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

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

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

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

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

 Fixed Capital
 Working Capital
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 Investment of Own savings
 Raising loans form friend and relatives
 Loans form commercial banks
 Borrowing from Financial Institutions
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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
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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
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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
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 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
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 The amount of capital required for smooth and uninterrupted functioning of normal business activities
Realizing Cash
Procurement of RM
Sales
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Production of
Finished Goods
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 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
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 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
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Interdependence among WC
Components
Accounts payables
Accounts
Receivables
Sales
Procurement of
RM
WIP
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Cash
Wages & Mfg.
Costs
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S & D
Gen. Admn.
Financial Costs
Finished Goods
Working Capital

TIME LINE
Purchase of
Raw
Materials
Payment of cash to raw materials
INVENTORY
CONVERSION PERIOD
Sale of finished goods
RCP
Cash received for
Sales
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GROSS OPERATING CYCLE (GOC)
PDP NET OPERATING CYCLE (NOC)
NOC = GOC - PDP
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 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
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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
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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
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Receivables conversion period (RCP)
The RCP is the time required to convert the
Receivables into cash
Closing Receivables
 RCP =
Cost of sales per day
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The payables deferral period (PDP)
PDP is the length of time the firm is able to defer payments on various resource purchases
 PDP
Closing Payables
= Cost of sales per day
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 Liquidity Vs. Profitability
 Level of Working Capital
 Pattern of financing
 Source mix
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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.
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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
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Approaches to Financing Current Assets
 Matching Approach
 Conservative Approach
 Aggressive Approach
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L
E
V
E
L
O
F
A
S
T
S
S
E
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Matching Approach
VARIABLE
CURRENT ASSETS
FIXED
CURRENT ASSETS
FIXED ASSETS
TIME
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SHORT
TERM
SOURCES
LONG
TERM
N
C
I
N
G
N
A
F
I
SOURCES
Financing Current Assets

o f
A s s e t s
L e l e v
Conservative Approach
VARIABLE
CURRENT ASSETS
FIXED
CURRENT ASSETS
S T SOURCES
LONG
TERM
SOURCES
N
C
I
N
G
N
A
F
I
FIXED ASSETS
TIME
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L e v e l o f
A s s e t s
VARIABLE
CURRENT ASSETS
FIXED
CURRENT ASSETS
SHORT
TERM
SOURCES
LONG
TERM
SOURCES
N
C
I
N
G
N
A
F
I
FIXED ASSETS
TIME
30 Financing Current Assets

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)
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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
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Business Plan & Project Analysis Tools
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