Entrepreneur's Handbook
DETERMINING THE FINANCIAL STRUCTURE OF THE VENTURE
During the financing activities of the entrepreneur, it is necessary to use the funds obtained from the provision of funds correctly, to direct the fund surplus to the appropriate investment channels and to pay attention to cash management while performing all these. To be able to do this, he / she must have a minimum level of financial literacy and basic accounting / financial statement knowledge.
The financing resources that can be reached by the entrepreneur are classified as foreign resources and equity according to the source and short-term, medium-term and long-term resources according to their maturity.
The venture's finance manager must make financing and capital budget decisions that will serve to maximize the market value of the firm, ie the welfare of the shareholders. This means providing appropriate funding, allocating them optimally between current and fixed assets, ie investing appropriately.
In terms of entrepreneurs, the resources to be used in the enterprise are classified as equity and foreign resources, and auto-financing opportunities arise as a result of the investment making profit. Usage areas of these funds are determined as Fixed Capital Investments (Fixed Assets), Working Capital (Current Assets).
2.1. Fixed Capital Requirement
Fixed capital investments, which can also be expressed as capital budgeting, can be related to the project that the entrepreneur intends to realize, and also refers to the financing of the fixed assets of the balance sheet within the ongoing business activity. The investment capital items required by the entrepreneur to start a business consist of expense items such as Land, Building, Facility, Machinery, Equipment, Establishment and Organization expenses.
Capital budgeting is about the evaluation of investments to be made in fixed assets to be used in production. So, what should be taken into consideration as the capital budgeting amounts will be high? (Sayılgan, 2017, s.347).
- Decisions to be made on this issue are long term and the amounts are high, so the abandonment costs are also highly consistent.
- Investments for excess capacity will be even more costly due to idle capacity. However, investments to be made less than necessary eliminate the opportunity to increase the market share and reduce the chance of competition.
- Preparations should be carried out in advance, as there will be a need for large amounts of financing.
2.2. Working Capital Requirement
Working capital refers to all cash and cash-like assets that are required for businesses to carry out their daily operating activities and assets that can be converted into cash within a year. Businesses need cash for the transactions they need to carry out their commercial activities. At this stage, it is necessary to seek answers to the following questions;
- What is the amount of working capital that the business will need?
- With which resources should this amount be financed?
- How should this amount be distributed in current assets?
2.2.1. Methods of Determining Working Capital Needs
Various methods are used to determine the working capital requirement. The easily applied of these methods can be exemplified as follows;
2.2.1.1. Turnover Coefficient Method
For a new startup, the working capital amount of the venture can be calculated by considering the operating activity cycle from raw material purchase to sales and collection. The activity turnover coefficient is calculated over the completion period of the operating activities, and the working capital is calculated over the estimated expenses. For example, considering that an enterprise whose activity cycle is calculated as 70 days, taking into account the waiting period of the raw material in stock, the time required for production, the waiting time of the products, the sales collection period, will bear 1,000.- TL expense, the amount of working capital required for its activities is calculated as follows.
Activity Cycle calculated as = 365 days / 70 days = 5,214.
Working Capital = 1.000.- TL x 5,214 = 5.214.- TL
To examine another calculation example, you can look at the table "How Much Working Capital Do You Need When Setting Up a New Business" in the "Annexes" section at the end of the section.
2.2.1.2. Percentage of Sales Method
The working capital requirement of an ongoing venture is calculated as follows.
Example:
2017 sales of r@ktas business were 3,000.- TL. The amounts related to working capital elements of the said period-end balance sheet are also below.
Cash 25 Bank Loans 30
Receivables 50 Merchant Loans 40
Inventories 50 Taxes and Funds Payable 15
Note = Amounts are in thousand TL.
The enterprise plans to increase its sales to 8,000.-TL in 2018. Let's determine the Gross and Net Working Capital need.
II –
Gross Working Capital = Sales x 41,5 = 8.000.- x 41,5 = 332.000.-TL
Net Working Capital = Sales x (41,5-28,3) = 8.000.- x 13,2 = 105.600.-TL
Working capital needs can also be determined by considering daily sales. For example;
Under the assumption that an average of 300 days worked in a year in r@ktas business, we can determine the Gross and Net Working Capital according to the Daily Sales Method as follows.
I- Determination of Daily Sales: Daily Sales = 3.000 / 300 = 10 TL/days
II- Daily Sales Value of Working Capital Elements
III - Capital elements to be found in 2018
8.000.- / 300 = 26,6.-TL/days
Cash = 26,6 x 2,5 = 66,5.-
Receivables = 26,6 x 5. = 133.-
Stocks = 26,6 x 5. = 133.-
Gross Working Capital = 332.5.-
Bank Loans = 26,6 x 3 = 79,8.-
Merchant Loans = 26,6 x 4 = 106,4.-
Paid Tax and fund. = 26,6 x 1,5 = 39,9
Short Term Outsources = 226,1.-
Net Working Capital = 106,4.-
2.2.2. Management of Working Capital Elements
The following points stand out in the analysis of the main items in terms of the management of working capital elements.
2.2.2.1. Cash Management
Cash has a strategic importance for businesses. Cash is required from the purchase of raw materials to the payment of all expenses in order to carry out business activities. In fact, the purposes of holding cash in business can be listed as transaction, prudence and speculation. The purpose of cash management is to determine the most appropriate amount of cash that allows the payment of financial liabilities without any difficulties and increases profitability as much as possible without reducing operating efficiency. The important thing in cash management is to increase efficiency in collection. In this context, it will be in the interest of the company to make the collection as early as possible and to postpone the payment for the longest possible term.
Inventory model can be applied to determine the most appropriate cash level.
Example
As a result of the planning result of the r@ktas enterprise, it has been determined that the cash need for the next period is TL 16,000. The procurement cost of the enterprise is 1.000.-TL each time from the fund procurement. The financing cost is 8% and the expected efficiency on marketable notes is 6%. Under these circumstances, what will be the amount of funds that the enterprise will provide from outside each time or, in other words, what will the cash level be in the next month?
2.2.2.2. Receivables Management
The importance of the management of receivables is also known. It is important to establish a credit policy within the receivables management process. It is very important to determine the appropriate loan term, appropriate discount rate and collection policy. It is also important to review policies regarding margin trading. As it is known, the credit transactions of a business are double-sided. The First is that the company owes the receivables it has to its customers through forward sales, the second is to borrow from other companies by buying on credit. Therefore, receivable management can be bilateral. In other words, besides the sales on credit, the credit purchases should also be taken into account and followed.
At the same time, the failure in the management of receivables, which can be seen as a result of being one of the working capital elements and the internal relatedness of working capital elements, also reduces the effectiveness of working capital management.
Example
The unit cost of the products produced by the r@ktas enterprise is 52,5 TL and the sales price is 75 TL. The capital cost of the firm is 20%. The probability distributions regarding the quantities that can be sold at various terms are presented below. What should be the best maturity to apply?
Average doubtful receivable rates according to the company's previous year data are as follows.
The most favorable maturity is determined as 60 days.
2.2.2.3. Stock management
Finally, if we need to mention the importance of stock management, stocks appear as the item with the least ability to turn into money among the elements of working capital. The purpose of stock management is to determine the stock level at which total stock costs will be minimum and the profitability of the company will not decrease. As it is known, stock types are listed as raw materials, semi-finished products, finished products, commercial goods, etc. Stock costs are listed as follows;
- Supply Cost
- Purchase Cost
- Cost of Stock Hold
- Cost of Stock Management System
The stock amount in which these costs are minimized is the most suitable stock amount.
Example:
The stock keeping expenses of the r@ktas enterprise are determined as 10% of the stock amount, the procurement cost for each batch is 160 TL, the unit purchase price is 20 TL, and the need for future sales is 1000 units. Order quantity options are 100, 200, 250, 400, 1000 pieces respectively.
The company can meet its needs with the above options. By deciding which option, the company determines the order amount that it can operate in the most economical way? The answer to this question can be calculated as follows.
It should not be forgotten that working capital management is related to all other assets and resources. Working capital elements are directly related to vendors, customers and employees. It is for dealing with lenders for principal and interest payments to the state for tax payments. Expenses for making fixed assets ready for use are related to working capital (Aksoy, 1993, s.5).