Entrepreneurship & Innovation 2012 - WordPress.com

Entrepreneurship & Innovation 2012

Lecture 5 Innovation process – key roles

Start-up finance and Cash-flow basics

© Robert Jones 2001-2012

robert.jones@anglia.ac.uk

Learning Outcomes

To understand:

the sources of start-up finance

the importance of Cash-flow management

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?

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)

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 2000 - dot.coms became dot.bombs (no business plans!!) so now a business plan is more important than ever. 2008 – credit crunch, banks even more reluctant to lend to SMEs

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

UK Govt’s Competition Commission report:- “The supply of banking services by clearing banks to small and medium-sized enterprises...” http://www.competition-commission.org.uk/rep_pub/reports/2002/462banks.htm#summary 11nov2003 “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)

“Banks Clean Up Their Act” 31 October, 2002 http://news.bbc.co.uk/1/hi/business/2381919.stm

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.

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

http://europa.eu.int/abc/doc/off/bull/en/200112/p103094.htm

BASEL II (2004) Introduced capital adequacy requirements more linked to the risk of borrowers.

Clients / Customers Suppliers

Cash-flow Cycle - overview

Costs Sales (includes profit margin) Cash

Work in Progress

Cash-flow basics

Euros Euros

Euros Euros

Creditors Debtors

Customers Suppliers

Cash-flow Cycle starts

Costs Sales Cash

Work in Progress

Start-up funds 4 Fs

Sources of cash

Raw materials or services

Products or services

Customers Suppliers

Cash-flow Cycle

Costs Sales Cash

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Fixed costs and indirect costs - before you start

Customers Suppliers

Cash-flow Cycle

Costs Sales Cash

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs

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

Customers Suppliers

Cash-flow Cycle

Costs Sales Cash

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

Customers ask to be “invoiced” - delay payment by 30 days or 60 days or more (typically 40-45 days in UK). What is your cash position?

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

Making good “sales”, business is growing BUT where is the cash inflow? Cash pile disappears.

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

CASH-FLOW CRISIS! Typical reaction is to extend overdraft. Is this sensible?

Overdraft?!

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

2 or 3 months later, payments are received. But, are you able to finance “late payment”? Late payment is typically 47 days in UK

Cash

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

Suppliers may now allow payment on a 30 day account - this eases the cash-flow

Account purchases

Cash

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

Cash sales are highly desirable. Perhaps offer discount for prompt payment. Reduces profit BUT eases cash-flow,

Account purchases

Cash

Cash Sales

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

Credit card machine - you receive payment within 5 days. BUT VISA charges 4% on transaction + monthly rental. Reduces profit BUT eases cash-flow.

Account purchases

Cash

Credit card sales

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs Invoice sales

Credit card purchases. A business account must be paid in full each month. Eases cash-flow.

Cash

Credit card sales

Credit card purchases

Customers Suppliers

Cash-flow Cycle

Costs Sales

Work in Progress

Rent, rates Equipment, assets Utilities, Loan repayments

Cash purchases

Direct costs

Invoice factoring - factor “buys” your invoices, Pays you 80% now, pays further 15% when customer pays factor. Reduces profit BUT eases cash-flow

Cash

Credit card sales

Credit card purchases

Invoice factoring

80% payment now

15% balance later

Cash-flow forecast – the heart of the business plan

Remember:-

Cash is king

Cash 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