Start-up finance and Cash-flow basics
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1 Entrepreneurship & Innovation 2012 Lecture 5 Innovation process key roles Start-up finance and -flow basics Robert Jones robert.jones@anglia.ac.uk
2 Learning Outcomes To understand: the sources of start-up finance the importance of -flow management
3 Sources of start-up funds 4Fs Founder s cash Family Friends Foolish investors Business partners Bank loan Bank overdraft Government grants? Business Angel & Venture Capital?
4 Bank s checklist:- What is the Bank Manager* looking for? *( Business banking relationship manager!) C haracter of borrower and business A bility to borrow and repay M argin of profit P urpose of the loan A mount of the loan R epayment terms I nsurance (security of payment)
5 Banks attitude to small business in UK:- Pre 1980 not interested in small business 1980s enthusiastic, even foolish, lending, incentives late 1980s recession and bad debt, clamp down on SMEs (banks killed off many SMEs by drawing in loans) 1990s - more business-like, a business plan is required, incentives for new SMEs, e.g.free banking for 18 months dot.coms became dot.bombs (no business plans!!) so now a business plan is more important than ever credit crunch, banks even more reluctant to lend to SMEs
6 Banks attitude to small business in UK:- Now banks often reject the first business plan and insist that you revise and improve your plan. A cash flow spreadsheet forecast is essential, with realistic & pessimistic scenarios. Typically UK banks look for a quick (2 3 year) payback
7 UK Govt s Competition Commission report:- The supply of banking services by clearing banks to small and medium-sized enterprises nov2003 A number of specific practices restrict and/or distort price competition e.g. excessive charges, excessive profits, obstacles to changing accounts (Followed an enquiry into SME banking by Cruickshank)
8 Banks Clean Up Their Act 31 October, Eight of the UK's main banks have agreed to change the way they treat small business customers. The banks concerned have agreed to the so-called behavioural remedies recommended by the Competition Commission. The proposals cover measures to make it easier to switch banks and to increase the transparency of bank charges.
9 EU Code of Conduct between credit institutions and SMEs A non-legislative initiative by the EC aiming to improve working relations between banks and SMEs
10 BASEL II (2004) Introduced capital adequacy requirements more linked to the risk of borrowers.
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17 -flow Cycle - overview Sales (includes profit margin) Euros Euros Euros Euros Costs Clients / Customers Debtors -flow basics Work in Progress Suppliers Creditors
18 -flow Cycle starts Start-up funds 4 Fs Sales Costs Customers Products or services Work in Progress Suppliers Raw materials or services Sources of cash
19 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Customers Work in Progress Suppliers Fixed costs and indirect costs - before you start
20 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Customers Direct costs Work in Progress purchases Suppliers At first, suppliers will probably demand cash payment before you have a track record with them. You now have direct costs for work-in-progress
21 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Direct costs Work in Progress purchases Suppliers Customers ask to be invoiced - delay payment by 30 days or 60 days or more (typically days in UK). What is your cash position?
22 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Direct costs Work in Progress purchases Suppliers Making good sales, business is growing BUT where is the cash inflow? pile disappears.
23 -flow Cycle Overdraft?! Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Direct costs Work in Progress purchases Suppliers CASH-FLOW CRISIS! Typical reaction is to extend overdraft. Is this sensible?
24 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Direct costs Work in Progress purchases Suppliers 2 or 3 months later, payments are received. But, are you able to finance late payment? Late payment is typically 47 days in UK
25 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Direct costs Work in Progress Account purchases purchases Suppliers Suppliers may now allow payment on a 30 day account - this eases the cash-flow
26 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Sales Direct costs Work in Progress Account purchases purchases Suppliers sales are highly desirable. Perhaps offer discount for prompt payment. Reduces profit BUT eases cash-flow,
27 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Credit card Direct costs sales Work in Progress Account purchases purchases Suppliers Credit card machine - you receive payment within 5 days. BUT VISA charges 4% on transaction + monthly rental. Reduces profit BUT eases cash-flow.
28 -flow Cycle Sales Rent, rates Equipment, assets Utilities, Loan repayments Costs Invoice sales Customers Credit card sales Direct costs Work in Progress purchases Suppliers Credit card purchases Credit card purchases. A business account must be paid in full each month. Eases cash-flow.
29 -flow Cycle 80% payment now 15% balance later Invoice factoring Sales Customers Credit card sales Direct costs Work in Progress Rent, rates Equipment, assets Utilities, Loan repayments Costs purchases Suppliers Credit card purchases Invoice factoring - factor buys your invoices, Pays you 80% now, pays further 15% when customer pays factor. Reduces profit BUT eases cash-flow
30 -flow forecast the heart of the business plan
31 Remember:- is king is different to profit Monitor your cash position often Timing of payments is key Keep your customers happy Keep your suppliers paid A love of money is the root of all evil But.. Money is the root of all evil
Cash-flow basics Robert Jones
Entrepreneurship & Innovation 2013 Innovation financial basis -flow basics Robert Jones 2001-2013 Robert Jones Ashcroft International Business School Anglia Ruskin University robert.jones@anglia.ac.uk
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