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.