4.3 Financial planning

Capital and assets balance each other out in a company's balance sheet. The capital side is contrasted with the assets in which the capital is tied up in the company. Capital is considered the sum of the values on a balance sheet. The operating assets denote the value of the property of a company.

 

 

 

 

The source of funds asks about the origin of the required capital. A distinction must be made between equity and debt capital.

Equity makes the company independent of external influences. The company is not threatened by the withdrawal of operating funds as a result of a loan termination. It is crisis-proof. High equity capital makes it easier to obtain loans. Equity capital should be at least as high as the fixed assets (e.g. business equipment) that form the basis of the enterprise.

When founding a company, equity should not be less than 10 - 20 % of the total capital.

 

Sources of equity are:

• Cash, bank deposits, securities;
• Entrepreneurial capital can be granted through ERP loans;
• Relatives and friends can provide capital;
• Partners and shareholders can also join a company as partners. In return, they may want a say and an interest on the capital invested.
• Equity investment companies enter the market as private or publicly funded investment companies. They provide capital to (young) enterprises that they cannot raise from their own savings or cannot obtain from banks due to a lack of collateral. Participations can be granted by state-owned companies under certain conditions from € 50,000. Private investors, such as "venture capital" are usually more interested in investments in "millions". They want to earn much higher returns.

 

Debt capital is to be procured in the form of loans. A loan is the temporary transfer of money or material assets in exchange for money (interest) between an investor (creditor) and a borrower (debtor). The capital provider trusts in the debtor's future willingness and ability to pay.

Credit is the external capital provided to a company in the form of money or material goods, e.g. from a bank.

There are favourable start-up loans from public funding programmes for start-ups. These can be applied for at the house bank. They are granted by the "Deutsche Ausgleichsbank".

The financing of debt capital:

• Start-up loan
  

The start-up loan is the most important form of financing for start-ups. There are separate funding programmes for this.

• Loans from banks, savings banks or Volksbanks are granted at any time at standard market conditions. They can be used by any company for financing - provided the company is creditworthy. 
• Overdraft facility
  

Current account credit is also colloquially called "overdraft credit". It is the credit that the credit institution grants to the current account holder as an overdraft credit, taking into account his previous banking transactions. The amount depends on the current income and expenditure and the creditworthiness of the account holder. Overdrafts are relatively expensive; they range from 10%-18% per year. They can be used to balance short-term liquidity fluctuations. They are hardly suitable as a long-term means of payment. The credit line can be agreed with the house bank. The usual amount is one to two months' income or monthly turnover of the credit holder or company.

• Supplier credit

Supplier credit, as the name suggests, is granted by the supplier of the goods. The credit depends on the respective payment term granted by the supplier. In this sense, each entrepreneur is a creditor until the goods or services have been paid for by his customer. Contractually, payment variants can be freely agreed. Some examples:

• The goods are payable immediately upon delivery without deduction.
• The goods are payable after delivery within 7 days with 2% discount.
• The goods are payable after delivery within 30 days without deduction.

• The goods will only be delivered against advance payment.
• Supplier and buyer agree on a term of payment. Even if immediate payment is agreed, time delays in banking transactions are to be expected. The time until payment for the goods must be pre-financed by the entrepreneur. Those who are liquid should make use of cash discounts, because that is how quickly cash can be earned. 
• Bill of exchangeThe

bill of exchange is a means of payment. In the bill of exchange (deed), an obligation
 is assumed,
detached from the reason for the
debt, to pay a certain sum of money to the legitimate holder of the deed. Bills of exchange are issued, for example, to pay for goods at a later date. At the same time, the bill of exchange can be used to pay one's own debts. The supplier does not ask for money at first, but for a bill of exchange. It contains the name, the amount and the period of validity. It can be honoured within the period of validity to settle own debts to another creditor. The bill of exchange must be paid to the last creditor noted, i.e. the owner of the bill of exchange, on the due date.

Creditworthiness plays a prominent role in business life and especially in a start-up. Credit involves trust in the will and ability of a person or company to properly fulfil its obligations (psychological level); on the other hand, performance (material level), which is made in the confidence that the consideration will be properly provided at a later date. Creditworthiness serves to monitor and examine the personal and material criteria of a company seeking credit. The legal, personal and economic circumstances are examined. Loans are only granted if there is a "calculable" certainty that the loan can be repaid. Today, the risk is examined for many companies according to the provisions of Basel II. Loans are always associated with risk.

Guarantees constitute collateral for loans. A guarantor is a person who undertakes vis-à-vis the creditor of a third party, the principal debtor, to vouch for the third party's obligations. This, for example, in the case of insolvency. A distinction can be made between private and public guarantees.

In the case of a loan guaranteed by a company, the owner, for example, undertakes to be liable with his personal assets by means of a personal guarantee. For example, a loan is usually only granted to a limited liability company if the shareholder assumes personal liability. In addition to the borrower (the company), another person is liable for interest and repayment (redemption). The same requirements are placed on the guarantor's ability to pay as on the borrower. The guarantee amount is usually higher than the loan amount so that interest and other costs can be paid from it.

Public guarantees are granted by guarantee banks. A guarantee bank stands surety for a borrower. They can provide deficiency guarantees if the available capital is not sufficient. Indemnity guarantees are fully-fledged guarantees for credit institutions or banks. However, they are usually only issued for up to 80% of the amount for which a guarantee is requested. A guarantee loan costs interest. Guarantee programmes are available from KfW Mittelstandbank.

Equity capital

Start-ups and entrepreneurs often encounter the fact that banks do not want to give loans for a business idea. This is the case when the prospects of success are difficult to assess. Investment companies or private investors can help here.

Equity capital is often also regarded as venture capital. From the point of view of a capital company, venture capital is to be treated like equity capital, because the financier participates directly in the start-up or the company.

There are currently about 200 private equity companies in Germany. Information on this is provided by the Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK) in Berlin.

Lease financing

In lease financing, medium and long-term rights of use to movable and immovable assets and goods are acquired by means of rental or lease agreements. The lessor who rents out a leasing object remains the legal and economic owner of the object. Use is transferred to the taker in return for a rent.

The term depends on the useful life of the item. For example, car leasing is common for three years. Equipment and machines are leased for 3 to 5 years. If the use is still economical after that, the contract can be extended with a lower lease rate.

The rental rate depends on the respective object and the competitive situation in the market. Different financing models (with partial down payments, residual payments) are common. The costs for leasing are between 1% - 5% of the respective purchase price. There is also 0 % leasing in car leasing.

Financing through leasing is advantageous because the company does not have to take out bank loans for it, which have to be secured by guarantees or other collateral. The leasing costs are directly operating expenses. Leasing thus creates liquidity.

A profitability calculation can show whether borrowing is worthwhile. Borrowing costs interest and fees. Capital costs are all expenses that have to be incurred in order to be able to draw on financial resources as equity or borrowed capital. The return on the use of borrowed capital should be higher than the cost of the respective loan.

 

Forms of financing

Source of funds   Rights of the Capital provider	External financing (via Financial Markets)	Internal financing (from turnover processes)
Equity	Equity in the form of a contribution or participation	Self-financing - Asset reallocation - Retention of profits from releases of funds such as provisions such as depreciation
Debt capital	Debt capital in the form of credits, loans, grants, (leasing, franchising)	-Asset reallocation, - Sale of property

Table 21: Forms of financing

 

In internal financing, the financial resources arise from the business activity. It is surpluses or sales revenue, which is also called cash flow financing. Depreciation of assets (Afa) as well as reserves from profits or provisions (capital that is temporarily invested or pension provisions) also belong to the area of internal financing. In addition, internal financing takes place through asset restructuring, e.g. sale of property. Rationalisations can also constitute internal financing.