Entrepreneurship Resourcing Finances

Entrepreneurship Resourcing Finances

Finances for new entrepreneurs

For a limited company the money that you put into the venture can take two forms – equity or loans. Equity takes the form of share capital. Over time the shareholders’ equity grows with profitable trading.

But if the venture fails then the shareholder risks losing everything, including the share capital they have put into the venture. For profitable, fast- growing businesses with a good management team there may be the opportunity to attract further equity investment from crowdfunding, business angels or venture capital organizations.

Loans

Loans can come from many sources, but most firms will have to turn to the banks for finance at some point. Loans are serviced by regular interest payments and the capital will, ultimately, have to be repaid, depending on the duration: short (under one year), medium (up to five years) or long-term (over five years).

Interest may vary with base rate or be fixed for the term of the loan. Agreeing to a fixed rate may involve a certain amount of crystal-ball gazing, but it does ensure that a small firm knows what its financing costs will be for some time to come.

Loans

Bankers are likely to look for the security of assets to act as collateral against any loan, and if they cannot get this, they may ask you for personal guarantees.

Personal guarantees can come from you or family or friends. Many countries have government loan schemes that offer lower rates of interest to small firms and/or guarantee provisions to replace or supplement personal guarantees.

Some countries have credit mutual schemes for small firms that offer similar advantages.

Other finance tools

There are two other ways of financing the purchase of fixed assets:

Lease – This allows the firm to use the assets without owning it by making regular lease payments;

Hire purchase – This allows the firm to purchase the asset over a period of time, again, by making regular payments with the asset acting as security in the event of default.

Lease & hire purchase

The main practical difference between the two methods is their tax treatment. Interest rates on lease and hire purchase schemes may be higher than on loans, but for a firm with little security to offer a banker they might be the only way to secure finance. Once you start trading, other sources of finance become available.

Most suppliers of goods and services offer trade credit terms (e.g. payment in 30 days), although they might insist on taking credit references and might also undertake a credit check. They will also place credit limits on accounts.

Available credits

Start-ups may have to establish a payment history to be offered credit and only gradually will the credit limit be extended. Trade credit is an important source of finance for most established firms – and it is free. It is also worth mentioning factoring and invoice discounting which is, again, only available once you establish a trading history.

These are ways of obtaining finance against the invoices you issue (typically 75–80% of the value). You pay interest on the cash advanced, until the invoice is paid. It can be expensive and there are many restrictions, but it can be a lifeline to undercapitalized, rapidly growing businesses. Your bank will put you in touch with organizations off ering these facilities.

Multiple Choice

Analyzing whether the cost of an item is more than, equal to, or less than the benefit that comes from purchasing that item.

• interest rate

• income

• cost comparison

• cost benefit analysis

Multiple Choice

A plan for future spending and saving, weighing estimated income against estimated expenses.

• income

• cost comparison

• budget

• cost benefit analysis

Multiple Choice

A financial document that shows how much a company makes and spends over a given period of time.

• income statement

• balance sheet

• cash flow statement

Multiple Choice

Income Statements should be prepared...

• monthly

• quarterly

• annually

• all of the them

Financial Projection

The final section of a business strategy presents a firm’s pro-forma (or projected) financial projections. 

Financial projection

Potential investors reading your plan will be primarily interested in the size of the returns and how quickly a company can grow, whereas bankers are more interested in the predictability and stability of a company’s financial results and how it will minimize risk.

Your financial statements show whether your business can get up and running successfully; many businesses represent viable ongoing concerns, but the trick is getting them started and through the early period when most start-ups will lose money.

Most students and entrepreneurs are not familiar with how to complete pro forma financial projections; get help if you need it.

Source and Use of Funds Statement

The source and use of funds statement is a document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money), where the money will come from, and what the money will be used for

The items from the source and use of funds statement normally become the initial assets and liabilities on a firm’s balance sheet If any of the funds you will be receiving come from an unusual source, you should substantiate the source of funding

Assumptions Sheet

An assumptions sheet is an explanation of the most critical assumptions that your financial statements are based on In many instances, the assumption sheet references earlier portions of the business plan.

Although the assumption sheet is only meant to comment on the most critical numbers used to prepare the financial statements, it’s impossible to overemphasize the importance of conveying that your statements are built on good data .

Multiple Choice

Making a(n) ___________ allows you to predict how much you will sell in the future.

• sales forecast

• Income statement

• balance sheet

Multiple Choice

A company must keep track of its cash flow.

• TRUE

• FALSE

Multiple Choice

Break Even =

• Sales = Expenses

• Profit = Expenses

• Revenue = Fixed Expenses

• Sales = Variable Expenses

Multiple Choice

What is an accounting method that allows you to spread the cost of equipment over the # of years it is used.

• Depreciation

• value

• assets

• liabilities

Multiple Choice

Courtney Young is the founder of a company in the semiconductor industry. Courtney's firm is still in the feasibility analysis stage and doesn't have a product that is ready to sell. The company is spending about $25,000 per month and expects to maintain that level of spending until it reaches profitability. The $25,000 a month is Courtney's ________ rate.

• consumption

• utilization

• burn

• usage

• liquidity

Multiple Choice

In startup firms, inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales. Which of the following reasons that motivate firms to seek funding or financing is illustrated in this example?

• Cash flow challenges

• Marketing costs

• Personnel costs

• Capital investments

• Lengthy product development cycles

Multiple Choice

The three primary reasons startups need funding are ________.

• cash flow challenges, capital investments, and lengthy product development cycles

• business research, cash flow challenges, and costs associated with building a brand

• bonuses for members of the new venture team, attorney fees, and lengthy product development cycles

• attorney fees, capital investments, and marketing research

• bonuses for members of the new venture team, marketing research, and personnel costs

Multiple Choice

Many entrepreneurs go about the task of raising capital haphazardly because they ________.

• are uncomfortable talking about money and they haven't written a business plan

• lack experience in this area and because they don't know much about their choices

• are focused on the nuts and bolts of starting their business

• haven't completed a feasibility analysis or business plan

• are intimidated by the process and they are unsure of how much money they need

Budgeting vs. Financial Forecasting

Budgeting vs. financial forecasting

Budgeting and financial forecasting are tools that companies use to establish a plan for where management wants to take the company—budgeting—and whether it is heading in the right direction—financial forecasting.

Although budgeting and financial forecasting are often used together, distinct differences exist between the two concepts. Budgeting quantifies the expectation of revenues that a business wants to achieve for a future period, whereas financial forecasting estimates the amount of revenue or income that will be achieved in a future period.

Budgeting

A budget is an outline of expectations for what a company wants to achieve for a particular period, usually one year. Characteristics of budgeting include:

Budgeting

• Estimates of revenues and expenses.

• Expected cash flows.

• Expected debt reduction.

Budgeting

A budget is compared to actual results to calculate the variances between the two figures.

Budgeting represents a company's financial position, cash flow, and goals. A company's budget is usually re-evaluated periodically, usually once per fiscal year, depending on how management wants to update the information. Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance.

While most budgets are created for an entire year, that is not a hard-and-fast rule. For some companies, management may need to be flexible and allow the budget to be adjusted throughout the year as business conditions change.

Financial forecasting

Financial forecasting estimates a company's future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data. Characteristics of financial forecasting include: 

Financial forecasting

• Used to determine how companies should allocate their budgets for a future period. Unlike budgeting, financial forecasting does not analyze the variance between financial forecasts and actual performance.

• Regularly updated, perhaps monthly or quarterly, when there is a change in operations, inventory, and business plan.

• Can be created for both short-term and long-term. For example, a company might have quarterly forecasts for revenue. If a customer is lost to the competition, revenue forecasts might need to be updated.

• A management team can use financial forecasting and take immediate action based on the forecasted data.

Financial forecasting

Financial forecasting can help a management team make adjustments to production and inventory levels. Additionally, a long-term forecast might help a company's management team develop its business plan.

Fill in the Blank

B--------- is the financial direction of where management wants to take the company, helping quantify the expectation of revenues that a business wants to achieve for a future period,

F-------- f---------- tells whether the company is headed in the right direction, estimating the amount of revenue and income that will be achieved in the future.

Fill in the Blank

Budgeting creates a baseline to compare a----- results to determine how the results vary from the expected p---------. Financial forecasting is used to determine how companies should allocate their budgets for a future period, but unlike budgeting, financial forecasting does not analyze the v-------- between financial forecasts and actual performance.

Key Differences

A budget is an outline of the direction management wants to take the company. A financial forecast is a report illustrating whether the company is reaching its budget goals and where the company is heading in the future. 

Budgeting can sometimes contain goals that may not be attainable due to changing market conditions. If a company uses budgeting to make decisions, the budget should be flexible and updated more frequently than one fiscal year so there is a relationship to the prevailing market.

Budgeting and financial forecasting should work in tandem with each other. For example, both short-term and long-term financial forecasts could be used to help create and update a company's budget.

Open Ended

What is meant by the term "bootstrapping"? Provide several examples of the ways that entrepreneurs bootstrap to raise money or cut costs?

Bootstrapping

Bootstrapping is the use of creativity, ingenuity, and any means possible to obtain resources other than borrowing money or raising capital from traditional sources. There are many ways entrepreneurs bootstrap to raise money or cut costs. Some of the more common examples include:

Bootstrapping

• Buy used instead of new equipment

• Coordinate purchases with other businesses

• Lease equipment rather than buying

• Obtain payments in advance from customers

• Minimize personal expenses

• Buy items cheaply, but prudently, through discount outlets or online auctions such as eBay

• Share office space or employees with other businesses and Hire interns

Available credits

Start-ups may have to establish a payment history to be offered credit and only gradually will the credit limit be extended. Trade credit is an important source of finance for most established firms – and it is free. It is also worth mentioning factoring and invoice discounting which is, again, only available once you establish a trading history.

These are ways of obtaining finance against the invoices you issue (typically 75–80% of the value). You pay interest on the cash advanced, until the invoice is paid. It can be expensive and there are many restrictions, but it can be a lifeline to undercapitalized, rapidly growing businesses. Your bank will put you in touch with organizations off ering these facilities.