Scribd
Upload
52 views23 pages

To Get Financing For A New Business, Entrepreneurs Must

This document discusses financing options and managing growth for new ventures. It outlines sources of equity like personal savings, friends/family, angels, and partners. Sources of debt include banks, asset-based lenders, and trade credit. The document also discusses managing cash flow, purchases, inventory, finances, people, and information systems. Business growth strategies include market penetration, product development, market development, and integration through vertical or horizontal means.

Uploaded by

hiwot kebede
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
52 views23 pages

To Get Financing For A New Business, Entrepreneurs Must

This document discusses financing options and managing growth for new ventures. It outlines sources of equity like personal savings, friends/family, angels, and partners. Sources of debt include banks, asset-based lenders, and trade credit. The document also discusses managing cash flow, purchases, inventory, finances, people, and information systems. Business growth strategies include market penetration, product development, market development, and integration through vertical or horizontal means.

Uploaded by

hiwot kebede
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 23

CHAPTER 7

FINANCING THE NEW VENTURE


 To get financing for a new business, entrepreneurs must
explore every option available.
 Four basic questions must be answered during initial
financial planning.
 What types of capital do I need in my new business?
 How can I estimate the amounts needed?

 Where can I obtain the required funds?

 What should my financing proposal include?

 Broadly speaking there are two main sources of finance

 Equity, i.e., ownership capital

 Borrowed capital (debt)


CONT….
 Equity financing
 Equity capital is money given for a share of ownership of the
company.
 The investor shares in the profits of the venture, as well as any
disposition of assets on a prorate basis.
 . Key factors favoring the use of one type of financing over
another are:
 availability of funds

 the assets of the venture and

 the prevailing interest rates.

 Equity capital is not therefore a continual drain from the cash


flow of a company, such as a loan, which needs interest payment
SOURCE OF EQUITY FINANCING

 Personal savings
 The entrepreneur should contribute at least 50% of the starting
up capital.
 If an entrepreneur is not willing to risk his own money
potential investors are not likely to risk their money in the
business either.
 Friends and family members

 Friends and relatives who believe in you are more likely to


invest in your business than are strangers.
 Angels

 wealthy individuals, often entrepreneurs themselves, who invest


in business startups in exchange for equity stocks in the
companies.
CONT…
 The most common way to find them is through networking
through community.
 Partners

 Entrepreneurs can take on partners to expand the capital


foundation of business.
 entrepreneurs must consider the impact of giving up some
personal control over operations and sharing profits.
 Debt financing

 Debt financing is a financing method involving an interest-


bearing instrument, usually a loan.
 The payment of which is only indirectly related to the sales and
profits of the venture.
CONT…
 debt financing (also called asset-based financing) requires that
some asset (such as car, house, plant, machine, or land) be used
as collateral.
 requires the entrepreneurs to pay back the amount of funds
borrowed, plus a fee expressed in terms of the interest rate.
 The entrepreneur needs to be careful that the debt is not so
large.
 Sources of debt financing

 Commercial banks

 banks focus on a company’s capacity to create positive cash


flow because they know that’s where the money to repay their
loan will come from.
CONT…
 None bank source
 none bank sources are the following:

 Asset-based lenders

 Inventory financing

 Trade credit

 Saving and loan association

 Insurance companies

 Venture capital

 Some people are endowed with good product ideas, but lack
the necessary funds to translate these ideas in to production.
CONT…
 The concept of venture capital was evolved to help such
persons.
 Venture capital is a form of equity financing of projects with
high risk and high return.
 It is meant for financing high technology projects.

 provides finance for growth businesses, usually through equity


capital with some loan element.
 investment funds from a variety of sources, including pension
funds, insurance companies, investment trusts, regional
development agencies, and private individuals through
Business Expansion Scheme (BES).
CONT…
 The structure of any particular investment will vary , but usually involves
any combination of three types of capital:
 Equity shares

 Preference shares, and

 Loans

 Points to consider in the financing proposal


The financial plan must consist
 Initial financial requirements;

 Profit-and-loss forecast;

 Cash-flow forecast;

 Break-even analysis;

 Projected source of funds;

 Projected balance sheet;

 Ownership interest;

 Risk and contingency plans


CHAPTER 8
MANAGING THE NEW VENTURE
o Once you open the door of your business, you will begin to
wear two hats instead of one.
the entrepreneur.

A manager
o As a manager you will coordinate the people, processes, and

other resources of your operation on the day to day basis.


 This is to achieve your principal objectives- profitability
and survival.
 Main areas in managing a business

 Managing Cash Flow

 You should have enough cash to meet your obligations


when they come due.
CONT….

 Comparing forecasted cash flow with actual result is


important.
 measures you can take to make improvements in cash flow.

 Tighten up your credits and collections.

 Take advantage of credit terms.

 Managing inventory carefully.

 Put cash surplus to work.

 Cut expenses.

 Managing Purchases

 Selecting the right quality, Buying the right quantity, Timing


your purchases, Choosing the right vendors, Getting the right
price, Follow up on purchase
CONT…

 Managing Inventory
 Finding the right level of inventory is necessary.

 It requires inventory planning.

 The purpose of inventory management is to find and maintain


inventory levels that are neither too small nor too large.
 Analyze Your Finances

 enables you gain understanding of your financial situations.

 Finances can be analyzed through

 comparing trends of financial statements

 analyzing ratios
CONT…
 Managing People
 The quality of an organization depends on the quality of people
it hires and keeps.
 Getting and keeping competent and motivated employees is
critical to the success of the organization.
 treating people appropriately by giving the tools, training, and
incentives they need to do their jobs.
 Information System

 How will owner and other organization members get


information?
 The system technology for information system may be manual
or computer based.
CONT…
 Growing Business
 Your business will not remain small for longer if you are
entrepreneur.
 Organizational growth is any increase in the level, amount, or
type of the organization’s operation and outputs.
 An organization may be considered growing when there is a
permanent increase in its sales, assets, volume of output, etc.
 A number of variables have been used in measuring
organizational growth.
 The most common measures are financial including:

 Increases in sales or revenue

 Increases in capital
CONT…
 Increases in profitability
 Increases in other financial measures

 Growth has also been measured by:

 The number of customers- number of customers served.

 The number of products- types of products offered.

 The number of locations- number of outlets opened.

 The number of employees

 Need for growth

o The important motives which drive business firms towards

growth are
 Survival

 Sever competition forces a firm to grow and gain competitive


strength.
CONT…
 By diversifying the range of its products and markets, a firm
can meet competition in the market and minimize its risks.
 Economies of scale

 A large firm enjoys the advantages of bulk purchase of


materials, strong bargaining power, spreading of overheads,
well organized promotion campaigns, cheaper finance,
automation, expert management, etc
 These economies result in reduction in per unit cost of
operations and increase in profits.
 Expansion of market

 Business firms grow to cater to larger markets and to meet the


increasing demand.
CONT…
 Owner’s mandate
 The owner of a company gets the ultimate benefit of growth in
the form of higher dividends and rise in the market value of
shareholding.
 they may direct the management to ensure the growth of the
company through continuous investing of profits instead of
distributing the entire earnings.
 Technology

 Business firms also grow in order to reap the benefits of


modern technology.
 Many firms invest in research and development to develop new
products and new techniques.
CONT…
 Self-sufficiency
 Some firms grow to become independent in terms of
marketing of raw materials or marketing of products.
 They acquire other firms to gain control over the supply of
materials and marketing of finished products.
 Growth Strategies

 Growth strategy may be defined as a strategic plan formulated


and implemented to expand the operation of a business firm.
 Different firms may adopt different strategies in order to grow.
CONT…

 First approach to pursue growth


1. Product-customer exploitation strategy (Market
penetration strategy)
 This strategy describes attempts to increase the sales of
current products to current customers.
2. Product development strategy
 This strategy describes attempts to increase sales to current
customers by developing new or improved products.
3. Customer development strategy (Market Development
strategy)
 In this strategy, the business attempts to sell current products
to new customers by taking its products to new location(s).
CONT…
4. Product-customer expansion
 Under this strategy the business attempts to expand the business
through new product and new customer.
 Second Approach to Expand a Business

 Integration

 business can grow either vertically or horizontally.

 Vertical Integration

 is a growth strategy that involves buying either one’s suppliers


and/or distributors.
 There are two strategies under vertical integration:

 Backward integration

 attempt to gain control of the supplier you use to produce your


product.
CONT….
 Forward Integration
 attempt to gain control of the distribution system for your
products. You can do this in two ways:
 First, you can eliminate intermediaries by selling directly to
your customers.
 Second, you can gain ownership of the distributors of your
business.
 Horizontal Integration

 involves buying up one’s competitor business in order increase


market share.
CONT…

 Diversification Growth Strategies


 is investing in products or businesses that are different from the
product you sell or the business you own.
 Synergetic Diversification

 involves seeking products or businesses that are


technologically compatible with one’s existing product or
business.
 Horizontal Diversification

 a growth strategy in which a business owner seeks products


that are salable to his or her present customers but
technologically unrelated to those products.
CONT…

 Example, Bell Sports, which manufactures bicycle helmets,


has begun selling clothing with the bell logo.
 Conglomerate Diversification

 It is a growth strategy in which a business owner looks to


acquire products or businesses that are totally unrelated to its
existing business both in terms of technology or markets.
 Joint Venture and Merger

 They are an external growth strategies.

 Joint venture

 two or more independent firms establish a new enterprise.

 a temporary partnership between two or more companies for a


specified purpose.
CONT…

 Merger
 means a combination of two or more firms in to one.

 It may occur in two ways:

 takeover or acquisition of one company by another,

 creation of new company by complete consolidation of two or


more units.
 Subcontracting

 hiring another firm to perform some process of the business.

You might also like