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B205A – Exploring Innovation and Entrepreneurship

Name:

Topic 1: Income Statement

Financial reporting is essential whether for newly created ventures or existing ones. An

entrepreneur who starts a new entrepreneurial venture needs to gain a good knowledge on how to

record and report their venture’s earnings and expenditures. That said, there are three primary

financial statements that should be developed when starting a new entrepreneurial venture and

income statement is the first one. An income statement commonly referred as a profit or loss

account is used to record and show the performance of a business. For new business ventures,

forecast income statements are utilized to estimate their profitability and performance once

launched in the future (Cassar, 2009). Therefore, an income statement is critical in understanding

the performance of a proposed or existing entrepreneurial venture.

An income statement’s main element is the final calculated figure, that is, the profit or loss

and which defines the financial performance of a venture. It is worth noting that this income

statement covers a specific period and which is reported to measure a venture’s financial

performance. The other key element includes the expenses which are the costs incurred to generate

income over a given period. The profit or loss realized over a given period equals the difference

between generated sales and the expenses (Fraser, Ormiston & Fraser, 2016, nd). In this case, a

profit is earned when sales exceed the expenses while loss is incurred when sales are less than

incurred expenses. For example, if company Z made sales of 100,000 KD and incurred expenses of

50,000 KD, then its profit would be (Sales-Expenses) 50,000 KD. In case the expenses exceed the
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sales generated, then the profit would be negative in what is referred as a loss. Thus, an income

statement is concerned about revealing this outcome to help in decision making.

Lastly, the calculated profit takes several types depending on the expenses deducted from

the earnings. For example, gross profit results from the difference between sales and cost of sales.

In this case, the cost of sales comprises of net purchases, that is, opening purchase plus purchases

less closing purchases and outward purchases returns. An operating profit results by deducting

administrative expenses from the gross profit. For example, company Z made gross profit of 50,000

KD while administrative expenses were 10,000 KD, then its operating profit would be 40,000 KD.

Lastly, a net profit is attained by deducting finance costs and taxes from the operating profit.

Therefore, the sales generated by a venture suffers a series of expenses before the venture arrives at

the net profit which is shared to shareholders or ploughed back.

Topic 2: Balance Sheet

A balance sheet is the second critical financial statement that an entrepreneurial venture has

to prepare and it ascertains the financial position of a venture. After getting to understand how a

business has performed through an income statement, an entrepreneur needs to know where the

business stands in a particular one moment in time. As such, a balance sheet presently referred as

statement of financial position answers questions such as; the worth of a venture, the ability of the

venture to pay bills and the benefits to be earned by owners of a venture (Oliver, 2014). A good

knowledge about a balance sheet provides a venture with the ability to control and manage cash

resources. That way, a venture is able to pay its bills, wages and would remain solvent. For

example, a balance sheet helps to calculate a business’s current ratio given by current assets divided

by current ratio. As a result, a good ratio implies that the current assets exceed current liabilities and

a venture can pay its short-term obligations when they fall due (Wise, 2013, Pg.30). Hence, a
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balance sheet plays an instrumental role in managing cash resources of a business and determining a

venture’s financial position at a given time.

Its key elements include; assets, capital, liabilities and the shareholders’ equity. Depending

on the format used, the sum of assets and equity should equal the sum of capital and liabilities.

Further, the difference between total assets and total liabilities provides the net worth of a business

in the equation (Net worth = Total assets – Total liabilities). A balance sheet has a very close

relationship with an income statement based on two forms of transactions. First, a transaction on

assets and liabilities’ re-allocation, when a venture pays a bill, an expense on income statement is

extinguished, and it causes a reduction in cash resources and liabilities recorded in the balance

sheet. Lastly, a change in net worth of a business. For example, if company Z sold goods worth 500

KD at 700 KD, its inventory decreases by worth of goods sold, increase cash resources at 700 KD

and consequently increase the company’s net worth by 200 KD which is the profit. Therefore, a

balance sheet is important to determine the financial position of a company at any given period.

Topic 3: Business Family Vs Going Public

A family business has been associated were common as compared to publicly traded

companies. However, these family businesses have been criticized for lack of outward-looking,

professionalism of management, creativity and entrepreneurial aspects. Corporations that have gone

public and are publicly traded are also prone to mismanagement due to agency problems. The

shareholders who are owners of a publicly traded corporation put their trust on professional teams

and who encounter personal interests (Anderson, Reeb & Zhao, 2012, Pg.355). These two kind of

firm possess benefits and drawbacks which plunge people in a fierce debate on what form of

business ownership is the best. Therefore, the two kinds of businesses still hold their preferences

among investors due to specific reasons and operating capacity.

Lastly, corporations that have gone public have adequate sources of capital that they can

access from stock markets. They have organized structures that make them credible to acquire credit

facilities from financial institutions and fund their activities. That way, these companies are able to

carry out their investments and reach a wide market due to financial capability. Family businesses

may not have authentic infrastructures or documentation that can support their credibility to secure

financing. Family business compared to publicly traded firms face financial struggles in their

operations and this limits their investment (Michiels & Molly, 2017, Pg.371). For example, U.S

firms were quicker to switch from family-owned firms than British firms. Hence, from these two

perspectives, going public for a business has more benefits than remaining into a family-owned

enterprise.

Topic 4: Entrepreneurial Marketing

Marketing is essential in promotion, advertising and selling of products and services. It

facilitates generation of sales and solving the problems and needs of customers by delivering

satisfaction. However, the form of marketing conducted is fundamental in pushing products into the

market and creating a sales funnel. For example, entrepreneurial marketing differs from other forms

of marketing carried out by companies. According to Miles, et.al (2015), entrepreneurial marketing

is a proactive and aggressive marketing method to identify and exploit opportunities to acquire

customers through innovative approach and value creation. Hence, an entrepreneur uses this

marketing to find opportunities and exploit them.

An entrepreneur goes to research for market needs and through entrepreneurial marketing,

they develop a product that suitably fits these needs. For example, Michael Dell, the owner of Dell

computers used entrepreneurial marketing to establish a company. He defined his customers,

offered something new, got closer to customers and provided exceptional services. Currently, Dell
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Computers is among the largest computer companies in the world. Therefore, entrepreneurial is

informal, dynamic, responsive to needs of customers and its simple in its design and execution.

Bibliography

Anderson, R.C., Reeb, D.M. and Zhao, W., 2012. Family‐controlled firms and informed trading:

Evidence from short sales. The Journal of Finance, 67(1), pp.351-385.

Cassar, G., 2009. Financial statement and projection preparation in start ‐up ventures. The

Accounting Review, 84(1), pp.27-51.

Fraser, L.M., Ormiston, A. and Fraser, L.M., 2016. Understanding financial statements. New York:

Pearson.

Michiels, A. and Molly, V., 2017. Financing decisions in family businesses: A review and

suggestions for developing the field. Family Business Review, 30(4), pp.369-399.

Miles, M., Gilmore, A., Harrigan, P., Lewis, G. and Sethna, Z., 2015. Exploring entrepreneurial

marketing. Journal of Strategic Marketing, 23(2), pp.94-111.

Oliver, K., 2014. Balance sheet Presentation under IAS 1 and US GAAP. Retrieve from:

https://bit.ly/3skoBof

Wise, S., 2013. The impact of financial literacy on new venture survival. International Journal of

Business and Management, 8(23), p.30.