peak in demand= cash out beofre in).

How? Have a good cash flow forecast, manage wokring capital effectively, chosse right sources of income. Cash flow forecasts: makes sensible assumpotions on inflows and outflows and allows for unexpected changes.

Working capital: cash needed to pay for the day to day trading of business. It is important because it facilitates the smooth flow of production.

Wokring capital needed depends on: planned production volumes, forecast cost per unit, length of the production cycle, credit terms allowed, credit termes recieved from suppliers.

Lack of working capital means: harder to buy and benefit from discounts, loss of reputation with suppliers, harder to repsond to oppurtunities,increased danger of overtrading.

Dealing with working capital shortgaes: discount prices, reduce purchases, more credit with suppliers, delay bill payments, debt factoring, sell assets.

ST:

reduce current assets, increase current libailities (delaying payments), sell surplus fixed assets.

LT:

Increase equity finance, increase long term liabilities, reduce net outflow on fixed assets.

Bank overdraft VS bank loan:

BO: easy to arrange, flexible, interest only paid on amount borrowed under facility, not secured on assets. HOWEVER can be withdrawn, interst charges vary, higher interest rates than a bank loan

BL: greater certainity of funding, lower interest rates, appropiate method of financing fixed asstes. HOWEVER requires collateral, interest paid on full amount outstanding, harder to arrange.