LEARNING SECTION
Meet Vayu · an order book is not a bank balance
Arjun leaves a salaried job to build Vayu Fenestration, a Bengaluru manufacturer of aluminium windows and doors for apartment builders. He contributes ₹25 lakh; family and friends add ₹10 lakh. The company fabricates, installs, bills, waits for payment and then waits again for retention money.
Demand grows quickly. So does the cash trapped in materials, customer credit and capacity. The question is not simply “Can Vayu sell more?” It is “Can Vayu finance the next stage without destroying value?”
All names, investors and figures are hypothetical. Years Y1–Y8 are model years, not calendar dates. Amounts are ₹ lakh; ₹100 lakh = ₹1 crore.
LEARNING SECTION
Five funding decisions across eight years
Founder + family: ₹35 lakh
Revenue ₹60 lakh; PAT −₹4.4 lakh; operating cash flow −₹22.8 lakh. Used machines and a small workshop keep spending down, but builders pay after the company has paid for materials.
Boardroom question: Would you spend the remaining cash on equipment, inventory or collections?
Term loans + cash credit
Revenue rises to ₹180 lakh, then ₹420 lakh. PAT turns positive, but operating cash flow deteriorates to −₹42.1 lakh and −₹64.5 lakh. The VayuLine brand improves margins; bigger builders tie up more cash.
Boardroom question: Should Vayu accept a large order from a builder known to pay in 120 days?
New angel equity: ₹120 lakh
The angel contributes industry contacts, a board role and reporting discipline. Revenue reaches ₹800 lakh and PAT ₹27.1 lakh, yet operating cash flow remains −₹55.3 lakh.
Boardroom question: How much ownership should ₹120 lakh buy when future rounds will dilute the angel?
New equity: ₹450 lakh
A new plant and expansion to two cities support ₹1,500 lakh of sales. Capital expenditure of ₹400 lakh pushes free cash flow to approximately −₹419.8 lakh.
Boardroom question: Is chasing the next revenue target sensible if discounts and credit terms worsen?
Series B: ₹350 lakh; then internal cash
Operating cash flow becomes positive in Y6. Free cash flow becomes positive in Y7. By Y8, revenue reaches ₹5,000 lakh and PAT ₹503.1 lakh.
Boardroom question: Would you prefer a strategic sale, PE transaction or a possible IPO route?
LEARNING SECTION
Lesson 1 · revenue, profit and cash tell different stories
| ₹ lakh | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 |
|---|---|---|---|---|---|---|---|---|
| Revenue | 60.0 | 180.0 | 420.0 | 800.0 | 1,500.0 | 2,600.0 | 3,800.0 | 5,000.0 |
| PAT | -4.4 | 0.1 | 6.5 | 27.1 | 66.4 | 194.5 | 338.3 | 503.1 |
| Operating cash flow | -22.8 | -42.1 | -64.5 | -55.3 | -51.9 | 118.4 | 347.0 | 493.8 |
| Capital expenditure | 8.0 | 25.0 | 40.0 | 120.0 | 400.0 | 350.0 | 250.0 | 250.0 |
| Free cash flow before financing | -30.8 | -63.3 | -91.1 | -150.7 | -419.8 | -195.2 | 134.6 | 278.7 |
Y2 is the trap: sales triple and PAT turns marginally positive, but operating cash outflow almost doubles. Vayu must fund materials and receivables before it collects.
Y5 is the deepest funding gap: the workbook’s pre-financing cash measure adds ₹32.1 lakh of interest back to PAT-based operating cash flow of −₹51.9 lakh, then deducts ₹400 lakh of capex: approximately −₹419.8 lakh. This is the workbook’s stated convention; its operating cash flow already includes interest.
LEARNING SECTION
Lesson 2 · working capital is an investment in growth
Vayu’s operating cash cycle runs from buying materials through fabrication and installation to customer collection. Builders also retain a portion of each bill. Supplier credit and customer advances help finance the gap.
| Case metric | Y3 | Y8 |
|---|---|---|
| Inventory days | 55 | 50 |
| Receivable days, excluding separately modelled retention | 95 | 70 |
| Retention equivalent days | 18 | 18 |
| Operating-cycle indicator | 168 days | 138 days |
| Supplier credit days | 25 | 45 |
| Customer-advance equivalent days | ≈11 | ≈29 |
| Case cash-cycle indicator | ≈132 days | ≈64 days |
| Net working capital | ₹142.9 lakh | ₹856.8 lakh |
The cycle shortens, but the rupee investment still rises as Vayu becomes much larger. Better days-based metrics do not automatically release cash when sales are expanding quickly.
The supplied case adds retention and customer-advance equivalents to the standard DIO + DSO − DPO convention. Inventory/payables and receivables use different cost/revenue bases. Treat this as the case’s operating indicator; calculate the rupee funding need from the separate balances.
What would 15 days faster collection achieve?
At Y5 revenue of ₹1,500 lakh: cash released ≈ ₹1,500 × 15 ÷ 365 = ₹61.6 lakh. That is about 13.7% of the ₹450 lakh Series A investment.
This assumes the same sales, full collection and no offsetting change in other working-capital balances.
LEARNING SECTION
Interactive lab · release cash from receivables
Explore how collecting faster changes the funding requirement. This is a one-time release of cash from receivables, not additional profit.
365-day year; uniform credit sales; all else held constant.
LEARNING SECTION
Lesson 3 · price the equity round backwards from exit
The workbook assumes an exit at the end of Y8. Its unrounded Y8 PAT is ₹503.068125 lakh and the assumed exit P/E is 15×.
The investments occur at the start of Y4, Y5 and Y6: five, four and three years respectively before the end-Y8 exit. Price the final round first, then work backwards to allow for later dilution.
| Round | Investment | Target p.a. | Years | Entry stake | Exit stake | Pre-money |
|---|---|---|---|---|---|---|
| Angel · start Y4 | ₹120 | 50% | 5 | 18.05% | 12.08% | ₹544.8 |
| Series A · start Y5 | ₹450 | 40% | 4 | 25.51% | 22.91% | ₹1,314.1 |
| Series B · start Y6 | ₹350 | 30% | 3 | 10.19% | 10.19% | ₹3,084.7 |
Required final stake = ₹911.25 ÷ ₹7,546.02 = 12.08%
Retention after Series A and B = (1 − 25.51%) × (1 − 10.19%) ≈ 66.90%
Angel’s entry stake = 12.08% ÷ 66.90% ≈ 18.05%
The 50%, 40% and 30% rates are the case’s illustrative target returns. They are not current market benchmarks or guaranteed results. The model uses simple pro-rata exit ownership; it does not model the stated term-sheet preference, an ESOP pool, fees or taxes.
LEARNING SECTION
Lesson 4 · dilution and value can move in opposite directions
| Holder | After bootstrap | After Series B | Exit proceeds · lakh | Money multiple | Gross IRR p.a. |
|---|---|---|---|---|---|
| Arjun (founder) | 90.0% | 49.34% | ₹3,723.4 | 148.94× | 86.9% |
| Family & friends | 10.0% | 5.48% | ₹413.7 | 41.37× | 59.3% |
| Angel | 0.0% | 12.08% | ₹911.2 | 7.59× | 50.0% |
| Series A fund | 0.0% | 22.91% | ₹1,728.7 | 3.84× | 40.0% |
| Series B fund | 0.0% | 10.19% | ₹769.0 | 2.20× | 30.0% |
Arjun’s ownership falls from 90% to 49.34%, yet his modelled stake is worth approximately ₹3,723.4 lakh at exit. The funding enables a larger company; dilution alone does not tell us whether the founder is better off.
Equally, a 49.34% shareholding alone does not settle effective control. Board composition, reserved matters and voting agreements also matter.
These are gross, single-entry/single-exit model returns. Founder proceeds do not value his years of work, salary forgone or personal guarantees. The assumed exit must occur for the modelled proceeds to be realised.
LEARNING SECTION
Lesson 5 · test the exit assumptions
The investors earn their target returns in the base case because the ownership stakes were solved to do exactly that. This is an arithmetic result, not evidence that the business will deliver the projections.
| End-Y8 exit P/E | Exit equity value · lakh | Angel gross IRR | Series A gross IRR | Series B gross IRR |
|---|---|---|---|---|
| 10× | ₹5,030.7 | 38.3% | 26.5% | 13.6% |
| 15× | ₹7,546.0 | 50.0% | 40.0% | 30.0% |
| 20× | ₹10,061.4 | 58.9% | 50.4% | 43.1% |
Holds Y8 PAT, final ownership and exit timing fixed; assumes proportional distributions with no preferences, fees or taxes. A delayed exit or lower profit reduces returns further, all else equal.
LEARNING SECTION
Lesson 6 · growth should earn its cost of capital
By Y7, Vayu’s modelled ROIC reaches approximately 24.9%, above its WACC of 22.5%. Modelled economic value added turns positive at about ₹35.6 lakh. In Y8, ROIC rises to 30.7% against WACC of 18.2%.
Early negative economic profit can be part of a credible investment plan. The investment case depends on later returns compensating for those early costs and risks. More sales alone do not establish value creation.
Improve the business
Build pricing power, tighten collections, obtain advances and allocate capital to attractive projects.
Improve finance and governance
Match funding to risk, strengthen reporting, manage leverage and plan the next capital requirement before cash runs out.
LEARNING SECTION
Boardroom discussion · decide before opening the answer
1. Would you accept the large township order in Y3?
Assess contribution margin, additional receivables and retention, customer concentration and a downside cash budget. Negotiate mobilisation advances and staged collections. Accept only if funding and risk-adjusted returns are credible.
2. Why can the bank not fund the whole growth plan?
Bank facilities depend on repayment capacity, security, eligible receivables, inventory and drawing-power limits. Equity can absorb uncertainty that a secured lender may not accept.
3. Should the founder chase the Series B sales target through discounts?
Only if the incremental cash returns justify the extra working capital, capacity and risk. Higher reported sales can weaken both liquidity and value.
4. Which exit should the board prefer?
Compare credible net proceeds, timing, execution risk, shareholder rights and the founder’s objectives. A strategic sale, PE transaction and IPO route can have very different conditions.
5. What is your first action as Vayu’s finance head?
Prepare a rolling cash forecast linking order intake, production, receivables, retention, capex, debt service and committed funding. Stress-test slower collections and lower margins.
LEARNING SECTION
Download and explore the full case
The original 15-page caselet and its Excel companion are available below. The workbook contains stage narratives, editable inputs and five calculation sections covering cash flow, working capital, equity rounds, cost of capital and valuation.
| Workbook area | What to explore |
|---|---|
| S1_Bootstrap to S6_Series_B_Scale | Narrative and funding decisions at each stage |
| Inputs | Underlying operating and financing assumptions |
| 1_Rev_Profit_Cash / 2_Working_Capital | Revenue, profitability, funding gaps and cash-cycle balances |
| 3_Equity_Raise | Entry stakes, dilution, exit proceeds and gross returns |
| 4_OppCost_WACC / 5_Valuation_Value | Opportunity costs, cost of capital, valuation sensitivities and value creation |
Source: supplied Vayu Fenestration caselet and workbook, following Leach and Melicher, Entrepreneurial Finance, Chapter 1. Figures on this page are rounded from the workbook. The downloadable files are unchanged classroom materials.
Where would you like to go next?
- Need a refresher on pre-money and post-money? →
Revisit the basic ownership formula before interpreting the case cap table. - What risks does Vayu’s angel carry? →
Review dilution, illiquidity, investor fit and follow-on funding. - When does growth create value? →
Reconnect the case’s cash and capital decisions to the core principles.