Start-up firm and net working capital financingconsider a


Start-up firm and net working capital financing

  • Consider a firm planning to expand sales by $36 million/year.
  • It requires additional facilities of $ 2 million.
  • Typically, the firm produces with 90 days of inventory (largely raw material).
  • The firm offers its customers an average of 90 days credit (Average Collection Period), and gets 30 days credit from suppliers.
  • Purchases account for 50% of every dollar sold. Other expenses are 20% of sales.
  • Assume that purchases occur at the beginning of the month, and sales at the end of the month.
  • The firm currently has excess cash balances of $ 5 million. It needs to keep cash balances of 10% of monthly sales.

How much additional financing does the firm need and when? Hint: calculate the monthly cash flows of the start-up.

 

 

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Finance Basics: Start-up firm and net working capital financingconsider a
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