PowerPoint
Presentations for
Small Business Management:
Launching and Growing New Ventures,
Fifth Canadian Edition
Adapted by
Cheryl Dowell
Algonquin College
Chapter 14
Financing Requirements,
Pro Forma Financial Statements,
and Sources of Financing
LOOKING AHEAD
After studying this chapter, you should be able to:
1.
Estimate the amount of financing a new or existing business will
need.
2.
Create pro forma (forecast) cash flows, income statements, and
balance sheets.
3.
Describe the types and sources of financing available.
4.
Describe the appropriateness of types of financing at various
stages of a venture’s life.
5.
Evaluate the choice between debt financing and equity financing.
6.
Discuss the most important factors in the process of obtaining
start-up financing.
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14-3
BUSINESS NEEDS
• Businesses need cash for three principal
reasons :
1. To purchase assets such as equipment and
inventory
2. To pay for other costs incurred such as payroll,
advertising, taxes, etc.
3. Pre-start-up costs which include R&D and expert
advice
LO 1
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DETERMINING ASSET REQUIREMENTS
Current assets
(working capital)
Fixed Assets
Other Assets
LO 1
• Assets that can be converted to cash within
the firm’s operating cycle—cash, accounts
receivable, and inventories
• Relatively permanent resources
intended for the use of the firm
• Intangible assets (patents, copyrights,
goodwill)
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14-5
BUSINESS DECISIONS
• Buy or lease the equipment?
• Acquire new or used equipment?
– Lease-versus-buy calculation program
– Government of Canada’s website for Canadian
entrepreneurs
(www.canadabusiness.ca/eng/page/calc)
LO 1
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14-6
WORKING CAPITAL OR
OPERATING REQUIREMENTS
• Working capital management
– The management of current assets and current
liabilities
• Cash budget (cash flow forecast)
– A planning document strictly concerned with the
receipt and payment of dollars
– Inflow and outflow of cash
LO 1
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14-7
CASH FLOW FORECAST
LO 1
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ESTIMATING REVENUES
AND OUTFLOWS
• Percentage-of-Sales
– Method of forecasting using a percentage of the
total sales
– Industry Canada
• www.ic.gc.ca/eic/site/pp-pp.nsf/eng/Home
LO 1
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14-9
TYPES OF FINANCING
Debt Capital: Financing provided by a creditor
Current (short-term) Debt
Long-Term Debt
• Accounts payable
• Loans and mortgages
• Accrued expenses
from banks and other
• Short-term notes
lenders with maturities
– cash amounts borrowed from
greater than one year
a bank or another lending
source and must be repaid
within a short period of time
LO 1
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14-10
TYPES OF FINANCING
Spontaneous financing
• Short term debt
External equity
• Funds that derive initially from the owner’s investment in a firm
Profit retention
• Re-investment of profit in a firm
Internal equity
• Funds that come from retaining profits within a firm
LO 1
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14-11
PRO FORMA INCOME STATEMENT
LO 2
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14-12
PRO FORMA BALANCE SHEET
LO 2
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SOURCES OF FINANCING
LO 3
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14-14
SOURCES OF FINANCING
LO 3
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OTHER INDIVIDUAL INVESTORS
• informal capital
– funds provided by wealthy private
individuals to high-risk ventures, such as
start-ups
• business angel
– a private investor who finances new, risky
small ventures
LO 3
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14-16
VENTURE CAPITAL COMPANIES
• Look for:
– Distinct technology
– Sustainable competitive
advantage
– Comprehensive business
plan
– Strong management team
with start-up
– Excellent market potential
– Credible exit strategy
LO 3
– People: compatible skills and
unusual tenacity, integrity,
imagination, commitment
– Products: high value-added
features
– Markets: large and rapidly
growing
– High margins: gross margins
of 40 to 50 percent
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14-17
BUSINESS SUPPLIERS AND
ASSET-BASED LENDERS
• Trade Credit (Accounts Payable)
• Equipment Loans and Leases
– installment loan from a seller of machinery used
by a business
• Bank Financing
– Chartered Banks And Credit Unions
LO 3
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14-18
TYPES OF LOANS
line of credit
• legal commitment by lender to lend up to a maximum amount
term loan
• money loaned for a 5- to 10-year term, corresponding to length
of time the investment will bring in profits
chattel mortgage
• loan for which equipment or other moveable property serve as
collateral
LO 3
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TYPES OF LOANS
real estate
• long-term loan with real property held as collateral
corporate credit cards
• offers business a level of convenience in making purchases,
not having to establish trade credit, and still delaying when
goods have to be paid for
LO 3
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UNDERSTANDING A LENDER’S
PERSPECTIVE
• The Five Cs of Credit
–
–
–
–
–
Character of the borrower
Capacity of the borrower to repay the loan
Capital invested in the venture by the borrower
Conditions of the industry and economy
Collateral available to secure the loan
• Concerns:
– How much the bank will earn on the loan?
– What is the likelihood that the lender will be able to
repay the loan?
LO 3
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UNDERSTANDING A
LENDER’S PERSPECTIVE
• Lender’s Questions:
– What are the strengths and qualities of the
management team?
– How has the firm performed financially?
– How much money is needed?
– What is the venture going to do with the money?
– When is the money needed?
– When and how will the money be paid back?
– Does the borrower have qualified support people,
such as a good public accountant and lawyer?
LO 3
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14-22
UNDERSTANDING A
LENDER’S PERSPECTIVE
• Firm’s historical statements
– Balance sheets
– Income statements
– Statements of cash flow for 3 years
LO 3
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14-23
UNDERSTANDING A
LENDER’S PERSPECTIVE
• Firm’s pro forma financial statements
– Timing and amounts of debt repayment included
as part of the forecasts
• Personal financial statements
– Borrower’s personal net worth (assets – debts)
and estimated annual income
LO 3
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NEGOTIATING THE LOAN
•
•
•
•
Interest rate
Loan maturity date
Repayment schedule
Loan covenants
LO 3
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FEDERAL ASSISTANCE TO
SMALL BUSINESSES
 Canada Small Business Financing Program(CSBFP)
 Business Development Bank of Canada (BDC)
 Industrial Research Assistance Program(IRAP)
 Program for Export Market Development (PEMD)
 The Canadian Youth Business Foundation (CYBF)
LO 3
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FINDING SOURCES OF FINANCING
• Spontaneous financing
• Profit retention
• External financing
– Comes from outside investors
– First ask, “Should I use debt or equity financing?”
LO 4
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14-27
DEBT OR EQUITY FINANCING?
Potential Profitability
• Borrowing increases potential for higher rates of return on
owners’ equity; exposes firm to more financial risk
Financial Risk
• Investing more owner equity limits potential return on
equity; lowers financial risk for firm
LO 5
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DEBT OR EQUITY FINANCING?
Voting Control
• Increasing equity through borrowing requires owners to
share control with external investors
LO 5
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