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Chapter 4 Operating Enterprise

This document discusses strategies for financing and operating a business enterprise. It covers sources of equity financing like personal savings, friends/family, angels, and partners. It also discusses sources of debt financing like commercial banks and non-bank lenders. The document then discusses managing cash flow, purchases, inventory, finances, people, and information systems. It concludes by covering strategies for growing the business through product development, market expansion, integration, and economies of scale.

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hiwot kebede
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28 views

Chapter 4 Operating Enterprise

This document discusses strategies for financing and operating a business enterprise. It covers sources of equity financing like personal savings, friends/family, angels, and partners. It also discusses sources of debt financing like commercial banks and non-bank lenders. The document then discusses managing cash flow, purchases, inventory, finances, people, and information systems. It concludes by covering strategies for growing the business through product development, market expansion, integration, and economies of scale.

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
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CHAPTER FOUR

OPERATE AN ENTERPRISE
 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


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.

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