Chapter 12 - Debt and other forms of financing. In this chapter, students will be able to understand: Figure out how much you need, financing is a continuing activity, align your sources & uses of funds, mature firms enjoy greater access to funds, start with internal funds sources, optimize your cash collection cycle (CCC), obtain working capital from receivables and inventories,. | DEBT AND OTHER FORMS OF FINANCING Chapter 12 1 Figure out how much you need Know the four basic ways to value your business Earning capitalization valuation Present value of future cash flows Market – comparable valuation Asset-based valuation Knowing the value of your business is the first step in figuring out how much you need to get funded These methods offer tangible formulas but often don’t account for Risk, Opportunity, etc 2 Financing is a continuing activity Factors within, and outside of, your control impact your cash needs & can change suddenly Cash needs must be frequently forecasted with a margin of error Plan for the most likely case Be prepared for the worst case (maintain access to a reserve) Remember the 3 “Rules of Cash” More cash is better than less cash Cash now is better than cash later Never run out of cash (#1 killer of new ventures!) 3 Align your sources & uses of funds Uses of funds Start-up costs Working capital Growth Sources of funds (cash flow) External Require external analysts or investors to independently appraise the worthiness of capital investments before releasing funds Internal Funds you control directly & absolutely Forecast uses of funds further out than the time required to secure sources of funds 4 Mature firms enjoy greater access to funds FIRM MATURITY INTERNAL SOURCES OF FUNDS EXTERNAL SOURCES OF FUNDS Start with internal funds sources Home equity lines of credit Interest rates are comparatively low Better for mid to longer term debt Credit cards Higher interest rates Miles/points may be available Better for short term debt to minimize cost of capital Use personal funds to “de-risk” your venture Confirm/deny market demand Confirm/deny your value proposition Create conditions needed to access other fund types Optimize your cash collection cycle (CCC) Ideal - a negative cycle Customer pays you before you pay suppliers Highest liquidity Next best – Customers pay cash, you pay credit Influenced by industry norms Optimize your | DEBT AND OTHER FORMS OF FINANCING Chapter 12 1 Figure out how much you need Know the four basic ways to value your business Earning capitalization valuation Present value of future cash flows Market – comparable valuation Asset-based valuation Knowing the value of your business is the first step in figuring out how much you need to get funded These methods offer tangible formulas but often don’t account for Risk, Opportunity, etc 2 Financing is a continuing activity Factors within, and outside of, your control impact your cash needs & can change suddenly Cash needs must be frequently forecasted with a margin of error Plan for the most likely case Be prepared for the worst case (maintain access to a reserve) Remember the 3 “Rules of Cash” More cash is better than less cash Cash now is better than cash later Never run out of cash (#1 killer of new ventures!) 3 Align your sources & uses of funds Uses of funds Start-up costs Working capital Growth Sources of funds (cash flow) External .
