Running on Empty - Case Study

Slide 1: 

Running on Empty Presenters: Umair Ansari Areef Ismail Rakhangi Nithin Joseph Heru

Slide 2: 

Agenda Facts from the case study Question 2 Question 1 Question 3 1 2 3 4 Running on Empty

Slide 3: 

Facts from the Case Study Ross McDowell decides to open up a Sports shop. He had financial issues. He drafts a required investment of upto $22,000 for setup of the retail shop and wages. For products, he drafted an investment of upto $50,000. Monthly Expense estimate is $6,500. He wants enough capital to survive for three months without revenues. McDowell has 10% of $72,000, required for the startup. He wants investors to finance 90% of the $72,000. Running on Empty

Slide 4: 

Advantages The funding is committed to your business and your intended projects. Investors only realize their investment if the business is doing well, e.g. through stock market flotation or a sale to new investors. The right business angels and venture capitalists can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making. In common with you, investors have a vested interest in the business' success, i.e. its growth, profitability and increase in value. Investors are often prepared to provide follow-up funding as the business grows. Disadvantages Raising equity finance is demanding, costly and time consuming. Your business may suffer as you devote time to the deal. Potential investors will seek background information on you and your business - they will closely scrutinize past results and forecasts and will probe the management team. However, many businesses find this discipline useful regardless of whether or not they actually receive any funding. Depending on the investor, you will lose a certain amount of your power to make management decisions. You will have to invest management time to provide regular information for the investor to monitor. At first you will have a smaller share in the business - both as a percentage and in absolute monetary terms. However, your reduced share may become worth a lot more in absolute monetary terms if the investment leads to your business becoming more successful. There can be legal and regulatory issues to comply with when raising finance, e.g. when promoting investments. Describe the advantages and the disadvantages of both equity capital and debt capital for Ross McDowell. Question 1 Answer Running on Empty Equity Capital

Slide 5: 

ADVANTAGES Because the lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company. A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth. Except in the case of variable rate loans, principal and interest obligations are known amounts which can be forecasted and planned for. Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the company. Raising debt capital is less complicated because the company is not required to comply with state and federal securities laws and regulations. The company is not required to send periodic mailings to large numbers of investors, hold periodic meetings of shareholders, and seek the vote of shareholders before taking certain actions. DISADVANTAGES Unlike equity, debt must at some point be repaid. Interest is a fixed cost which raises the company's break-even point. High interest costs during difficult financial periods can increase the risk of insolvency. Companies that are too highly leveraged (that have large amounts of debt as compared to equity) often find it difficult to grow because of the high cost of servicing the debt. Cash flow is required for both principal and interest payments and must be budgeted for. Most loans are not repayable in varying amounts over time based on the business cycles of the company. Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options and non-core business opportunities. The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can carry. The company is usually required to pledge assets of the company to the lender as collateral, and owners of the company are in some cases required to personally guarantee repayment of the loan. Describe the advantages and the disadvantages of both equity capital and debt capital for Ross McDowell. Question (Contd.) 1 Answer (Cont.) Running on Empty Debt. Capital

Slide 6: 

Equity Financing Option: It is costly and time consuming. Investors will make sure to have a background check before they invest their money into any business. Profits will have to be shared with those who are going to invest their money. Time investment is required to produce regular information updates to the investors. SBA Financing Option: Pay slightly higher interest rates during repayment. Businesses may also have to go through additional requirements before they can be granted a small business loan. Some applications for SBA loan might take longer to be approved than loans in commercial banks, making the small business wait a considerably long time. This time wastage critical business losses or missed lucrative opportunities by small businesses. Explain why the following funding sources would or would not be appropriate for McDowell: family and friends, angel investors, an initial public offering, a traditional bank loan, asset-based borrowing, or one of the many federal of SBA loans. Question 2 Answer Running on Empty

Slide 7: 

McDowell should opt for Debt Financing, as it is a large amount and he is just stepping in the business field. As per his calculations, he can sustain 3 months without any revenue with the full amount, hence, he should ask the bank to start the payback after 3 months, as his revenue generations will stabilize. Being a small business, he can generate profits and then use these profits to clear off his existing loans. Steps to take before approaching a Potential Source. As we are advising him to go for a Debt. Financing, the first and foremost thing which he should have is a Strategic Business Plan, defining what is the vision of the company, its goals, products, etc. Feedback from experienced people in the business fields. Conduct research both in the market as well as online, to find out the financing options. Develop contingency plans. Work with a team of your classmates to brainstorm ways that Ross McDowell could attract the capital he needs for his business. What steps would you recommend he take before approaching the potential sources of funding you have identified? Question 3 Answer Running on Empty

Slide 8: 

Conclusion Generate Business profits and invest back for the growth of the business as well as paying back the loan amounts. Running on Empty

Slide 9: 

THANK YOU! Presenters: Umair Ansari Nithin Joseph Areef Ismail Rakhangi Heru