Entrepreneurship Series Finance

Finance Concepts Financing is the use and manipulation of money. Raising money for a business is one aspect of financing.

Finance Concepts Debt The business borrows the money and pays it backs over a set period of time at a set rate of interest. Companies sell debt in the form of bonds and debentures. They may also take loans from banks as part of debt.

Finance Concepts Equity The business gives up a percentage of ownership for money. The investor receives a percentage of future profits from the business based upon the percentage of ownership. Companies sell equity in the form of shares.

Debt vs. Equity Debt Equity To finance through debt, the Entrepreneur goes to a person or to an institution that has money, and borrows it, signing an agreement to repay the sum with interest. Equity means that in return for money, the investor receives a percentage of ownership in the company. Lender has no say in the future or direction of the as long as the loan payments are made. The equity holder has a say in the direction of the business. The payments are predictable. The equity investor assumes greater risk than the debt lender. If the loan repayment is not made, the lender can force the business into bankruptcy that is force the business to shut down to get loan back, even if that loan is only a fraction of what the entire business is worth. The equity investor cannot force the business into bankruptcy to get back the original investment. If a business is forced into bankruptcy, debt investors get paid off first from the sale of business assets. Equity investors have claim on what ever is left over has been paid. The debt investors get only a contracted rate of interest or return. The equity investor could make an investment back many times over if the business prospers.

Simple Accounting Whatever be the nature of enterprise, some method of accounting is recommended. This helps to keep control over the cash that flows in and out of the business. A simple method of accounts is the Receipts & Payments Account.

Simple Accounting Receipts – Money coming in Payments – Money going out Balance – Difference between money coming in and money going out (how money you have)

Receipts & Payment Exercise

Receipts & Payment Exercise Rs. Payments To Opening Balance By Cooking Equipment 2000 To Own Capital 1000 By Furniture Purchase To Sales 7050 By Raw Material 1500 To Recived Loan from Bank 4000 By Purchased Gas 350   By Electric Bill 750 By Wages By Repaid to Bank Loan By Closing Balance as on 31 Jan 3450 TOTAL 12050

The Balance Sheet Assets – All items of worth owned by a business, such as cash, inventory, furniture Current Assets – Can be sold within one year Fixed assets (long-term) – Mostly permanent. Examples are buildings, machines, factories, etc.

The Balance Sheet Liabilities – All debts owed by the business such as bank loans and loans from family and friends. Current liabilities - Those that must be paid in a fairly short period, usually within a year. Long-term liabilities - Those that are to be paid over a period longer than one year.

The Balance Sheet Owner’s Equity (or Capital or Net Worth) – Owner's equity or net worth is what's left over after liabilities are subtracted from Assets. Owner's equity is the value 'on the balance sheet' of the business to the owner.

The Magic Formula Assets – Liabilities = Owner’s Equity OR

The Balance Sheet

Profit & Loss Statement The P&L Account shows the sales and costs incurred during a particular period for a business.

Costs are what you pay for producing the product. Sales is how much money the enterprise receives for selling its products or services. Profit is what money you make after all costs/expenditures are subtracted from sales.

Profit & Loss Exercise Profit & Loss Account Period of 1 Jan - 31 Jan EXPENDITURE INCOME Debit Description Rs. Credit To Opening Balance of Stock By Sales   Purchases Electric Bill Wages Gas SUBTOTAL COSTS Profit for January = Sales – Costs TOTAL = Costs + Profit