Entrepreneurship and finance

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