entrepreneurship and finance
DESCRIPTION
Financial management tools for entreprenuersTRANSCRIPT
ENTREPR
ENEURSHIP A
ND
FINANCE
A bit about entrepreneurship
WHAT IS YOUR BUSINESS MODEL?
WHAT ARE YOUR STRATEGIC RISKS?
• Demand• Competition - White spot vs.
Sweat spot• Capabilities
ARE YOU WORKING IN OR ON THE BUSINESS?
Now, let’s talk about finance
BUSINESS LIFE CYCLE AND FINANCE
Huge capital needed when risk is the highestand reputation the lowest
As business grows,more capital neededto finance operations
Demand for innovation requiresmore investment
ONLY FEW CONCEPTS
• Capital• Long term – Production capacity, intellectual property• Short term – working capital, trade financing
• Profitability• Revenue – Pricing, discount• Cost – Fixed, variable, sunk
• Cash flow• The bloodline of business• Cash flow does not equal to profitability
• Return to entrepreneurs• Salary• Dividend• Equity value• Need to distinguish between business and personal
CAPITAL
• Savings
• Family and friends
• Business partners
• Crowd funding
• Developmental agencies
• Customers
• Financial institutions
• Alongs
• Need to match funding arrangements with cash flow from business• Long term investment with long term funding• Working capital and trade needs with short term funding
PROFITABILITYSales 100,000 100%
If number of products sold is 5,000 Cost of sales
Unit price 20 Materials 20,000 Unit cost 9 Labour 10,000 Unit gross profit 11 Depreciation 10,000 Break even point 4,727 Royalty 5,000 Unit contribution margin 13
45,000 45%
Gross profit 55,000 55%
Less: Overhead
Salary 15,000 Rental 12,000 Depreciation 10,000 Establishment 15,000
52,000 52%
Profit 3,000 3%
To enhance profitability:• Increase volume of sales• Increase price• Reduce cost
CASH FLOW
Opening trade receivables 20,000 Opening trade creditors 15,000
Sales 100,000 Purchases 20,000
120,000 35,000
Closing trade receivables (15,000) Closing trade creditors (5,000)
Cash collection 105,000 Cash payment 30,000
Cashflow:
Cash collection 105,000
Cash payment (30,000)
Salary (25,000)
Royalty (5,000)
Rental (12,000)
Establishment (15,000)
Capital loan* (25,000)
Net cash flow (7,000)
* Loan of RM 200,000 paid over 8 years for property, plant and equipment having economic life of 10 years
RETURN TO ENTREPRENEURS
If investment is 100,000
Return on equity 3%
Equity value (asume PE 8) 24,000
This is just a simple computation of the value ofequity based on price to earningapproach.
More sophisticated approaches are available but eventuallywill be determined by willing buyer willing seller basis
OBSERVATIONS
• Many entrepreneurs have skills in production, marketing and operations but may not have financial management capabilities
• Basics financial management tools such as understanding unit cost, profit margin, break even point and cash flow are important
• Having an annual budget is useful but budget will become obsolete very fast, the ability to project performance are important to understand possible outcomes and responses
• Instead of spending on audit (historical performance) it would be wiser to spend more on management accounting services to understand key financial management indicators, manage risks and make business more competitive