3920u10 - New Venture and Small Business Management...

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Unformatted text preview: New Venture and Small Business Management FORMATION EXPANSION STABILITY UNIT 10 MODULE 1 Estimating Financing Needs l l l l l l l fixed asset acquisitions l accounts receivable product development l fixed asset acquisition initial inventory l potential short-term marketing losses rent payroll etc... Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved PROJECTED FINANCIAL STATEMENTS CAPITAL START-UP OPERATING = COSTS + NEEDS REQUIREMENTS SALES PROFIT l BALANCE SHEET l INCOME STATEMENT l CASH FLOW STATEMENT YEAR 1 M1 M2 M3 M4 YEAR 2 YEAR 3 M12 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved CHILDREN'S CLOTHING INC. THREE SCENARIOS... l most l most l most (OPENING BALANCE SHEET) Accounts Receivable 0 $40 000 0 $40 000 Fixed Assets $20 000 $60 000 Debt Owner's Equity l Paid In l Retained Earnings Accounts Payable Accrued Liabilities ? ? ? ? ? ? $60 000 likely pessimistic optimistic Inventory Prepaids Total Assets Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 1 New Venture and Small Business Management CHILDREN'S CLOTHING INC. (OPENING BALANCE SHEET) Accounts Receivable Inventory Prepaids 0 $40 000 0 $40 000 Fixed Assets Total Assets $20 000 $60 000 CHILDREN'S CLOTHING INC. (OPENING BALANCE SHEET) Accounts Receivable Inventory Prepaids 0 $40 000 0 $40 000 Fixed Assets Total Assets $20 000 $60 000 $22 000 $62 000 FABRIC $30 000 BUTTONS $2 500 ZIPPERS $2 500 THREAD $5 000 SHELVING $3 000 CUTTING TABLE $2 000 SEWING MACHINE $4 000 BUTTONING MACHINE $4 000 STEAM PRESS $5 000 OFFICE EQUIPMENT $2 000 10% CONTINGENCY Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved CHILDREN'S CLOTHING INC. (OPENING BALANCE SHEET) Accounts Receivable Inventory Prepaids 0 $40 000 0 $40 000 CHILDREN'S CLOTHING INC. (OPENING BALANCE SHEET) INVENTORY = Cost of Goods Sold Turnover = $250 000 (1- .234) 3.7 = $51 757 Accounts Receivable Inventory Prepaids 0 $40 000 0 $40 000 $50 000 $50 000 Fixed Assets Total Assets $22 000 $62 000 $33 000 $73 000 Fixed Assets Total Assets $33 000 $73 000 $83 000 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved CHILDREN'S CLOTHING INC. (OPENING BALANCE SHEET) 43 ACCOUNTS days x $250 000 = $29 452 RECEIVABLE = 365 CHILDREN'S CLOTHING INC. (OPENING BALANCE SHEET) Accounts Receivable Inventory Accounts Receivable Inventory Prepaids 0 $50 000 0 $50 000 Fixed Assets Total Assets $33 000 $83 000 $113 000 $80 000 Fixed Assets Total Assets $30 000 Prepaids $30 000 $50 000 0 $80 000 $33 000 $113 000 $40 000 $55 000 I(SMALL BUSINESSES) $95 000 $128 000 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 2 New Venture and Small Business Management CHILDREN'S CLOTHING INC. (INCOME STATEMENT) MONTH 1 SALES 3000 CHILDREN'S CLOTHING INC. (OPENING BALANCE SHEET) Accounts Receivable Inventory $40 000 Accounts Payable $55 000 Accrued Liabilities 0 $95 000 Debt ? ? ? ? $140 600 2 7000 3 12000 4 16000 5 19000 6 21000 COST OF GOODS SOLD w VARIABLE w FIXED GROSS PROFIT 1950 2000 (950) 4550 2000 (450) 7800 2000 2200 10400 2000 3600 12350 2000 4650 13650 2000 5350 Prepaids SELLING, ADMIN AND FINANCES 4500 NET INCOME CUMULATIVE (5450) Fixed Assets 4500 (4950) 4500 (2300) 4500 (900) 4500 150 4500 850 Total Assets $33 000 Owner's Equity l Paid In $128 000 l Retained Earnings ? (12 600) $128 000 (12 600) $128 000 (5450) (10400) (12700) (13600) (13450) (12600) Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved BUSINESSES SHOULD PREPARE `MOST LIKELY', `MOST PESSIMISTIC' AND `MOST OPTIMISTIC' PROJECTIONS. BUT... MOST PESSIMISTIC SALES COST OF GOODS SOLD $18 000 MOST LIKELY $21 000 w VARIABLE w FIXED GROSS PROFIT SELLING, ADMIN AND FINANCES $12 600 $2 500 $2 900 $13 650 $2 000 $5 350 $5 000 ($2 100) $4 500 $850 ONLY 1 IN 5 DO ! Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved NET INCOME Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved MOST PESSIMISTIC SALES COST OF GOODS SOLD $18 000 MOST LIKELY $21 000 MOST OPTIMISTIC $24 000 MOST PESSIMISTIC MOST LIKELY MOST OPTIMISTIC w VARIABLE w FIXED GROSS PROFIT SELLING, ADMIN AND FINANCES NET INCOME $12 600 $2 500 $2 900 $13 650 $2 000 $5 350 $14 400 $1 500 $8 100 ACCOUNTS RECEIVABLE INVENTORY $34 000 $54 000 $88 000 $40 000 $55 000 $95 000 $46 000 $57 000 $103 000 $5 000 ($2 100) $4 500 $850 $4 000 $4 100 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 3 New Venture and Small Business Management ENTREPRENEURS MAY UNDERESTIMATE THEIR NEEDS BECAUSE... l they lack skill at business planning l they underestimate start-up costs l they are overly optimistic l they lack management skills Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 4 New Venture and Small Business Management SMALL BUSINESS CAPITALIZATION (i.e. how they finance what they own) LONG-TERM DEBT SHORT-TERM DEBT UNIT 10 MODULE 2 Alternate Sources of Financing RETAINED EARNINGS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved CAPITAL STOCK 18% 15% 6% 5% 2% DEFERRED TAXES OTHER 30% 24% ACCOUNTS PAYABLE Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved SMALL BUSINESS' SOURCES OF FINANCING RETAINED EARNINGS SOURCES OF FINANCING l DEBT 30% 5% 5% 6% 24% AFFILIATES INDIVIDUALS OTHERS l EQUITY l INTERNALLY GENERATED Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 28% FINANCIAL INSTITUTIONS 2% 1% SUPPLIERS DEFERRED TAXES PUBLIC EQUITY MARKETS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved SMALL BUSINESS GROWTH FACTORS MANAGEMENT SKILLS SKILLED LABOUR MARKETING CAPABILITY ACCESS TO MARKETS ACCESS TO CAPITAL COST OF CAPITAL 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 SMALL BUSINESS LIFECYCLE FORMATION EXPANSION STABILITY RISK MEAN SCORE Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 1 New Venture and Small Business Management FORMATION EXPANSION STABILITY SOURCES OF EQUITY... RISK RETURN l the entrepreneur l private investors (family, friends, wealthy individuals, etc...) APPROPRIATE SOURCES... EQUITY DEBT Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved l venture capitalists l public equity markets Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved SOURCE ANGELS THROUGH... PRIVATE INVESTORS ("ANGELS") TYPICALLY PROVIDE HIGH-RISK, SEED MONEY IN AMOUNTS LESS THAN $500 000 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved l family l friends l acquaintances l advisors Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved ANGELS... l are interested in assisting the entrepreneur VENTURE CAPITALISTS PREFER INVESTMENTS OF $1 MILLION AND OPT FOR... OTHER START-UP 11% 12% 27% 9% 38% BUYOUT l monitor financial performance l act as a `sounding board' l tend not to impose structure on the entrepreneur Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved ACQUISITION TURNAROUND 3% EXPANSION Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 2 New Venture and Small Business Management VENTURE CAPITALIST INVESTMENT CRITERIA l a realistic business plan l principals who will give up equity l products with an S.C.A. l notional or global niche l commitment to research and development l motivated management group l exit in 4-7 years Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved FEW SMALL BUSINESSES MEASURE UP ! Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved VENTURE CAPITALISTS 2 CRITICAL ISSUES... l VALUATION OF THE BUSINESS l TYPE OF DEBT / SECURITY Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved VENTURE CAPITALISTS VENTURE CAPITALISTS WANT EQUITY RETURNS AND DEBT POSITIONING THEREFORE, WE OFTEN SEE CONVERTIBLE DEBENTURES Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved VENTURE CAPITALISTS VENTURE CAPITALISTS PROTECT THEIR INVESTMENT BY WAY OF... THE CONCEPT OF LEVERAGE l $100 000 in financing needs l $10 000 of earnings before interest OPTIONS... 100 % 0% l ANTI-DILUTION PROVISIONS l EMPLOYMENT CONTRACTS l BOARD REPRESENTATION Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved EQUITY 0% ALTERNATIVE 1 DEBT 100% ALTERNATIVE 2 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 3 New Venture and Small Business Management THE CONCEPT OF LEVERAGE ALTERNATE 1 LEVERAGE = THE CONCEPT OF LEVERAGE RETURN ON INVESTMENT ALTERNATIVE 1 $10 000 - $5 000 reduction $100 000 ALTERNATE 2 $80 000 $20 000 = NET INCOME EQUITY DEBT EQUITY 0 $100 000 ALTERNATIVE 2 $10 000 - $5 000 reduction - $5 600 interest $20 000 = N/A = 4:1 INTEREST COST RETURN ON INVESTMENT = 5% = LOSS ! = NET INCOME $10 000 EQUITY $100 000 $10 000 - $5600 $20 000 RISK RETURN Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved = 10% = 22% Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved THE CONCEPT OF LEVERAGE `RULE OF THUMB' "as long as a firm's return on assets exceeds the cost of debt, its return on investment will increase if the venture employs more debt financing" DEBT FINANCING THE PRESUMPTION OF LOWER RISK... l SHORTER-TERM FINANCING l RANKS HIGHER THAN EQUITY (re: claim on assets) Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved DEBT FINANCING `THE PECKING ORDER' DEEMED TRUSTS SECURED CREDITORS UNSECURED CREDITORS PREFERRED SHAREHOLDERS COMMON SHAREHOLDERS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved DEBT FINANCING `THE PECKING ORDER' DEEMED TRUSTS SECURED CREDITORS UNSECURED CREDITORS PREFERRED SHAREHOLDERS COMMON SHAREHOLDERS entrepreneurs are often able to protect their investment by lending money as secured creditors rather than investing as shareholders Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 4 New Venture and Small Business Management DEBT FINANCING `THE PECKING ORDER' DEEMED TRUSTS SECURED CREDITORS SECURED SHAREHOLDER LOANS UNSECURED CREDITORS PREFERRED SHAREHOLDERS COMMON SHAREHOLDERS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved DEBT FINANCING SOURCES... l financial institutions achieved through a GENERAL SECURITY AGREEMENT l suppliers l shareholders, families, friends l external investors l government agencies Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved DEBT FINANCING WORKING CAPITAL CYCLE INVENTORY PURCHASED ON CREDIT INVENTORY SOLD TO CUSTOMERS VENTURE PAYS ACCOUNT PAYABLE, EXPENSES AND TAXES VENTURE COLLECTS THE ACCOUNTS RECEIVABLE DEBT FINANCING WORKING CAPITAL CYCLE INVENTORY PURCHASED ON CREDIT INVENTORY SOLD TO CUSTOMERS VENTURE PAYS ACCOUNT PAYABLE EXPENSES AND TAXES VENTURE COLLECTS THE ACCOUNTS RECEIVABLE GENERATES AN ACCOUNT PAYABLE GENERATES AN ACCOUNT RECEIVABLE GENERATES A NEED FOR CASH ! ELIMINATES NEED FOR CASH CASH CONVERSION PERIOD GENERATES AN ACCOUNT PAYABLE GENERATES AN ACCOUNT RECEIVABLE GENERATES A NEED FOR CASH ! ELIMINATES NEED FOR CASH Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved LONG SHORT SMALL BUSINESS CAPITALIZATION SMALL BUSINESS CAPITALIZATION Relative to large firms, small businesses carry more debt... l entrepreneur's preference w cost & control Small businesses also tend to be less liquid... l high current asset levels w channel power w purchasing volumes w lack of effective current asset management Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved l lower profitability w less retention of earnings Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 5 New Venture and Small Business Management THE ENTREPRENEUR'S DECISION ON CAPITAL STRUCTURE MUST CONSIDER... STRUCTURING THE DEAL l understand the fundamental economic nature of the business l type of business l its financial strength l economic environment Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved l understand the financier's needs and perceptions l understand your own needs Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 6 New Venture and Small Business Management WHY ARE BANKS MISUNDERSTOOD ? UNIT 10 MODULE 3 Bank Financing l banks have low risk tolerance, yet new ventures present higher risks l individuals risk preferences (tolerance) and perceptions vary Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved A BANKER'S CONCERNS... l potential return l likelihood of default CHARACTER CAPACITY CAPITAL CONDITIONS COLLATERAL Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved CHARACTER THE 5 `C's' OF CREDIT l perception of personal characteristics (eg. ethics, honesty, integrity, etc...) CAPACITY l requires the demonstration of adequate cashflow Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved CAPITAL CONDITIONS l perceptions of the macro-environment l capital invested by owners demonstrates commitment COLLATERAL and the industry environment l amount of capital impacts on liquidity and leverage Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved l collateral security is a bank's critical secondary source of repayment Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 1 New Venture and Small Business Management COLLATERAL COLLATERAL OPERATING LINES OF CREDIT ARE OFTEN AVAILABLE UNDER A `MARGIN FORMULA'. A TYPICAL FORMULA MIGHT BE: 75% of ACCOUNTS RECEIVABLE (<90 days arm's length transactions) + 0 - 50% of INVENTORY (generally not work-in-progress) PRIOR SECURED DEBTS EXAMPLE BOOK VALUE RECEIVABLES $100 000 INVENTORY PRIORS $100 000 $25 000 MARGIN FORMULA $100 000 X .75 ($100 000 - $20 000) X .5 OPERATING LINE AVAILABILITY $75 000 $40 000 REQUIREMENTS ARE DETERMINED BY THE TYPE OF FINANCING... SHORT-TERM l operating lines of credit LONG -TERM l demand loans l term loans Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved includes GST, accrued payroll, etc. ($25 000) work-in-progress Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved $90 000 COLLATERAL BANK FINANCING NON-PREFERRED BUSINESSES... LONG-TERM DEBT IS ALSO MOST OFTEN AVAILABLE AS SOME PERCENTAGE OF THE ASSET'S VALUE Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved l START-UPS (risk) l TERM FINANCING l RETAIL (eg. service businesses, leaseholds, computers) (risk, leaseholds, inventory) Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved SMALL BUSINESS LOANS ACT In exchange for a government guarantee for 85% of the loan value, participating institutions put aside certain preferences vis-a-vis start-ups, term financing, retail, etc... Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved SMALL BUSINESS LOANS ACT HIGHLIGHTS... l eligibility = I (revenues less than $5 million) l 90% of certain fixed assets l maximum loan size $250 000 l pricing premium: 2% up-front, 1.25% / annum l personal liability limited to 25% of loan amount Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 2 ...
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This note was uploaded on 06/02/2011 for the course AK 3920 taught by Professor Jonkerr during the Winter '10 term at York University.

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