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Entr Chapter 6

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Abenzer Mulugeta
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7 views

Entr Chapter 6

Uploaded by

Abenzer Mulugeta
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/ 20

CHAPTER 6

ORGANIZING AND FINANCING THE NEW


VENTURE

11/21/2024 1
Entrepreneurial Team and Business formation

• The success of an enterprise is more often


determined by the individuals who lead it
forward than by its products or services.
• The entrepreneurial team transforms creative
ideas into commercial realities through their
handwork and determination.
• Entrepreneurs must provide inspiration and
direction, and they must be able to create
organization to sustain growth.
11/21/2024 2
Which Legal Form Is Best for Your Business?

• When you start a business, you must decide


on a legal structure for it. Usually you'll choose
a sole proprietorship, a partnership, or a
corporation. There's no right or wrong choice
that fits everyone. The job is to understand
how each legal structure works and then pick
the one that best meets your needs

11/21/2024 3
Legal form of a business

• Sole Proprietorship
• The vast majority of small business starts out
as sole proprietorships. These firms are owned
by one person, usually the individual who has
day-to-day responsibility for running the
business. Sole proprietors own all the assets of
the business and the profits generated by it.

11/21/2024 4
Partnerships

• In a Partnership, two or more people share


ownership of a single business. Like
proprietorships, the law does not distinguish
between the business and its owners.
• The Partners should have a legal agreement that
sets forth how decisions will be made, profits will
be shared, disputes will be resolved, how future
partners will be admitted to the partnership, how
partners can be bought out, or what steps will be
taken to dissolve the partnership when needed
11/21/2024 5
Corporations

• A corporation, chartered by the state in which it is


headquartered, is considered by law to be a unique
entity, separate and apart from those who own it. A
corporation can be taxed; it can be sued; it can
enter into contractual agreements.
• The owners of a corporation are its shareholders.
The shareholders elect a board of directors to
oversee the major policies and decisions. The
corporation has a life of its own and does not
dissolve when ownership changes.
11/21/2024 6
ASSET MANAGEMENT
• The funds raised in a business are invested in
various assets. Such investments have
associated costs. These could be interest on
loans, debentures etc. or opportunity cost in
case these funds are owned.
• analysis and supervision is required at pre-
investment stage and at the post-investment
stage

11/21/2024 7
Cont’d
• Cash is the most important asset to manage,
and to generate cash, business must generate
sales.

• In order to generate sales, most businesses


must have inventory and facilities, service
enterprises need office and staff, and
manufacturers face more extensive
requirements including plant and equipment.
11/21/2024 8
Cont’d
• The following are decisions related to assets
management:
§ Inventory Decision
§ Accounts Receivable Decision
§ Equipment Decision
§ Facilities Decision

11/21/2024 9
Cont’d
• Generally, underwriting assets creates liabilities;
consequently, with the exception of cash,
having too many unproductive assets creates
burdensome liabilities that require financing.

• Stoking large inventories or allowing account


receivable to accumulate threatens cash flow.
Idle facilities of equipment create unnecessary
cost.
11/21/2024 10
FINANCIAL PLANNING
Assessing the Financing Requirements
 Financial Planning is appraisal of the financial aspects likely
to happen in the future for which decision on course of
action has to be taken now.

 Financial planning deals with futurity of present decisions


in terms of goal setting.

 It helps developing strategies to achieve them by chalking


out strategies, operational program and assures smooth
work.
11/21/2024 11
Cont’d
• Prior to start-up, entrepreneurs can reduce
financial burdens by planning assets carefully.
The key is to “gain access” to assets while
minimizing financing.

11/21/2024 12
Cont’d

• Goal setting may be in terms of profits, sales, market share,


acquisition of assets etc. Such goals are set after considering various
functional areas like production, marketing, personnel, inventory,
etc. The goals that are set could be short-term and long-term.

• For example, determining capital structure of the firm shall be a


long-term goal.

• The second step shall involve forecasting or determining the most


probable course of events
•

11/21/2024 13
Cont’d
• A financial forecast includes estimation of the
following:
1. Capital requirements
2. Working Capital requirements
3. Capital structure (debt-equity ratio)
4. Credit Policy
5. Contingencies

11/21/2024 14
Short-term and long-term finance

The sources of short-term finance could be:


1. Bank borrowing for working capital
2. Sundry creditors
3. Deposits/borrowing from friends, relatives
and others
4. Deposit received from customers.

11/21/2024 15
Cont’d
The sources of long-term finance include:
1. Owner's capital, that is, equity;
2. Deposits/Loans given by owners (partners/directors) to
the firm;
3. Term loans from financial institutions;
4. Hire purchase/leasing facility from National Small
Industries Corporation or similar organizations.
5. Credit facilities from commercial banks.
6. Seed capital, margin money, subsidy, soft loans from
Government/Financial Institutions etc.
11/21/2024 16
Cont’d
When arranging funds one must consider:
a. Cost of borrowing
b. Time required for obtaining such finance
c. Period for which funds required
d. Repayment capacity keeping future profit
generation pattern in view
e. Conditions stipulated by lenders of money.

11/21/2024 17
Types of Loans
short-term and medium and long-term loans

To be specific the term "finance" sanctioned in


the form of "term loan" is required for:
i. Land and site development
ii. Building and civil works
iii. Plant and machinery
iv. Installation expenses, and
v. Miscellaneous fixed assets

11/21/2024 18
Equity Financing

• capital invested in a business by its owners,


and it is “at risk” on a permanent basis.

11/21/2024 19
Dept Financing

• Small enterprises have fewer chances than


large firms for obtaining debt financing. They
are excluded from financial sources such as
money raised through the sale bonds,
debentures, and commercial paper

11/21/2024 20

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