Financial business planning as a success factor on competition

Scientific Study , 2019 , 114 Pages

Business economics - Company formation, Business Plans

The aim of this case study is to provide a basic theoretical understanding about financial business planning in the field of start-up companies and also for business case purposes within running ventures. In conclusion, there shall be a controversy discussion about different financial success factors and the associated risks and limits in order to persist on competition. In addition to that, there will be a transfer into a practical example to apply the theoretical knowledge. The final approach is a critical evaluation about the topics regarded.

Entrepreneurship is enjoying ever growing popularity, most likely due to the idea that it is only possible to develop the own personality through a self-determining activity. A business start-up establishes for the founder the highest degree of individual personal development and complacency. Thus, it is not surprising that especially for the younger generation this topic become more and more in the center of attention. Furthermore, independent or freelance activities may provide both personal fulfillment and an opportunity of more income.

All companies require capital, to invest in plant, machinery, inventories, accounts receivable, and all the other assets it takes to run a business. The topic finance planning has an essential importance in the context of business planning. It summarizes all textual descriptions of the business plan into clear interpretable numbers. Potential and value of a business idea has to be clearly visible and identifiable. Based on a detailed planning the capital requirements arise, which is needed to derive the necessary type of funding.

Due to the fact that most start-ups are characterized by relatively high risk of fail and a huge need of capital by the founder, which can cause an existential personal threat, a detailed and realistic finance plan is mandatory. For the existence of a start-up, it is essential to have always available and sufficient liquidity and it constitutes therefore a fundamental motive for a corporate financing.

Table of Contents

II LIST OF ABBREVIAT

III LIST OF FIGU

IV LIST OF TABLES

1 EXECUTIVE SUMME

2 RESEARCH DESIGN
2.1 Methods of Data Collect
2.1.1 Content Analysis
2.1.2 Market Research
2.1.3 Knowledge of the Industry
2.1.4 Assumptions
2.1.5 Restrictions of Data Collection
2.2 Framework of the Resear
2.3 Subject of the Research
2.4 Differentiation of Central Terms
2.4.1 Central General Terms
2.4.1.1 Finance
2.4.1.2 Finance Planning
2.4.1.3 Business Plan
2.4.1.4 Business
2.4.1.5 Small and Medium-Sized Companies
2.4.1.6 Start-Up
2.4.1.7 Success Factors
2.4.2 Central Financial Terms
2.4.2.1 Income
2.4.2.2 Expenses
2.4.2.3 Assets
2.4.2.4 Earnings
2.4.2.5 Liabilities
2.4.2.6 Liquidity
2.4.2.7 Equity
2.4.2.8 Depreciation
2.4.2.9 Cash Flow

3 BASICS OF FINANCIAL PLANN
3.1 Basic Princip
3.1.1 Requirements of Finance Planning
3.1.2 Framework of Financial Reporting and Planning
3.1.3 Selection of Legal Form
3.1.4 Start-up Funding
3.2 Information Process
3.2.1 Determinants of Information Needs
3.2.2 Uncertainties
3.2.3 Estimations
3.2.4 Environmental Analysis
3.2.5 Industry and Competition Analysis
3.3 Financing Opti
3.3.1 External Financing
3.3.2 Equity Capital
3.3.3 Mezzanine Financing
3.3.4 State Subsidies
3.3.5 Leasing, Rent and Hire Purchase
3.3.6 Inheritance
3.3.7 Alternative Finance Options
3.4 Calculation Elements
3.4.1 Market Size and Sales Revenue
3.4.2 Payroll Expense
3.4.3 Insurance Expense
3.4.4 Depreciation
3.4.5 Taxes
3.5 Methods of Valuati
3.5.1 “Stuttgarter Verfahren”
3.5.2 Multiplier Methods
3.5.3 Discounted Cash Flow Method
3.5.4 Business Ratios
3.5.5 Net Present Value
3.5.6 Valuing a Start-Up

4 FINANCIAL SUCCEESS FACTORS
4.1 Introduction
4.2 Direct Factors
4.2.1 Qualification of the Entrepreneur
4.2.2 Moral, Ethics and Honesty
4.2.3 Set of Figures
4.2.4 Cost Structure
4.2.5 Visualization of Mathematical Correlations
4.2.6 Credit Discussions
4.2.7 Flexibility
4.2.8 Risk and Back-Up
4.2.9 Consultancy and Customers Voice
4.2.10 Organizational Framework
4.2.11 Plausibility
4.2.12 Paranoia
4.3 Indirect Fact
4.3.1 Business-Case-Marketing
4.3.2 Misjudgements
4.3.3 Learning from Mistakes
4.3.4 Sustainability and Long-Term View
4.3.5 Innovativeness
4.3.6 Investment in Knowledge
4.3.7 Investment in Talented People
4.3.8 Inventive Spirit
4.3.9 Protection of Intellectual Properties

5 PRACTICAL EXAMPLE
5.1 Design of the Finance Plan
5.2 Financial Plan
5.3 Calculation Approach
5.3.1 Income
5.3.2 Expenses
5.3.3 Gross Profit
5.3.4 Financing
5.3.5 Miscellaneous
5.3.6 Ratios
5.3.7 Earnings
5.4 Analysis and Interpretat
5.4.1 Scenario and Sensitivity Analysis
5.4.2 Financial SWOT Analysis
5.4.3 Evaluation of Gathered Data

6 CRITICAL EVALUAT

7 PERSPECTIVE AND GUIDANCE

V LIST OF REFERENCE

VI LIST OF APPEN

ANNEX 1: FINANCIAL PLAN LEAT

ANNEX 2: BUSINESS PLAN LEA

II List of Abbreviation

Abbildung in dieser Leseprobe nicht enthalten

III List of Figures

Figure 3-1 Optimum Zone of Data Gathering (cf. Taschner, 2016, p. 75)

Figure 3-2 Classification of Industry Analysis (cf. Heger, Schermann, & Volcic, 2012, p 41)

Figure 3-3 Five Forces Model in accordance to Porter (cf. Porter, 1999, p. 34)

Figure 3-4 Source of Financing in different Phases (cf. ETH Zürich, et al., 2016, p. 147)

Figure 3-5 Models of Start-Up Financing and Strategies (cf. Hahn, 2014, p. 21)

Figure 3-6 Typical Financing Options (cf. Hahn, 2014, p. 22)

Figure 3-7 Overview of Ratios (cf. Eayrs, Ernst, & Prexl, 2011, p. 139)

Figure 5-1 Projected Sales by Year (cf. ANNEX 2: BUSINESS PLAN LEAT)

Figure 5-2 Scenario and Sensitivity Analysis Cumulative Cash Flow Overview

IV List of Tables

Table 5-1 Sales Target Overview (cf. ANNEX 2: BUSINESS PLAN LEAT)

Table 5-2 Change in Inventory Overview

Table 5-3 Cost of Sales Overview

Table 5-4 Investments Overview

Table 5-5 Operating Expenses Overview

Table 5-6 Personnel Costs Overview

Table 5-7 Gross Profit Overview

Table 5-8 Finance Structure Overview

Table 5-9 ERP-Capital for founding Overview

Table 5-10 House Bank Credit for Investments Overview

Table 5-11 House Bank Credit for Operating Expenses Overview

Table 5-12 Overdraft Facilities Overview

Table 5-13 Interest and Repayment Schedule Overview

Table 5-14 Depreciation Overview

Table 5-15 Income Taxes Overview

Table 5-16 Gross Margin Overview

Table 5-17 Cashflow Overview

Table 5-18 Earnings Overview

Table 5-19 Scenario and Sensitivity Analysis Cumulative Cash Flow

1 EXECUTIVE SUMMERY

Entrepreneurship is enjoying ever growing popularity, most likely due to the idea that it is only possible to develop the own personality through a self-determining activity. A business start-up establishes for the founder the highest degree of individual personal development and complacency. Thus, it is not surprising that especially for the younger generation this topic become more and more in the centre of attention (cf. Hahn, 2014, p. 3). Furthermore, independent or freelance activities may provide both personal fulfilment and an opportunity of more income (cf. Maschmeyer, 2016, p. 279).

All companies require capital, to invest in plant, machinery, inventories, accounts receivable, and all the other assets it takes to run a business (cf. Brealey, Myers, & Allen, 2013, p. 749). The topic finance planning has an essential importance in the context of business planning. It summarizes all textual descriptions of the business plan into clear interpretable numbers. Potential and value of a business idea has to be clearly visible and identifiable. Based on a detailed planning the capital requirements arise, which is needed to derive the necessary type of funding (cf. Küsell, 2006, p. 379).

Due to the fact that most start-ups are characterized by relatively high risk of fail (cf. Andreessen, 2013) and a huge need of capital by the founder, which can cause an existential personal threat, a detailed and realistic finance plan is mandatory (cf. Vogelsang, Fink, & Baumann, 2013, p. 49). For the existence of a start-up, it is essential to have always available and sufficient liquidity and it constitutes therefore a fundamental motive for a corporate financing (cf. Hahn, 2014, p. 5).

Also, a recent study indicated that for financial funding and success with a startup, passion and enthusiasms of the funders doesn’t matter as much as a detailed preparation about the business idea and the finance planning (cf. Dholakia, 2015, p. 11).

The actuality of this topic in general can be foreseen from the fact that in Germany in year 2015 roundabout 388,000 companies were launched, unlike 422,000 startups in the year 2014 (cf. BMWI, 2016, p. 4). The spread is even larger when you receive attention to the fact, that we had in the year 2011 round about 835,000 start-ups and in the year 2003 even 1.5 million (cf. Opoczynski & Horn, 2012, p. 13).

This decreasing number of foundations in Germany is related at one hand to the bad entrepreneurial spirit, one the other hand to the low available risk capital (cf. SPIEGEL Online, 2016, p. 1). This fact justifies also the necessity of a critical approach to financial planning in order to have any opportunity to become successfully professional independent. Furthermore, major management decisions are usually based nowadays on business cases, which also depending on reliable finance plans (cf. Siebold, 2015, p. 14).

The aim of this case study is to provide a basic theoretical understanding about financial business planning in the field of start-up companies and also for business case purposes within running ventures. In conclusion, there shall be a controversy discussion about different financial success factors and the associated risks and limits in order to persist on competition. In addition to that, there will be a transfer into a practical example to apply the theoretical knowledge. The final approach is a critical evaluation about the topics regarded.

Because of extensive topic area and the high complexity of financial planning, the case study will apply in a generally basis with an additional practical orientation. A discussion about the whole width field of business accounting and finance with all special forms would go far beyond the scope of this case study and had therefore to be explicitly delimited from the viewing angle.

The theoretical principles provide a necessary foundation to discuss the practical orientated analysis. The data were collected from different sources like content analysis of literature, professional journals and magazines. In order to provide the necessary data for the practical example, a delimited market research and assumptions were taken into account. Also, the existing knowledge of the considered industry by the author has supported the practical dispute.

The theoretical and practical core content is focussing on several important issues in this respective field, including capital requirements, start-up funding, projected cash flow, projected profit and loss as well as business ratios. By using the example of a potential start-up company in the field of machine engineering, it was possible to develop a hands-on experience to give the reader an added value.

As a foundation for the practical approach, the business idea of a potential startup, named LEAT, from the developed business plan were chosen (cf. ANNEX 2: BUSINESS PLAN LEAT)

The aim of the considered potential start-up, named LEAT, is to create a mediumsized company in the field of machine engineering with the purpose to provide different kind of reliable mobile and stationary power supply units (PSU) for different applications and environments, combined with automation solutions in the context of the upcoming Industry 4.0 revolution. Furthermore, the providing of any required support for the customer, like maintenance, service and spare part deliveries are considered. Applications will be from common use like standby and backup PSU´s, over professional use for construction sites and maritime using, up to special solution for aeronautic and military use under harsh environment (cf. ANNEX 2: BUSINESS PLAN LEAT). With the concept of modular architecture there will be different power ranges between 20 kVA and 200 kVA available. For special projects, it is possible to extend the range up to 1,000 kVA. A special challenge is to provide a worldwide rare kind of super noise cancelled power supply units which requires a special engineered solution to distinguish from the standard market solutions (cf. ANNEX 2: BUSINESS PLAN LEAT).

The business plan is prepared to obtain financing in the amount of at least € 500,000. This financing is required to begin to work on site preparation and modifications, structuring of the production and assembly lines, equipment purchases and to cover expenses in the first years of operation (cf. ANNEX 2: BUSINESS PLAN LEAT).

Capital contributions from the founder in addition to the financing will allow LEAT to successfully open and maintain operations through the first two years. The intended initial capital investment will allow LEAT to provide their customers with full engineered solutions and services to meet there needs (cf. ANNEX 2: BUSINESS PLAN LEAT).

2 RESEARCH DESIGN

The chapter “RESEARCH DESIGN” is divided into following sections:

- Methods of Data Collection
- Framework of the Research
- Subject of the Research
- Differentiation of Central Terms

2.1 Methods of Data Collection

For such research, it is essential to gather different kinds of data from different sources and with different type of methods.

Main criteria for social data evaluations are the relevance and the quality of the gathered data. Thereby data are generated on different abstraction level, the macro level (e.g. global organizations), the meso-level (e.g. government and administrations) as well as the micro level (e.g. polling agencies and research institutes) (cf. Atteslander, 2010, pp. 354 355).

2.1.1 Content Analysis

Content related analysis are indispensable in the empirical social research and provides fundamental knowledge from scientific literature, topic related articles or depth interviews. The content analysis allows to study communication contents like texts, pictures or films with main focus on writings. This is allocated as an empirical data collection method (cf. Atteslander, 2010, p. 195).

2.1.2 Market Research

The market research delivers information about the relevant competitors, the customers and economic performance. An analysis was necessary to work out the findings for practical dispute.

2.1.3 Knowledge of the Industry

In the respective field of machine engineering, power generation and automatization, there is a level of knowledge of the author available which has developed over on decade. This experience regarding technology and economic aspects provides a deeper insight and valid practical evaluation.

2.1.4 Assumptions

Nevertheless, the financial planning contains always a reaching into the future, which cannot provide reliable data of economic aspects, for instance interest rate development, sales figures and condition of purchase transactions. To face such uncertainties, it is necessary to work with assumptions and trends.

To assess the uncertainty of the estimations and to determine their potential impact on the financial valuation it is necessary to perform a sensitivity analysis (cf. Berk & DeMarzo, 2014, p. 699). A more detailed view into assumption and the sensible handling with that will be discussed later on.

2.1.5 Restrictions of Data Collection

The collected data of the research are subject to restrictions due to the fact of incomplete availability of data, lack of complete penetration of the issues or gaps in the market knowledge.

Another problem is the flaw in the interpretation of secured sociological findings due to a lack of professionality (cf. Atteslander, 2010, p. 360).

2.2 Framework of the Research

The basic framework of the research is the German environment with possible growth in Europe. The viewed industry is located in the field of the financial intensive machine engineering. Associated business and economical subjects which are needed around business financing are only at most mentioned and not deeper discussed. The study is aiming aspect of financial business planning regarding a business start-up in the pre-foundation phase. In this context, foundations escaped from unemployment with their specific nature and hurdles are not in the focus of the work in hand. As a foundation for the practical approach, the business idea of a potential start-up, named LEAT, were chosen (cf. ANNEX 2: BUSINESS PLAN LEAT).

2.3 Subject of the Research

The subject of the research is a potential start-up company with its specific environmental influences and with focus to the financial planning in the context of a business plan. The aim of the considered potential start-up named LEAT is to create a medium-sized company in the field of machine engineering with the purpose to provide different kind of reliable mobile and stationary power supply units (PSU) for different applications and environments, combined with automation solutions in the context of Industry 4.0 revolution. Furthermore, there will be in addition an offering of any required support for the customer, like maintenance, service and spare part deliveries. Applications will be from common use like standby and backup PSU´s, over professional use for construction sites and maritime using, up to special solution for aeronautic and military use under harsh environment (cf. ANNEX 2: BUSINESS PLAN LEAT). With the concept of modular architecture there will be different power ranges between 20 kVA and 200 kVA available. For special projects, it is possible to extend the range up to 1,000 kVA. A special challenge is to provide a worldwide rare kind of super noise cancelled power supply units which requires a special engineered solution to distinguish from the standard market solutions (cf. ANNEX 2: BUSINESS PLAN LEAT).

2.4 Differentiation of Central Terms

Differentiations and explanations are made in this section for considered central general terms and central financial terms, which are substantial in the context of this case study to support the understanding for reader.

2.4.1 Central General Terms

2.4.1.1 Finance

Finance or financial management is an instrument to achieve support for decision makers with the ways in which funds for a business are raised and invested. Businesses raise funds from investors to use these funds to invest in equipment, premises, inventories and so on in order to create wealth. Therefore, the understanding and knowledge about main forms of finance available, the risk associated with each form of finance, the role of financial market in supplying finance as well as the costs, benefits and risks of each financial form are mandatory. In contrast to finance, accounting management is concerned with collecting, analysing and communicating financial information’s (cf. Mc Laney & Atrill, 2016, p. 2). In the case of finance business planning in the context of start-ups, information’s from accounting become available foremost during running the business.

2.4.1.2 Finance Planning

Finance planning is defined as a process of targeted structuring of future finance decisions with orientation to liquidity, profitability and risk goals. It is based on operating subplans, especially sales and production planning. On the other hand, it shapes the other segment plans. Due to this interdependencies finance planning is considered as a part of the overall business planning process and is therefore understood as integrated finance planning. The main tasks are the determining of the future financial needs and the kind, amount and time of financing measures. A distinction is made between strategic finance planning, which provides the scope for finance decision, and the operational finance planning to determine the detailed decisions within in the strategic framework (cf. Breuer, Breuer, Eggert, & Minter, 2017).

2.4.1.3 Business Plan

A business plan is a written documentation about the entire business concept, including the product idea, economic environment, stated objectives, the necessary financial resources and the potential risks. In addition to that, the company founder self is presented about her or his suitability and experience to realize successfully the enterprise with the purpose to convey a realistic image of the success prospects of the start-up company to potential investors (cf. Fischl & Wagner, 2016, p. 19). Thereby the business intention is orientated to the future (cf. Taschner, 2016, p. 7). In contrast to a business case, which states in compact form what the investment is about, a business plan describes furthermore in a detailed way how the investment will be realized (cf. Siebold, 2015, p. 23).

Taschner establishes the connection between both the business plan and the business case, in which he says that the results of a business case can substantiate a business plan (cf. Taschner, 2016, p. 7).

2.4.1.4 Business

Peter Drucker argued, that the purpose of businesses is to create and keep a customer (cf. Drucker, 1967). Nearly fifty years after his approach it has become part of the conventional wisdom due to the fact, that it is now widely recognized that in order to succeed, businesses must focus on the customer’s needs (cf. Mc Laney & Atrill, 2016, p. 18).

Basically, any relatively permanent organized collaboration between human beings with the purpose of a joint service provision represents a social system. Due to the technical context of the many businesses it is common to define such a system as a social-technical one. Besides that, an important attribute of the system is the openness to their environment which causes the condition of existence for the social-technical system business (cf. Jung, Bruck, & Quarg, 2013, pp. 8 9).

Both approaches are appropriate views on the discussed topics and the practical example. For the terms company, corporation, enterprise or firm neither in this respect or in what follows no differentiation will be made.

2.4.1.5 Small and Medium-Sized Companies

This case study aims to German small and medium-sized enterprises (SMEs). There is no generally accepted clear differentiation criterion for small and mediumsized companies identifiable. Although the definitions have become much closer in the last few years.

The European Union (EU) recommend to define micro enterprises with less than ten employees and a maximum annual revenue of two million Euro. Small businesses pertain to companies with less than 50 employees and up to ten million annual turnovers. Whereas medium sized enterprises are characterized with less than 250 employees and maximum 50 million revenues (cf. European Union, 2017).

The Institute for SME Research classifies micro businesses and small enterprises just like the EU except the medium-sized category. Those are defined as companies with up to 500 employees and 50 million Euros revenues (cf. IfM Bonn, 2017). The “KfW Förderbank” on the other hand had defined SMEs with maximum 500 million Euros annual revenues but changed recently the definition following the EU statement (cf. KfW, 2017).

Furthermore, the German Commercial Code (HGB) defines small cooperation’s with up to 50 employees and six million balance sheet totals or twelve million annual revenues. Medium-sized cooperation’s are limited to 250 employees and 20 million balance sheet totals or 40 million annual revenues (cf. § 267 HGB).

Due to the most referenced definition of the EU, in the following this determination will be go along with.

2.4.1.6 Start-Up

In a broad sense start-ups are basically young companies, notwithstanding of the nature of the products and service provided, which is situated just in the preor set-up phase of a business and is reaching out for financing funds. Nevertheless, often applied in common language use is the start-up term in a narrow sense to be defined as young growth companies, which has special innovation potential and is willing to take up activities in the growing field of software development, finance, biotech, nanotech, online trading, new production processes, industry 4.0 as well as aerospace technology (cf. Hahn, 2014, p. 4).

Another form of start-ups are so-called lean start-ups which are originated in 1999. They are driven to develop frequently very fast a very rudimentary product and to bring it to market. Afterwards an intense marketing hype is necessary to provide a desired cash cow. This form is nowadays considered as an unhealthy and unsuccessful way to start a business. A stronger focus on the customer and their needs are these days mandatory to develop a substantial business model (cf. Andreessen, 2013).

2.4.1.7 Success Factors

Both Al-Laham (1997, p. 401) and Barney (1997, p. 34 f.) agree that the main objective in the strategic development is to ensure the long-term viability of the business so called security of livelihood.

This global target will be operationalised in the German literature with the concept of potential success factors by Gälweiler. He defines the potential success factors with the entire framework of all product and market specific prerequisite for success, which have to be at the latest set before the achievement has to be started (cf. Gälweiler, 1990, p. 26).

Potential success factors of a company constitute guide values in order to generate competitive advantages and eventually to realise the long-term corporate goals. Thereby a distinction between potential external market success factors and potential internal performance success factors can be made. The challenge for both is to activate them accordingly (cf. Fischer, 1993, p. 16).

Fischer (1993, p. 18) and Breid (1994, p. 37) are pointing out that the definition, the measurability as well as the impact of potential success factors remain usually vague. Therefore, they prefer the concept of success factors which tries to operationalise the potential success factors and to make them more assessable for the management. Hence success factors are characterised by concretised potential success factors which directly influences the success and failure of a company. Concrete potential factors are discussed later on (cf. 4 FINANCIAL SUCCEESS FACTORS).

2.4.2 Central Financial Terms

2.4.2.1 Income

Income describes the increases in economic benefits within an accounting period by either or both increasing assets or decreasing liabilities. Further income is separate into revenues which arises from the ordinary course of business and gains, which is outside the ordinary course of business (cf. Harrision, Horngren, Thomas, & Suwardy, 2013, pp. 13 14).

2.4.2.2 Expenses

Expenses refers to decreasing of economic benefits during an accounting period, which results in a decrease in equity as well as incurred expenses in the ordinary course of the business, whereas losses may or may not be in the ordinary course of the business (cf. Libby & Short, 2014, p. 103).

2.4.2.3 Assets

Assets are economic resource with the intention to provide future economic benefits to the entity. These includes cash, inventory, account receivables, machinery, equipment and properties (cf. Harrision, Horngren, Thomas, & Suwardy, 2013, pp. 13 14).

2.4.2.4 Earnings

In financial statements, earnings are usually conducted in different gradations due to the need of different level of information’s. There are for instance earnings before interests, taxes and depreciation (EBITDA), earnings before interest and taxes (EBIT), earnings before taxes (EBT) and earnings after taxes (EAT). In each case on the result of the ordinary business activities (cf. Gabler Wirtschaftslexikon, 2017). In the stated finance plan (cf. 5 PRACTICAL EXAMPLE) there are worked out the different earning types.

2.4.2.5 Liabilities

Liabilities describe the obligation of the entity with the result of an outflow of economic benefits, like bank loans, account payables and other obligations (cf. Harrision, Horngren, Thomas, & Suwardy, 2013, pp. 13 14).

2.4.2.6 Liquidity

The solvency of a company, thus the ability to pay, is referred to as liquidity. Sometimes liquidity is also referred to liquid funds itself, for example cash or bank deposits. Occasionally the term is used to describe the state of whole markets, especially in the USA to address liquid markets for shares of major companies (cf. Volkart & Wagner, 2014, p. 55). In the context of this case study the meaning of the ability to pay is used.

2.4.2.7 Equity

Equity refers to the residual interest between the value of the assets and the value of the liabilities and represents the shareholder’s residual claim. Further distinction is made between the share capital which represents the amount shareholders have invested in the entity and the retain earnings which is the amount earned by income-producing activities and kept for use within the business (cf. Harrision, Horngren, Thomas, & Suwardy, 2013, pp. 13 14).

2.4.2.8 Depreciation

The understanding of depreciation is the recording of decline in the value of an asset, often material assets like machines, facilities or real estates. Furthermore, it is called amortisation or value adjustment (cf. Volkart & Wagner, 2014, p. 153).

2.4.2.9 Cash Flow

The cash flow describes a payment flow or the balance between a defined aggregated payment flow of revenues respectively inpayment and expenses respectively payouts (cf. Volkart & Wagner, 2014, p. 55). A further differentiation like operating cash flow, free cash flow, net cash flow or gross cash flow in the context of this elaboration does not take place. Due to fact that probably the cash flow the most important item is that can be extracted from a financial statement (cf. Berry, 2016), the main focus in the further valuation of the stated finance plan (cf. 5 PRACTICAL EXAMPLE) were put on that.

3 BASICS OF FINANCIAL PLANNING

The chapter “BASICS OF FINANCIAL PLANNING” is divided into following sec- tions:

- Basic Principles
- Information Processing
- Financing Options
- Calculation Elements
- Methods of Valuations

3.1 Basic Principles

3.1.1 Requirements of Finance Planning

In the context of finance planning it is essential to be always aware of substantial financial data of the business operations. However, within a start-up company a sophisticated financial statement is not necessary due to the vague nature of made assumptions. Nevertheless, minimum requirements have to be fulfilled such as statements about estimated revenues and profit, needed financial resources within what timeframe and on which assumptions the forecast is stated. Therefore, a profit and loss statement, a balance sheet and a break-even analysis for at least the next five years are required. The data shall refer if appropriate to each quarter of the first year and after that annually (cf. ETH Zürich, et al., 2016, p. 143). Due to the finance-intensive nature of the viewed start-up LEAT in the machine engineering industry an annually 5-year examination has been chosen without a detailed view into the first year because of the less informative first year.

In addition to that the finance plan should be transparent, coherent, equipped with reliable data, a reasonableness should be granted as well as an existing authenticity to the addressee (cf. Lutz & Bussler, 2010, pp. 142 143).

The general overall goal of financial management, which financial business planning is all about, is to maximize the market value of the existing owners’ equity. With this in mind it doesn’t matter what the organizational form is, due to the fact that good financial decisions increase the market value of the owners’ equity, and poor financial decisions decrease it. The entrepreneur tries to serves best to the business by identifying goods and services that add value to the firm because they are desired and valued in the free marketplace (cf. Hillier, Ross, Westerfield, Jaffe, & Jordan, 2016, pp. 9 10).

3.1.2 Framework of Financial Reporting and Planning

The conceptual framework of financial reporting and planning, a joint publication by the IASB and FASB, defines as objective to provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Qualitative characteristics are split in fundamental and enhancing ones. The Fundamental characteristics must be at first relevant and faithfully represent what it contents substitutes. Information that is relevant and has faithful representation may be further enhanced if it is comparable, verifiable, timely and understandable (cf. Harrision, Horngren, Thomas, & Suwardy, 2013, pp. 8 12). Within the approach it is necessary become aware which decision are to take, who is the addressee of the finance plan, which time horizon is pursued, which level of detail is needed as well as which form of presentation should be prepared. From there it is necessary to set up a business case model, then to collect input data to use suitable methods and finally to check the outputs for uncertainties including the presentation of the results (cf. Taschner, 2016, pp. 31 43). Relevant elements within the finance plan are a capital requirement plan, a financing plan, a revenue plan, a cost projection, a viability plan and a liquidity plan (cf. Lutz & Bussler, 2010, p. 153).

3.1.3 Selection of Legal Form

Capital is the engine of every start-up. Regarding the capital procurement, it is necessary to take the selection of the legal form of the company into account. The legal form determines therefore important framework for financial planning. The legal form partnership allows relatively easy to provide borrowed capital due to the fact that all shareholders of the company are personally and jointly liable which gives the bank sufficient securities for a loan. Whereas a cooperation has limited liable capital to offer to the bank. Often it is necessary that the shareholders have personally to guarantee for the loan or involve personal securities. One the other hand, involving a third investor as shareholder causes problems to partnership, because they are designed that several persons use a part of their own capital to lead together an own company or to pursue a special target and not for the admission of new members. In contrast to that, cooperation’s are better constructed for receiving external equity capital, because of the strict regulated liability. The inclusion of additional shareand stockholders, the increasing of capital contribution as well as their change are comprehensive regulated (cf. Küsell, 2006, p. 332 ff.).

Another aspect regarding the legal form in the context of financial planning is the needed minimum foundation capital which is amounted for private limited companies to 25,000 euros and for stock cooperation’s with at least 50,000 euros (cf. Opoczynski & Horn, 2012, p. 51).

3.1.4 Start-up Funding

A solid financing is an essential success criteria for business start-ups. Insufficient financing is one of the most common cause of fail during a foundation. Lack of financing prevent founders to test their ideas in the beginning. Usually a financing is necessary to cover the initial costs. After a while the founder make enough income to cover the expenses, pay interests and redemptions as well as the own cost of living. Later financing is mostly necessary to smoothing liquidity shortfalls or further investments. The best-case scenario is when the initial financing is adequate to the point when the income exceeds all outcomes. An overstated financing causes unnecessary costs of interests and on the other hand an underestimated financing leads to trouble within the company (cf. Küsell, 2006, p. 261).

Typical sources of error with the assessment of required amount of financing are neglect of the living costs of the founder, some cost become left behind or turn out to be misjudged, the expenses are planned too inflexible or too exaggerated. Also, the development and the amount of the income over the time are mostly improperly assessed (cf. Küsell, 2006, p. 262).

Therefore, a good und thorough expenses planning is necessary. Nevertheless, a discrepancy of income estimations can also occur. In general, you can say that it is essential to avoid planning mistakes on the expenses side and to calculate the revenue rather conservative and not too optimistically (cf. Küsell, 2006, p. 262).

A general rule for a start-up is to have at least twice as much at hand of cash reserves as what was stated in the last balance sheet to be able to compensate sudden eroding incomes (cf. Andreessen, 2013).

3.2 Information Processing

3.2.1 Determinants of Information Needs

The need of information’s for a finance plan is determined by the two factors, model depth in combination with the level of detail and the factor data quality. First of all, the need of information is depending on the designed model, which also causes the amount and the level of detail for the necessary inputs. It clarifies how many various variables have to assign with values and how much individual values are necessary for each variable. The second factor data quality is determined in the empiric research with at least the criteria’s validity, reliability and objectivity. Validity describes that the data is actual measuring what they pretend to measure. The reliability constitutes the trustworthiness of the data to deliver constant results, even with repeated measurement trials. The objectivity expresses the independency to the person which is investigate the data. Other persons have to get to the same results (cf. Taschner, 2016, pp. 73 75).

The following graphic is visualizing the dimensions data quality, data volume and level detail and the thereof optimum zone (Figure 3-1).

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Figure 3-1 Optimum Zone of Data Gathering (cf. Taschner, 2016, p. 75)

Furthermore, the gathered data should have a consistency, promptness and topicality, reliability as well as a transparency (cf. Taschner, 2016, pp. 76 77).

3.2.2 Uncertainties

Conceptual constructed business models contain uncertainties as a significant flaw. Neither founder of the business or a potential investor are able to be sure about the liability and resilience of the stated data because of the outputs which are based on uncertain inputs and uncertain research data (cf. Taschner, 2016, p. 19). In addition to that business case models are build up as a simplified model of the reality which causes in turn blur and discrepancies. Uncertainties cannot be completely eliminated however qualitatively estimated and the analysis leads to a higher level of safety. To face the topic, established methods shall be used such as simple qualitative correction procedures by which risks are explained in a textural way (cf. Siebold, 2015, pp. 188 191). Quantitative corrective procedures, also known as scenario analysis, rate the probability of occurrence of the risks and opportunities and complete the consideration with more restrained revenues and with generous measured costs and investments (cf. Taschner, 2016, p. 125). Furthermore, a sensitivity analysis considers an investigation through modification of one assumption and with all other conditions are the same, to identify their impact on the complete finance model (cf. ETH Zürich, et al., 2016, pp. 135 136) and their vulnerability among each other (cf. Siebold, 2015, pp. 190 191). Another method to that is the combination of the sensitivity analysis, a risk evaluation and a Monte-Carlo-Simulation, which is concerned about the question in what probability the output will adopt certain values, when the input factors have the ascertained probability distribution. This assessment and others needs a lot of software support in order to calculate the different input combinations. Regardless of the chosen method for consideration of uncertainties, it leads to a more understandable and more honest finance plan and it also facilitates the decision-making process. But it doesn’t make the finance plan righter or more precise and it involve more additional effort (cf. Taschner, 2016, pp. 126 130).

3.2.3 Estimations

Due to the fact that in the rarest cases all necessary numbers and facts are available, estimations are an essential integral part of planning and decision-making processes. In general, you can say that it is better to determine roughly correct than precisely incorrect. Therefore, it is necessary to build up with a logical and comprehensible way a solid foundation through transparent numbers. Furthermore, information’s should be compared with independent sources. Sometimes a creative way is required to locate surrogate variables, which are associated with the needed value. At the end, it is important to verify critically the determined estimations for plausibility (cf. ETH Zürich, et al., 2016, pp. 76 77).

For cash-out estimations standardized methods can be used like analogy approach, parametric technique, PERT method and Delphi procedure. Market related measures may receive with trend extrapolation, scientific forecasts, expert opinions and empirical values. The methods provide more valid data then estimations which are based on statistical probability-theoretical considerations. Another form of prediction, which is not in this context applicable, is the prophecy based on prophetic power for instance by visionaries (cf. Siebold, 2015, pp. 160 161).

3.2.4 Environmental Analysis

As a basis for financial planning it is not only important to analyse in a microeconomic approach, this means based on the own company, but also in a macroeconomic business environment to support the view of the whole economy in order to determine objectives and strategies. Therefore, a common tool is the PEST analysis. The abbreviation PEST stands for political, economic, social and t echnological influence factors, which includes national and international economic policy as well as political and social developments. In addition to that there are technological developments in production and products (cf. Pfaff, 2004, p. 95). Heger proposes in this context to derive the influence of the global environment, the complexity, the dynamic and the effect on the industry out of it (cf. Heger, Schermann, & Volcic, 2012, p. 28).

Political elements can be for example a regulatory framework, jurisdiction, political stability, subsidies, government regulations, trade agreements etc. (Eayrs, Ernst, & Prexl, 2011, p. 6 ff.). The main intention of the regulations is to uphold the competition, the consumer protection as well as the balance between economic and other interests like the environmental protection (cf. Kotler, Keller, & Bliemel, 2007, p. 260).

On the other hand, economical influencing factors can be categorized in purchase power, infrastructure, GDP, economic cycle, interest rate level, exchange rate, unemployment rate, public debt etc. (Eayrs, Ernst, & Prexl, 2011, p. 6 ff.). The main focus is to identify and to analyse economical national and international developments and tendencies, especially which influences those have on the industry respectively the own company (cf. Heger, Schermann, & Volcic, 2012, p. 29).

Factors like education, income, demographic development, social security, social norms, etc. describing the s ocial elements of the PEST analysis (Eayrs, Ernst, & Prexl, 2011, p. 6 ff.). Those factors indicate social, cultural and religious values and standards of a society as well as their changes (cf. Heger, Schermann, & Volcic, 2012, p. 30).

Whereas t echnological parameters include speed of innovation, communications systems, expenses for R&D, relevant developments in related industries, etc. (Eayrs, Ernst, & Prexl, 2011, p. 6 ff.). Questions which have to be answered for example are about the optimization potential and their application range of the relevant technology as well as questions about existing or forthcoming rivalling technologies (cf. Baum, Coenenberg, & Günther, 2007, p. 58).

Source of supply for the PEST analysis can be obtained for instance from public institutions, associations, chambers of commerce, rating agencies, market research institutions, research facilities and others (Eayrs, Ernst, & Prexl, 2011, p. 8 ff.).

3.2.5 Industry and Competition Analysis

Another analysis which is important as groundwork for finance planning is the industry and competition analysis. Therefore, Porter defines an industry as a group of companies whose products respectively services are able to replace themselves (cf. Porter, 1980, p. 23). In order to analyse the industry, it is necessary to define the own business area and the relevant market. Developments within the industry have a significant influence on the own success. Therefore, it is essential to identify trends and factors respectively future developments within the industry or to anticipate them (cf. Schermann, Siller, & Volcic, 2010, p. 32 f.). The following illustrations shows the classification of the industry analysis around the business analysis,

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Figure 3-2 Classification of Industry Analysis (cf. Heger, Schermann, & Volcic, 2012, p. 41)

Thereafter it is recommended to conduct the competition analysis by using the five forces model in accordance to Porter (cf. Heger, Schermann, & Volcic, 2012, p. 41). The findings revealed that the strategy of a company has to be orientated to the environment. Next to the global environment development, the structure of the industry as well as the own optional strategies leads to the significant influence on the rules of the competition. Porter describes five fundamental forces (cf. Figure 3-3) which have on a long term view a significant influence on the profitability of an industry (cf. Porter, 1999, p. 33 ff.).

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Figure 3-3 Five Forces Model in accordance to Porter (cf. Porter, 1999, p. 34).

The results of the combination of the industry analysis and Porter's five forces model provides a fundamental basis for the financial strategy approach.

3.3 Financing Options

Through relevant news platforms with numerous success stories about large business financing rounds for start-ups and equity financing of venture capital companies could lead to the impression that such a financing option is needed to ensure the continued existence of a successful start-up. However, this assertion fails to recognize that in practice the share of the whole amount of start-up financing which is supported by venture capital companies is insignificantly low (cf. Hahn, 2014, p. 5).

A KfW study in the year 2015 has shown that in the year 2014 financing of German start-ups came up from different finance sources. 42.7 percent of the foundations were supported by private funds of friends and relatives. More than a third received a bank loan, 22 percent a promotional loan and 12 percent a loan on overdraft. In many cases the founder takes a huge financial risk with the start-up project (cf. HHL Leipzig Graduate School of Management, 2016, p. 10).

Generally, companies have the choice between equity capital and debt capital. Outside creditors which are provide the debt capital, usually demand financial securities and compliance of predetermined frame of accounting ratios (cf. ETH Zürich, et al., 2016, p. 146).

Another aspect of financing sources are the different stages of development divided into the seed, start-up, expansion and flotation phase (cf. Figure 3-4). Usually the calculated funds are not needed at once (cf. ETH Zürich, et al., 2016, p. 146).

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Figure 3-4 Source of Financing in different Phases (cf. ETH Zürich, et al., 2016, p. 147)

Founders need active to overcome boundaries of economic activities due to the lack of equity through different financing instruments (cf. Kollmann, 2011, p. 163). The financing of start-ups can be achieved either as a determined strategy (“strategy follows finance”) or as a fulfilling strategy (“finance follows strategy”) based on the budget model (cf. Nathusius, 2001, p. 27 ff.). The following chart shows the different models of start-up financing (cf. Figure 3-5).

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Figure 3-5 Models of Start-Up Financing and Strategies (cf. Hahn, 2014, p. 21)

A determined strategy for start-up financing has his roots in the old economy where founders had to accept, that it is only possible to choose a business model which is within the available resources (“strategy follows finance”). A distinction with the self-financing is made between self-feeding business (no budget model) without available equity capital and bootstrap financing (low budget model) with existing equity capital (cf. Kollmann, 2011, p. 136 f.). The subsequent illustration demonstrates the typical financing options (cf. Figure 3-6).

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Figure 3-6 Typical Financing Options (cf. Hahn, 2014, p. 22)

Within the no budget model, it is necessary to transform nothing into liquidity by using personal effort and to monetise very fast all entrepreneurial activities. Therefore, the financing options are a free of charge work effort by the founder (sweat equity), simultaneous employment (moonlighting), advanced payments by customers, shifting of own payment obligation into the future (differential payment) and public funding (cf. Kollmann & Kuckertz, 2003, p. 13).

The low budget model indicates own capital of the founder as well as from family and friends in order to initially get along without external source of capital. By using the internet with its significant opportunities of potentiation effects, it is often possible to launch a business idea with a low budget in a short time. Essential in the concept of using own money for foundation, is to generate a positive cashflow with minimum resources and in a short timeframe. Should this not succeed the use of external equity like bank loans or public funding is already too late (cf. Hahn, 2014, p. 23).

In contrast to the no budget and low budget model the big budget model (“finance follows strategy”) is characterised by an independent development of a business idea, detached from financial restriction. This model has his origin in the new economy and particular in the net economy. Relevant is the potential of success and the ability to enthuse one or several investors. Depending of the finance phase, founders can rely on business angels, venture capital, incubators and private equity (cf. Kollmann & Kuckertz, 2003, p. 14).

Wetzel defines three different categories of financing models. Life-style ventures, seeking for revenues up to 10 million USD within the first five years. Over 90 % of all start-ups are part of the lifestyle motives. Whereas middle-market ventures aiming to capture between 10 and 50 million USD following the bootstrap model. However high-potential ventures endeavour to have over 50 million USD inside the first five years and pertain to the high flyers with less than 1 % of the foundations (cf. Wetzel, 1997, pp. 185 186). The applicable case example which is allocated in the conservative machine engineering sector can be categorized to the middlemarket ventures (cf. ANNEX 2: BUSINESS PLAN LEAT).

3.3.1 External Financing

External Financing is characterized by limited duration and usual repayment over the time with fixed interest rates. Hedges are provided over securities and guarantees. Codetermination by the investor are occasionally possible as well as agreed information rights (cf. Küsell, 2006, p. 263).

In the context of bank loans credit institutes allocate credits at the highest condition in order to get the necessary money on favourable terms. In the procedure for awarding a business credit, the dimension of the ability for repayment of the debtor, internal health of the company and an external positive market trend is relevant. Also, redeemable securities are essential. A second dimension for the credit institute is the own refinancing on a long-term view to mitigate the existing risks. A third dimension for a bank is the legal limitation in bank business activities (cf. Küsell, 2006, pp. 265 267).

In order to analyse and mitigate the risk as a result of the business loans, a capital requirements directive Basel II of the Basel Committee on Banking Supervision is binding to the world’s major industrialized countries. An element is the valuation of the risk costs in order to determine the interest rate. On the one hand, the assessment can be done by an external rating agency like Moody’s or Standard & Poor’s. On the other hand, the verifying bank is allowed to perform the own classification. Relevant performance criteria of a company are for example planning, controlling, management, market, product, value chain, income situation, profit situation and net worth (cf. Küsell, 2006, pp. 267 270).

With a proper preparation, an optimisation of the interest payments is possible. Drivers can be good competing offers, comprehensive securities, persuasions of the business idea and negotiating skills of the founder. Another opportunity, fraught with risk, is to utilize the mechanics of the capital market by choosing a suitable period of time (cf. Küsell, 2006, pp. 270 272).

As already mentioned, financial securities are essential in order to receive a bank loan. Therefore, most credit institutes demand a minimum level of the founders own equity capital in order to confirm the motivation and to reduce the need of financing resources. Other credit protections can be assets of the founder, liability of third parties and organisations as well as assets which are acquired through the financing, like real estates, machinery, facilities or goods (cf. Küsell, 2006, pp. 272 276).

3.3.2 Equity Capital

Equity capital is characterised by an unlimited time duration of the handed over capital and in the context of start-ups by most likely non-existent loan securities. The compensation occurs through variable dividend payouts. Partners or shareholders have usually voting rights and legally anchored information rights (cf. Küsell, 2006, p. 263).

The main motive of the partners and shareholders is a high return on investment (ROI). The rate of return should be substantial over the return of a loan capital. On a long-term view equity provider request on a regular basis an annual interest rate of 30 %. The primary mechanism is the faith into the supported project and the skills and objectives of the people behind it. Therefore, the business plan as presentation of the business idea has an outstanding importance. Next to the skills of the founder, it replaces the missing securities (cf. Küsell, 2006, pp. 282 283).

Typical equity providers are business angels and venture capital companies. Business angels are private persons who are interested in participation of start-ups or young companies. They are most likely organised in business angel clubs or associations with a regional focus. Angels are often top managers, entrepreneurs or executive employees. The main intention of them is not only a high return, but also an active involvement in a worthwhile engagement in order to pass on their knowledge and experience. The process of such investment could last a long-time due to the hesitant nature of private investors. In addition to that, investments are often transacted through several angels (cf. Küsell, 2006, pp. 284 286).

On the other hand, the venture capital companies are corporations which are specialised in providing of equity capital They are experts in their respective fields to manage funds or rather private equity funds. Funds are a kind of earmarked fortunes, which is arising of third parties from the national territory and foreign countries. Venture capital companies pursue the aim of the highest possible return. Therefore, the main focus of supported business concepts are ideas, which have a potential for floatation (cf. Küsell, 2006, p. 287).

3.3.3 Mezzanine Financing

The mezzanine financing is a capital provision with characteristics from both, external financing and equity capital in order to combine advantages from either financing options. The impact of this type of financing is depending on the specific contract negotiations and is based on a customized nature, also referred to as structured finance. Due to the earnings weakness of the banks, the increased demands on risk ratings because of Basel II and the growing capital requirements of the companies are altogether driver for the high importance of the mezzanine financing. Moreover, it improves the creditworthiness and thus legal capacity and it also minimises the risk for the financier’s, due to the regulation of the repayment and the fixed minimum remuneration. As a result of the hybrid nature, it means for the capital investors more risk than external financing, but as balancing for that an increased interest rate compared to equity capital is the reward. For the mezzanine financing, different forms of contract have been established, such as subordinated loans, shareholder loan, silent partnerships, convertible bonds and participation rights (cf. Küsell, 2006, pp. 298 304).

3.3.4 State Subsidies

With state subsidies is understood to mean a support by the state respectively state carried institutions in order to balance market failures of the financing mechanism of companies. Many start-ups are nowadays only possible through subordinated loans of the state owned KfW Mittelstandsbank or state development banks of the federal states, due to the fact that private banks the associated risk wouldn’t be able to bear on their own. Loans and Guarantees are lowering the risks for private banks but the procedure is not unproblematic due to the higher processing effort and the refinancing over the subsidies. Some house banks, which should process the application for a state subsidies, reject their support and referring to a third party. Characteristics of promotional loans are low interest rates, long grace periods, none or less required securities, arranged as subordinated loans without payment for the bear of higher risks (cf. Küsell, 2006, pp. 298 304).

There are different promotional loans with particular prerequisites and conditions. Import KFW promotional loans are for example the “ERP Start-up Loan-StartGeld”, the “ERP Start-up Loan – Universal” as well as “ERP Capital for Start-ups” (cf. KfW, 2017)

[...]

• Author: Patrick Lukasiak (Author)
• Publication Year: 2019
• Pages: 114
• Catalog Number: V471480
• ISBN (eBook): 9783668937628
• ISBN (Book): 9783668937635
• Language: English
• Tags: financial