Financial Management

Forms of Business OwnershipSole ProprietorshipPartnershipPrivate Limited companyLimited Liability Partnership (LLP)Public Limited company

Financial PlanningHow much money is required ?Where will the money come from?When does the money need to be available?Method of estimation :Money required for fixed assets, deposits,

advances, Terms of receivables etc.Plus Money required for running expenditure like

rent, salary, EB, conveyance, other amenities for next 10 months

Source and Forms of CapitalSources of Capital :Internal – life savings, loan from family and

friendsExternal – Banks, institutions , angel

investors, venture capital, suppliers.

Forms of capital :Fixed capital for long term fund

requirement.Working capital for short term operational

fund requirement.

Capital StructureDebt and Equity .High Debt is preferred when the business is

highly profitable and is in growth phase.Low Debt is preferred when the business is slow

and making losses.

Optimum capital structure is :Lowest cost of fund for the highest return on

investment.Debt within repaying capacity of the firm.It should not dilute the control.

Factors Determining Capital Structure Nature of the business : Highly fluctuating revenue – Low debtHighly seasonal – Low debtSize of the enterprise : Smaller the firm lower the debt portion.Rate of return :Higher the rate of return – Higher the debtCash Flow :Higher cash flow - more debt.Use of funds :Revenue generating investment – debt

Measure of CapitalizationHistorical cost : Sum total of all fixed and other setting up

cost plus working capital.

Earnings based : The expected earning ( as per the industrial

average). Example : Industrial average return is 10%,

and the actual revenue projection is Rs. 100,000/- the rate of capitalization ( or the required capital ) should be 1,000,000/-

Term FundsLong term Funds - repayment > 5 yearsFor creating fixed assets. • Sources of Long term funds- bank loans,

public deposits, Debenture, Retained income.

Short term Finance -repayment < 1 year For day –to- day operational needsSources of Short Term funds – OD, Cash

Credit, Packing Credit, Bill Discounting , Customer - advances.

Venture CapitalFunding for a new, high risk technology

backed ventures, with a very high return potential. (This is a historical view.)

VCs in India : Seek 20% to 40% stake.Prefer to have say.Once revenue has started.When people, system are in place.Tend to push their views on management.

Angel Financing

Investing more for social needs and personal passion.

Invest in small amount without much concern about the return.

Offer business venture advice and guidance.Quit when the goings get good.Chennai Funds is one of the Angel Investors.

Export FinanceFinancing at the pre-shipment and post

shipment stages.Pre-shipment Finance - to purchase raw

material, to pay for the conversion cost and packing cost.

Facilities :Packing creditAdvances against incentivesAdvance against duty drawback.Note : 7.5% interest ( with subventions from

time to time) and to maximum of 6 months.

Export Finance

Post-shipment Finance – Financing from the date of shipment till the

date of actual realization of the bill amount.Note : Finance , 6 months and the rate of

interest < 8.5% ( with some subvention).

Crowd FundingThrough Social Media the “crowd” will be

asked to finance the project.

An agreement will be made that the participants will be paid proportionately from the net revenue.

Many creative ventures are started with “crowd funding” format.

Working capitalOperating Cycle

Cash

Raw materia

ls

Semi Finishe

d Finishe

d

Bills receivabl

es

Working CapitalNeed for working capital :

To buy raw material and components

To convert semi and finished products - power, fuel, salary, wages, rent.

To finance the terms of the customers – selling on credit

Working capitalManagement of Working capital :Management of Cash : Excess cash results in

loss of opportunity revenue. Deficit in cash creates road block to the smooth functioning of the organization.

Management of Inventory - Raw material, work-in-progress, and finished goods :

Excess inventory increases the cost – like carrying cost, interest on the money locked up etc. Deficit in inventory results in reordering cost, production stoppage, high prices etc.

Working Capital ManagementManagement of Accounts Receivable

(AR): AR should not exceed more than 15% of the

total sales.Excess AR involves capital cost, default,

collection cost etc.Management of Accounts Payable (AP) :

Credit purchase.Excess AP will reduce the credibility of the

organization, consequently buying power.But it provides interest free funds!!!

Working Capital- The Sources

Personal savingsPersonal borrowingsTrade creditBill discountBank loans, over draft, cash credits

Working Capital - AssessmentFactors that determine the Working

Capital requirements :Length of Operating Cycle.Nature of business – manufacturing, trading

Vs restaurants and hospitals. Terms of credit to customers and from

suppliers.Seasonality of the business.Production process – labor intensive Vs

technology intensive

Working Capital - AssessmentCost of raw material, labor, rent etc.Length of credit period allowed to

customersLength of credit period allowed by

suppliersLength of time involved to pay wages and

overheads.Total operating expenses.Seasonality of the raw material

availability.

Significance of Working Capital Management :

To keep the operations going till the realization

of sales proceeds.

Balancing between outflow of funds with inflow funds to sustain the operations.

To buy materials and components at a competitive price and terms.

Institutional Finance Industrial Development Bank of India ( IDBI)Industrial Finance Corporation of India Ltd.

( IFCI)Industrial Credit and Investment Corporation

India (ICICI).State Financial Corporations ( SFC) –TIIC

( TN Industrial Investment Corporation)State Industrial Development Corporations –

( Tidco)Small Industries Development Bank of India (

SIDBI)Export Import bank ( EXIM)

Lease Financing and Hire Purchase

Leasing : Right to use the asset for a period of time for payment of certain sum of money as rentals. Ownership is not transferred.

Hire Purchase : The ownership is transferred, while payment is made in a deferred way.

Tax BenefitsIncentives and Concessions for small scale and Tiny

Industries :

Up to 1 Crore sale no excise duty.Capital subsidy of 12% to invest in technology.Royalty and Patents charges are Tax deductible.20% IT deduction , for the units in Backward and

Rural Areas.Total deductions for the Scientific Research expenses.25% of the investment in machinery is given as

“Investment allowance”Additional shift allowance is given apart from

Depreciation in the Income Tax.

NegotiationBe clear about your break point and be ready

to walk away if that is reached.Ask for extra to sweeten the deal; something

valuable to you but does not cost them.Always take something in return, when you

are giving something.Open the dialogue with the room for

maneuvering.Never feel rushed; be deliberately slow.Know your worth.Go to negotiation with a professional

assistance.

Negotiation with FinanciersDo not start to negotiate when you are

desperate for money.Start with areas of agreement.Be clear about what you want - money,

management expertise, market access and so on.

Know the financier – what is their previous record, what is their expected rate of return, how long they want to stay invested, are they active mentor type or just investor and so on.

Be clear about main goal of the negotiation.