Financial Management

1
Financial Management

• obtaining the required funds

2
Sources of funding

• Personal funds
• Partners
• Love money
• Banks
• Factoring
• Leasing
• Trade credit
• Government
• Venture capital
• Dependent on the size of the business

3
Personal funds, Partners, and Families

• The first place most venture founders look to
  finance their idea
• Personal savings, second mortgage on the house
• Partners can increase the cash pool (resources)
  and assist in running the business
• Love money relatives are another much-used
  source of funding for new businesses -- contracts
  and keeping careful records is important

4
Debt Financing

• Banks
• Banks generally do not lend to new business
  ventures
• Collateral is most often required to obtain a
  loan for a new business venture
• A personal guarantee is also often required that
  is supported by mortgages and/or a co-signer

5
Collateral

• Chattel mortgage for purchase of equipment -- up
  to 80
• Insurance -- term insurance with the bank as the
  beneficiary of the policy -- life insurance or
  fire insurance
• Inventory Valuation range from 10 to 60 often
  50 for finished goods
• Personal guarantees loan is made to the
  entrepreneur not the business
• Real estate up to 75 of the appraised value

6
Types of Loans from Banks

• Operating or working capital loans
• Used to look after day to day operating
  requirements
• lines of credit to pay employees, purchase
  materials and meet obligations
• May be secured by receivables, fixed assets or
  other collateral
• Interest is on a daily bases and payments are
  made monthly
• interest rates are usually 1 to 2.5 above the
  prime rate
• Term Loans
• Used to purchase fixed assets
• The term may be five years or more
• Interest is on a daily bases and payments are
  made monthly
• interest rates are usually 1.5 to 3.5 above the
  prime rate

7
Types of Loans from Banks

• Equipment financing
• Borrowing money to purchase equipment and using
  the equipment as collateral
• Letters of credit
• A letter of guarantee issued by the bank on
  behalf of a client guaranteeing payment to a
  supplier -- international business
• Accounts receivable financing
• loans up to 75 of the value of account
  receivable
• requires a good working relationship with the
  bank (past-history)
• Credit cards
• convenient short-term credit
• high-interest rates

8
Other types of Dept Financing

• Factoring
• account receivables are sold to a factoring
  company (industrial finance company)
• interest rates are higher than those at the
  chartered bank (6-8 above the prime rate)
• Leasing
• obtaining the use of machinery, vehicles or other
  equipment on a rental basis
• conserves capital
• provides tax advantages
• Trade credit
• supplier credit -- 30,60, or 90 days

9
Public Sources of Financing

• Government loans specified to assist small
  business
• Banks are a good source of information regarding
  government programs
• The Small Business loans act was designed to help
  small business obtain term credit
• Employment and Immigration Canada offers a number
  of programs to help venture founders
• The Business development bank also provides
  financing to small business ventures

10
Equity Financing

• Venture Capital
• private sector venture capital firms
• corporate venture investment
• large financial institutions
• government
• See Industry, Science and Technology Canada
  the directory of Venture capital firms
• Individuals
• friends and family, wealthy individuals

11
Guidelines for Financial Management

• Go easy on borrowing
• Do not use working capital for long-term
  investments
• Equity is better than dept in the short-run -- it
  helps cash flow
• Interest payments add to your cash burden there
  is no tax benefit with zero profit
• Arrange a large amount of credit -- to meet
  unexpected situations
• Cash flow is more important than profit --
  businesses die without cash
• Consider the following sequence for business
  financing equity, trade credit, love money,
  short-term bank credit, long-term borrowing

12
Financial Management

• Goals
• Short-term
• Obtaining start-up funds
• Cash-flow management
• Break-even analysis for short-term decisions
• Planning ahead for the second set of financing
• Long-term
• Earning adequate return on capital investment

13
Cash-Flow Management

• Liquidity is crucial for small business owners
• Growth in sales always lags behind expenses --
  products must be created or services rendered in
  order to generate profit
• Monitor cash-flows through projections
• Do not exhaust all sources of financing
• Improve your cash flow position by asking
  yourself
• Is the business generating adequate profit
  (exclude non-cash items)?
• Are profits earned sufficient to meet next
  periods operation?
• Does the company need additional machinery or
  equipment?
• Was the contribution margin adequate to cover
  overhead?
• Should the company arrange further financing?
• Is it possible to negotiate better terms with
  suppliers?

14
Budgeting

• Budgeting is used for the planning and
  controlling of expenditures
• The budget quantifies the small businesss plans
  and expectations regarding future revenue, cost,
  cash-flow and profit -- consists of
• a statement of objectives -- i.e. Desired Sales
• a list of priorities and a statement of how they
  are related to the objectives
• a set of pro-forma statements that quantify the
  objectives
• a monthly cash-flow projection for the coming
  year
• schedules and/or budgets for departments where
  necessary
• example cash budget -- forecast of receipts and
  disbursements
• Allows for comparison of actual with planned
  performance