How much can my biz grow without external funding?
So that you may be able to reduce
external funding.
Self-Financeable Growth (SFG)?
To calculate SFG
Step 1: Find out Sales/day = 10000000/365 = Rs. 27397.2
Step 2: Find the number of days of Accounts receivables (A/R in days) = total A/R/sales per Day = 1920000/27397.2 = 70 days Step 3: Find out COGS/day = 6000000/365 = Rs. 16438.4 Stee 4: find out Inventory per day = Total Inventory/COGS per day = 1315000/16438.4 = 80 Days Step 5: find out Accounts payable per day = total A/P/ COGS per day = 495000/16438.4 = 30 Days Step 6: find out the Operating Cash Cycle (OCC). Total time required to generate revenue from the time that you purchase material/start operations on day 1, suppose you buy material. For the next ‘x’ days, you process the material (i.e. hold it in inventory) & on the xth day, you sell it. And then the customer pays you after ‘Y’ days. Therefore OCC = (x + y) Therefore in the above case OCC = 80 + 70 = 150 days Step 7: Find out for how many days in the OCC, you own money is invested, i.e. for how many days have you self-financed = OCC – A/P in days = 150 – 30 = 120 days i.e. for 120 days, you have self-financed your operations Step 8: Find out the percentage of surplus that the business can generate per OCC, Surplus = Total sale – (COGS + OP Exps) = For every Rs. 100 of sale, what is COGS & Op exps 100 – (60 + 35) = 5% surplus for every OCC Step 9: How much of this expense is self-financed? COGS of 60 is spent over 150 days How much of 60 is self-financed Out of 150 days, 30 days is financed by vendors, therefore (150-30) = 120 days is self-financed what component of 60 is self-financed? 60 X (self-financed days/ Total OCC) 60(120/150) = Rs. 48 towards COGS What proportion of Op Exp is self-financed? Operating expenses are like Salaries, electricity bill, tel bill, rent, water bills. These are paid regularly across the OCC. Hence, we assume that the Op Exps are spread evenly across the OCC. Hence, for half the OCC, I get credit and for the other half, the company self-finance it. Therefore the propoartion of OP exp that is self-financed is ½ of the total Op. exp 35(1/2) = Rs. 17.5 towards Op Exps Therefore, total Self-financed amount = 48 + 17.5 = Rs. 65.5 Step 10: To calculate the SFG per OCC How much surplus generated per OCC = Rs. 5 How much self-financed amount was required per OCC = Rs. 65.5 Therefore, what is the growth that can be achieved using self-finance = 5/65.5 x 100 = 7.63% is SFG per OCC Step 11: SFG per year How many OCCs in one year = 365/150 = 2.43 OCCs Therefore SFG per year = 7.63 x 2.43 = 18.54%
This means, the company can grow at the rate of 18.54% per year with its own funds, i.e. without external borrowing