BU121 LECTURE EIGHT
Entrepreneurial Finance Part 2
Cash Budgeting
Tool to forecast and manage cash flows
Helps you to determine what you need in terms of cash and manage it
**10 marks on final exam**
Format:
Receipts: What you have/ expect to have coming in
Disbursements: What you have/ expect to have going out
You should always compare expected cash amount to minimum cash balance
To create a cushion if something comes up
Ending cash balance = beginning cash balance of next month Worksheet based on historical measures of amounts and timing of cash flows / what is typical in industry
Keys
3 possibilities (besides excess = balance required)
1. Deficiency
Borrow for deficiency + minimum
Ending balance = minimum required
Some of the borrowings needed to cover bills so you may have borrowed more than the minimum required
2. Excess >Minimum
Surplus available to repay borrowing
You can choose how much to allocate toward repayment
Depends on the question
If you do use all of it to repay, ending balance = minimum required
If you don’t, ending balance = total excess
3. Excess < minimum
Borrow to = minimum required
End balance = minimum required
Example – For New Venture
You need to prepare a cash budget until your cash flow is positive, then you don’t need the investor’s cash anymore
Minimum cash balance
Large enough to reduce risk but not too big to take away investing opportunities
No formula, you need to use your judgment to decide this
Beginning Cash balance
The money that you have invested
Sales forecast uses a top down and bottom up with sensitivity
Collection rates based on research of what’s normal in your industry
What is the normal payment pattern?
Purchases for next month’s sales
Based on your cost of goods sold and lead time from order to delivery
You need to talk to suppliers to find out what the lead time is
Terms of payment
Research what is normal in the industry
Must be able to back them up
Forecast other monthly expenses depending on your plans
What are your other expenses besides the cost of your product
Cash Burn Rates and Liquidity
Cash Burn Rate
How quickly the business uses cash
Determines weeks of cash remaining
You want to know how much cash you have left in terms of time
Cash Build rate
How quickly a venture builds cash through collections on sales
In the end, trying to find the net of build and burn
Are collections better than expenses or is is the other way around?
Liquidity
The ability of the venture to maintain a build rate high enough to meet its obligations as they come due
AKA net build
Cash flow positive
Start to get their return at this point
Measuring Burn and Build Rates
Cash burn = the cash a venture expends on its operating and financing expenses and its investments in assets
If your payables go up, it means that your money hasn’t been spent yet/used so you subtract any increase in payable
Basically, any time you use cash must be accounted for
Cash build: What the venture receives on its sales
Receivables are subtracted when increased because those sales have not generated cash
Net Cash Burn: When cash burn exceeds cash build
Monthly burn rate
Monthly Build rate
Monthly Net cash burn rate
Venture Life Cycle
The stage you’re at will dictate how much financing you will need
Early stage
No historic info or experience
Investors are seeing projections
Seasoned firm
Been in business, shows results
Investors are seeing what’s real
All businesses move through the stages at different times
Stages
Development: From idea to business – prototype, trial
Startup venture: Revenue generation begins at “time zero”
You have actually started your business
Made your sale
Survival stage
You are in business but things won’t explode right away
Revenues pay some but not all expenses – borrow or give up equity
Rapid-growth
Cash inflows > outflows and venture value increases
Early maturity:
Growth slows, most value realized – consider exit
What kind of exit
