BBA 603 ENTREPRENEURSHIP

Unit III: Preparation of Business Plan, Financing the new enterprise, Financial Management
for new ventures, Source of Finance.

Business Plan & Preparation of a Business Plan

Business Plan

A Business Plan is a blueprint of the step by step procedure that would be followed in order to
convert a business idea into a successful business venture. It involves the following tasks –

• Identifying business opportunities and an innovative idea

• Researching the external environment for opportunities and threats
• Identifying internal strengths and weaknesses
• Assessing the feasibility of that idea and
• Allocating resources in the best possible manner

Objectives of a Business Plan →

 To give direction to the vision of Entrepreneur

 To objectively evaluate the future prospects of the business
 To monitor the progress after implementation of the plan
 To seek loans from Financial Institutions
 To facilitate the decision making process
 To persuade others to join the business
 To identify strengths and weaknesses present in the internal environment
 To identify opportunities and threats in the external environment
 To assess the feasibility of the business

Preparation of a Business Plan →

A good business plan must identify strengths and weaknesses internal to the business and the
challenges in terms of opportunities and threats to assess the viability of the business. It must
lay down all the necessary steps that are involved in initiating and operating a proposed
business.

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Preparation of a business plan involves the following steps:-

(I) Preliminary Investigation – In order to create an effective plan an entrepreneur

must –

 Review available business plans

 Draw key business assumptions on which plan is based
 Scan the environment for Strengths, Weaknesses, Opportunities and
 Threats
 Seek professional advice
 Conduct a functional audit

(II) Idea Generation – It involves generation of a new concept/product/service or value

addition to an existing Product or Service. The idea must be such that satisfies the existing
demands and future demands of market.

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 Sources of ideas –

 Consumers
 Existing companies
 Research & Development
 employees
 Dealers/Retailers

Methods of generating ideas –

 Brain storming
 Group discussion
 Data collection through questionnaires
 Invitation of ideas from professionals
 Value addition to existing Product and Service
 Market research
 Import of ideas from products launched abroad
 Commercializing inventions

Screening of ideas is done to identify practical ones and eliminate impractical one. The most
feasible and the most promising idea is selected for further investigation.

(III) Environment scanning → The internal and external environment must be

analysed to study the prospective strengths, weaknesses, opportunities and threats of the
business. An entrepreneur must collect information from all formal and informal sources in
order to understand the supportive and obstructive factors related to the business enterprise.

External Environment –

 Socio cultural appraisal – It involves assessment of the values, beliefs and

norms of a particular society in order to understand their perception towards a
particular idea or product.

 Technological appraisal – It involves assessment of existing technical know-

how and availability of technology necessary to convert an idea into a product.

 Economic appraisal – It assess the economic environment in terms consumer

price index, inflation, balance of payments, consumption pattern, per capita
income etc.

 Demographic – It involves an assessment of the overall population pattern of a

particular region. Variables like age, education, income pattern, sex,
occupation, distribution etc. help in identifying the size of target market.

 Government appraisal- It assess various grants, legislations, policies,

incentives, subsidies etc. formed by government.
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 Internal Environment –

 Availability of Raw materials

 Availability of various machines, tools and equipment required for
 production
 Means of Finance and assessment of opening, maintaining and operating
expenses
 Assessment of Present, Potential and Future market
 Assessment of cost, quantity and quality of human resources required

(IV) Feasibility analysis – Feasibility analysis is done to find out whether the proposed
project will be feasible or not. The various variables that are studied include –

(a) Market Analysis – It is conducted to –

 Estimate the demand of the proposed product in the future
 Estimate the market share of the proposed product in the future

(b) Technical or operational analysis – It is conducted to access the operational

ability of the proposed business. It is very important to find out the cost and
availability of technology. Under Technical analysis data is collected on following
parameters –
 Material availability
 Material requirement planning
 Plant location
 Plant capacity
 Machinery and Equipment
 Plant layout

(c) Financial analysis – A Financial Feasibility test is carried out to access the
financial issues related with the proposed business. The following estimates have to be
carried out –
 Cost of land and building
 Cost of plant and machinery
 Preliminary cost estimation
 Provision for contingencies
 Working capital estimates
 Cost of production
 Sales and production estimates

Based on the above analysis the following projections are made –

 Break-even point
 Cash flow statement
 Balance Sheet

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(V) Drawing functional plans – If the feasibility plans give a positive indication a draft
business plan is formulated. It involves preparation of the following functional plans –

(a) Marketing Plan – A marketing plan lays down strategies for marketing a
product/service which can lead to success of business. These strategies are made in
terms of marketing mix (4 P’s) i.e. Product, Price, Place and Promotion.

(b) Production/Operation Plan –A production plan is made for a business

involved in manufacturing industry while an operation plan is made for business
involved in service industry. It includes strategies for following –

 Location and reasons for selecting a location

 Physical layout
 Cost and availability of equipment, machine and raw material
 List of suppliers and distributors
 Cost of manufacturing and running operations
 Quality management
 Production scheduling capacity and Inventory management

(c) Organizational Plan – It defines the type of ownership i.e. it could be a single
proprietary, partnership firm, company, private limited or public limited. It also
consists of details about the organization structure and norms guiding the organization
culture.

(d) Financial Plan – It indicates the financial requirement of the proposed business
and furnishes the following details –

 Cost incurred in smooth running of all the financial plans

 Projected cash flows
 Projected income statement
 Projected Breakeven point
 Projected ratios
 Projected balance sheet

(e) Human Resource Plan → It consists of the details on the following:-

 Manpower requirements
 Recruitment and Selection
 Compensation
 Organization structure
 Wages and Salaries
 Budget
 Remuneration etc.

(VI) Project Report Preparation → It is a written document that describes step by

step, the strategies involved in starting and operating a business. It is prepared when
environmental scanning has been done and feasibility studies have been carried out.
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(VII) Evaluation, Review and Control → In order to keep up with the dynamic
environment and successfully face global competition a business must be continuously
evaluated and reviewed. It is necessary to periodically evaluate, control and review a business
to keep up with the technological changes and introduce changes in the business strategy.

Project Report | Meaning | Contents of a Project Report

Meaning of Project Report

A Project Report is a document which provides details on the overall picture of the proposed
business. The project report gives an account of the project proposal to ascertain the prospects
of the proposed plan/activity.

Project Report is a written document relating to any investment. It contains data on the basis
of which the project has been appraised and found feasible. It consists of information on
economic, technical, financial, managerial and production aspects. It enables the entrepreneur
to know the inputs and helps him to obtain loans from banks or financial Institutions.

The project report contains detailed information about Land and buildings required,
Manufacturing Capacity per annum, Manufacturing Process, Machinery & equipment along
with their prices and specifications, Requirements of raw materials, Requirements of Power &
Water, Manpower needs, Marketing Cost of the project, production, financial analyses and
economic viability of the project.

Contents of a Project Report

Following are the contents of a project report.

1. General Information

A project report must provide information about the details of the industry to which the
project belongs to. It must give information about the past experience, present status,
problems and future prospects of the industry. It must give information about the product to
be manufactured and the reasons for selecting the product if the proposed business is a
manufacturing unit. It must spell out the demand for the product in the local, national and the
global market. It should clearly identify the alternatives of business and should clarify the
reasons for starting the business.

2. Executive Summary

A project report must state the objectives of the business and the methods through which the
business can attain success. The overall picture of the business with regard to capital,
operations, methods of functioning and execution of the business must be stated in the project
report. It must mention the assumptions and the risks generally involved in the business.

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3. Organization Summary

The project report should indicate the organization structure and pattern proposed for the
unit. It must state whether the ownership is based on sole proprietorship, partnership or Joint
Stock Company. It must provide information about the bio data of the promoters including
financial soundness. The name, address, age qualification and experience of the proprietors or
promoters of the proposed business must be stated in the project report.

4. Project Description

A brief description of the project must be stated and must give details about the following:

 Location of the site,

 Raw material requirements,
 Target of production,
 Area required for the work shed,
 Power requirements,
 Fuel requirements,
 Water requirements,
 Employment requirements of skilled and unskilled labour,
 Technology selected for the project,
 Production process,
 Projected production volumes, unit prices,
 Pollution treatment plants required.

If the business is service oriented, then it must state the type of services rendered to
customers. It should state the method of providing service to customers in detail.

5. Marketing Plan

The project report must clearly state the total expected demand for the product. It must state
the price at which the product can be sold in the market. It must also mention the strategies to
be employed to capture the market. If any, after sale service is provided that must also be
stated in the project. It must describe the mode of distribution of the product from the
production unit to the market. Project report must state the following:

 Type of customers,
 Target markets,
 Nature of market,
 Market segmentation,
 Future prospects of the market,
 Sales objectives,
 Marketing Cost of the project,
 Market share of proposed venture,
 Demand for the product in the local, national and the global market,
 It must indicate potential users of products and distribution channels to be used for
distributing the product.

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6. Capital Structure and operating cost

The project report must describe the total capital requirements of the project. It must state the
source of finance; it must also indicate the extent of owner’s funds and borrowed
funds. Working capital requirements must be stated and the source of supply should also be
indicated in the project. Estimate of total project cost, must be broken down into land,
construction of buildings and civil works, plant and machinery, miscellaneous fixed assets,
preliminary and preoperative expenses and working capital.

Proposed financial structure of venture must indicate the expected sources and terms of equity
and debt financing. This section must also spell out the operating cost

7. Management Plan

The project report should state the following.

a. Business experience of the promoters of the business,

b. Details about the management team,
c. Duties and responsibilities of team members,
d. Current personnel needs of the organization,
e. Methods of managing the business,
f. Plans for hiring and training personnel,
g. Programmes and policies of the management.

8. Financial Aspects
In order to judge the profitability of the business a projected profit and loss account
and balance sheet must be presented in the project report. It must show the estimated sales
revenue, cost of production, gross profit and net profit likely to be earned by the proposed
unit. In addition to the above, a projected balance sheet, cash flow statement and funds flow
statement must be prepared every year and at least for a period of 3 to 5 years.

The income statement and cash flow projections should include a three-year summary, detail
by month for the first year, and detail by quarter for the second and third years. Break even
point and rate of return on investment must be stated in the project report. The accounting
system and the inventory control system will be used is generally addressed in this section of
the project report. The project report must state whether the business is financially and
economically viable.

9. Technical Aspects

Project report provides information about the technology and technical aspects of a project. It
covers information on Technology selected for the project, Production process, capacity of
machinery, pollution control plants etc.

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10. Project Implementation

Every proposed business unit must draw a time table for the project. It must indicate the time
within the activities involved in establishing the enterprise can be completed. Implementation
schemes show the timetable envisaged for project preparation and completion.

11. Social responsibility

The proposed units draw inputs from the society. Hence its contribution to the society in the
form of employment, income, exports and infrastructure. The output of the business must be
indicated in the project report.

Financing the New Enterprise

Estimating and Financing Of Funds

Introduction

Finance is the life blood of an enterprise. Finance to an enterprise is what blood is to a human
body. Without adequate blood a human body cannot survive and function. Similarly, an
enterprise, big or small, cannot survive and run without adequate capital. Finance is required
for the establishment and running of an enterprise development. Even managerial functions
like planning, execution, coordination and control cannot be discharged without adequate
funds.

Need for Estimating Funds Requirement:

An enterprise needs both long term and short term funds. While estimating funds requirement
it is essential to pay attention on estimation of the total financial requirements and profit
earning capacity of the business enterprise. In this .connection, both the situation i.e.,
overcapitalization and under-capitalisation should be avoided. At the first instance, the
entrepreneur should make comprehensive study of the total funds requirement. Estimation of
funds requirement will include the following:

1. Fixed Assets: Cost of fixed Assets, such as, land, building, plant, machinery, furniture and
fittings etc.

2. Current Assets: Requirements for Current Assets, such as raw materials, stock, Bill
receivable, credit sales and daily routine expenses such as salaries, wages, rent, stationary etc.

3. Promotion Expenses: Promotion expenses including legal expenses. Expenses for

strengthening the business, such as expenses required for advertising, sales promotion, etc.

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4. Administration: Company organisation establishment expenses, such as expenses on
hiring services of experts etc.

5. Cost of capital: Cost of obtaining requisite finance, such as underwriting, commission,

brokerage etc.

6. Intangible Assets: Cost of Intangible Assets, such as, patents, purchase of goodwill, if any
etc.

Working Capital

The capital requirements are generally estimated for (a) Fixed Capital and (b) Working Capital
separately.

Fixed capital is required to invest in fixed assets while working capital invests in the short-
term financial requirements of the business enterprise.

The amount invested in fixed assets is permanently blocked in the investment throughout the
normal business operations. Working capital on the other hand changes and does not
diminish in value by day to day use.

The relative proportion of fixed and working capital required for an enterprise varies from
industry to industry. There are no hard and fast rules as regards to fixing their respective sizes.
If the fixed capital is high, working capital will be low or vice versa.

The presence of high working capital can be ascertained from the large carry-over of raw-
materials, ratio of indirect cost to the total costs and lack of control over performance. While
the high fixed capital is seen in the heavy investment in fixed assets. For efficient conduct of an
enterprise proper balance has to be maintained between the fixed capital and working capital.

The relative proportion between fixed and working capital depends to a large extent upon the
nature of business. In transportation and engineering companies the proportion of fixed
capital is high as compared to the public utilities. In advertising agencies and manufacturing
industries the proportion of working capital is high. Initially, a business requires more
working capital but later on as the cycle of production, selling and collection starts the
requirements of working capital diminishes comparatively.

Sources of Raising Working Capital: Working capital may be raised by a business

enterprise through various sources. The most common sources of securing working capital are
as follows:-
1. Issue of Shares and Debentures: Companies issue different types of debentures to
raise the working capital. It is borrowed capital. Investors are attracted by offering attractive
rate of interest. Debentures are popular in Indian capital market. Convertible debentures are
more in demand. This source has fixed burden. For permanent working capital shares are
issued.

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2. Bank Credit: Companies take bank loan to meet the need of working capital. Banks grant
loans in the form of overdraft, cash credit, discounting of bills etc. These are secured loans on
which interest is paid. This sources is very common in industrial world.

3. Loan from Financial Institutions: Financial institutions also provide working capital.
Large companies get working capital from financial institution. But this sources is not useful
for small business units.

4. Public Deposits: Companies also accepts deposits from the investors for short period
generally up to three years. It is called public deposit. People prefer to lend money to the
companies as interest offered is attractive. Many companies collect large amount from this
source.

5. Advances from Dealers: Sometimes, business takes advantages from their dealers.
Advance is given by the dealers along with big order. Dealers prefer it as it is the confirmation
of meeting the orders. This source is used to meet the regular expenses of the business.

6. Self-Financing: Accumulated funds within the company are used to meet the need of
fixed working capital. The source of self financing is economical as burden of interest is not
there. But it can be used only by existing company earning adequate profits and having
surplus funds.

Factors Determining Working Capital Requirement

The working capital requirement of a business unit depends upon various factors which need
to be considered collectively. The factors determining the working capital requirements are as
explained below:

1. Nature of Business: A company’s working capital requirement is related to the kind of

business it conducts. Public utilities, for example, conduct their business on cash basis hence
they require limited amount of working capital. On the contrary, trading concerns and service
industries require huge working capital as they have to carry stock-in-trade, accounts
receivable and liquid cash. Manufacturing units requiring costly raw materials/imported raw
materials require huge amount of working capital.

2. Size of the Business Unit: Size of the business unit also determines the working capital
requirement. Large units require more working capital while small units require less working
capital. Similarly, capital intensive industrial units require lower amount of working capital as
expenditure on wages, etc. is low. On the other hand, labour intensive industrial units need
huge working capital in order to meet wage bill of employees.

3. Nature of Operating Cycle: Companies having short operating cycle (e.g. electricity
supplying company) and selling services in cash basis, need limited/modest amount of
working capital while companies having long operating cycle (e.g. machine manufacturing)
and also sell the product on credit/installment basis need substantial amount of working
capital.
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4. Time Consumed in Manufacturing Process: When manufacturing process is lengthy
and complex in character, more working capital is required as capital will be blocked in the
production process or working progress. Companies producing heavy machinery like
generators, require more working capital. Similarly, if the manufacturing cost is high, the
working capital requirement will be more.

5. Speed of Turnover of Circulating Capital: The speed with which the circulating
capital completes its full round plays an important role in deciding the capital requirement. If
the sale is quick, limited working capital is adequate. Thus, the faster the sales, the lesser will
be the working capital requirement and vice versa. The cash requirements also determine the
amount of working capital. It more cash is needed for meeting regular needs, the working
capital required will be more.

6. Position of Business Cycle: Requirement of working capital very with the business
environment. During boom period, the management is induced to pile up big stock of raw
materials and other items likely to be used in the future business operations. This is for taking
the advantage of high market prices. Naturally, the working capital requirement will be more.
During depression, big amounts are locked up in the working capital as the inventories remain
unused and book-debts uncollected. In both the cases, the requirement of working capital
increases.

7. Terms of Purchase and Sale: A business unit, making purchases of raw materials, etc.
(inventories) on credit basis and selling goods on cash basis will require lesser amount of
working capital. On the contrary, a business enterprise having no credit facilities and at the
same time forced to grant credit to its customers may require more working capital.

8. Dividend Policy and Taxation Policy: Every company takes into consideration the
effects of dividend policy on cash position. A shortage of working capital often acts as a
powerful reason for reducing the rate of dividend. On the other hand, a strong position on the
working capital front may justify continuing high dividend payment even though the earnings
of the company are not sufficient to cover the payment.

The taxation policy of the government determines the amount of working capital. Heavy tax
burden on the corporate sector raises the amount of working capital required. Frequent
payment of taxes (like sales tax) also raises the amount of working capital requirement.

9. Raw Material and Labour Cost: A business unit requires more working capital if the
raw material requirement (inventory requirement) is more in quantity and higher in cost.
Similarly, labour intensive business unit requires more working capital as monthly wage bill is
quite substantial. For example, small-scale industries need more working capital as they are
labour intensive. On the contrary, a capital-intensive industrial unit needs less amount of
working capital on account of low wage bill.

10. Seasonal Variations: There are seasonal variations in the working capital requirement.
During the busy season, more working capital is required while its need will be less during the

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slack season. For example, in the case of sugar factory, working capital required will be more
during the busy season whereas the amount required during the slack season will be very
limited, as sugar production is not conducted during the slack season.

11. Banking Connections: A company with good banking connections requires limited
working capital but working capital required will be more in the absence of such connections.

12. Cash Requirement: The working capital requirement is influenced by the amount of
cash required for meeting various payments such as salaries, rent, taxes, etc. The greater the
requirement of cash, the higher will be the working capital requirement of a business
enterprise.

13. Miscellaneous Factor: (a) Reserves and depreciation policy. (b) Supply position of raw
materials. (c) Demand position for finished products. d) Expansion programmes of the
company. (e) Operating efficiency. (f) Changes in the price level. (g) Credit standing of the
firm. (h) Availability of efficient transport facilities. (i) Position of inflation in the country.

Factors Determining Fixed Capital Requirement: Fixed capital requirement

depends on number of factors as explained below:

1. Nature of Business Activity: The nature of business activity determines the amount of
fixed capital. Public utilities and transport undertakings need large amount of fixed capital for
purchasing fixed assets. On the other hand, commercial enterprises need limited amount of
fixed capital as fixed assets required are limited.

2. Size and Nature of Business Unit: Size of the business unit determines the amount of
fixed capital. A large size business unit needs more fixed capital as it needs big factory building
and more machines. A small size unit needs limited fixed capital for purchasing fixed assets.
Similarly, capital intensive business units need more fixed capital while labour intensive
enterprises require limited amount of fixed capital. However, labour intensive enterprises
need large amount of working capital for payment of wages, etc.

3. Scale of Operations: Scale of operations (large or small) determine fixed capital

requirement. A small-scale enterprise needs less fixed capital whereas a large scale enterprise
requires more fixed capital.

4. Government Subsidy (Concessions): Fixed capital requirement depends on the

concessions (subsidy) offered by the government. For example, government may supply land
at a concessional rate or may supply machinery on installment basis or offer term loans on
easy terms. In such cases, the amount of fixed capital required may be comparatively less as
certain fixed assets will be available at lower prices. Such concessions are normally offered for
establishing industrial units in industrially backward areas.

5. Type of Product Manufactured: The type of product manufactured determines the

amount of fixed capital. Such product may be large (motor car) or it may be a small (soap or

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plastic jar.) If the product to be manufactured is big and needs sophisticated plant, the fixed
capital requirement will be more. However, if the product is small and needs limited number
of machines for manufacturing, the amount of fixed capital required will be limited. Finally
fixed capital required will be more if each and every part is manufactured within the company
only. On the other hand, fixed capital required will be less if some components are purchased
and assembled in order to complete the product.

6. Method of Manufacturing (Technology Used): The method of manufacturing may be

manual or mechanical. Similarly, it may be both manufacturing and assembling or simply
assembling of accessories. This factor determines the amount of fixed capital. For example, if
the production method is simple with stress on manual labour, the fixed capital requirement
will be less. However, if the manufacturing process is highly mechanical, more fixed capital
will be required. Similarly, a company requires limited fixed capital if it is engaged in the
assembling work. However, a company manufacturing all components of the product and also
handling their assembling requires more fixed capital.

7. Method of Acquiring Fixed Assets: The method of acquiring fixed assets determines
the amount of fixed capital. The assets can be purchased outright or on installment basis or on
rental basis (lease). Fixed capital required will be more if land, machinery, etc. are purchased
on full payment. On the other hand, fixed capital required will be less if the machinery is
purchased on installment basis and land is acquired on lease basis. Similarly, a company
purchasing machinery as per latest technology will require large amount of fixed capital
whereas the fixed capital requirement will be less if secondhand machinery is purchased.

8. Scope of Activities Undertaken: A company may be engaged in the production as well

as marketing of its product. Such a company will need substantial fixed capital. On the other
hand, a company concerned only with production and not will distribution will need less
amount of fixed capital. Similarly, more fixed capital will be required if the company is
manufacturing by-products and ancillary parts along with the main product line. This is
natural as investment in fixed assets will be more.

All factors noted above need to be considered collectively while determining the fixed capital
requirement of a business unit. Such capital requirement should be calculated properly as
faulty calculation leads to over or under capitalisation. Even excessive investment in fixed
assets should be avoided as such investment is unnecessary and reduces overall profitability of
a business unit.

Financial Management for New Ventures

New business leaders and managers have to develop at least basic skills in financial
management. Expecting others in the organization to manage finances is clearly asking for
trouble. Basic skills in financial management start in the critical areas of cash management
and bookkeeping, which should be done according to certain financial controls to ensure
integrity in the bookkeeping process. New leaders and managers should soon go on to learn
how to generate financial statements (from bookkeeping journals) and analyze those

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statements to really understand the financial condition of the business. Financial analysis
shows the "reality" of the situation of a business -- seen as such; financial management is one
of the most important practices in management. This topic will help you understand basic
practices in financial management, and build the basic systems and practices needed in a
healthy business.
Basic Accounting
The bread and butter of financial planning is knowing where a business has been. That means
having a solid grounding in financial accounting and knowing what reports to pull to get the
information needed. Without these records, you won’t know whether you are producing profit
consistently, much less whether your business is growing or declining. Good financial planners
have the ability to see red flags within the accounting records and use that information to
create processes to avoid pitfalls in the future.

Different documents generated from the accounting records provide a foundation for the
decision making process. These documents include the Income Statement, the Cash Flow
Report and the Balance Sheet.A good planning analyst knows, however, that the
accounting statements are not the whole picture. They are only part of the story. Sometimes
the issues that need to be resolved are buried in the business processes and accounting
ledgers, and they only hint at what’s going on as transactions occur. A smart analyst goes
beyond the reports.

In addition to the information generated for routine financial statements, special purpose
reports are needed to support non-routine decisions about the business. These decisions can
include whether to make or outsource a product or service, whether to replace existing
machinery, whether to accept a special order, or even how to price products or services to
survive difficult economic times. Knowledge of what costs are relevant to the specific decision
and what qualitative factors should be considered can make the difference between a good
decision and a poor decision.
The Profit Centers of the Business
With the historical records identified and interpreted, the next basic step is to understand the
profit centers of the business. These are the core activities of general sales and revenue for the
company, and if they are limited or restricted, those revenue streams decrease or shut down.
Since a business fundamentally needs profit to keep going and growing, the improvement of
these profit centers is a primary goal of financial planning.

The interesting twist, however, is that profit for a business isn’t just made by focusing more on
sales. Profit can be generated by being more efficient in production, by investing excess funds
wisely, in addition to finding new markets and different ways of selling. Financial planning
looks for all of these avenues and whether they are viable directions given the circumstances of
the business.

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Managing Cash
It may seem like an archaic term from an era before digital finance and the electronic age,
but cash flow management can make or break a business. Any financial planning attempted
without understanding cash flow is leaving a big, wide door open to problems. Annual
financial reports don’t reflect the timing of when various funds go in and out of the business
during its operating cycle. As a result, hiccups can occur if one doesn’t pay attention to having
revenue available to pay bills and critical expenses. Thus, knowing how to use cash budgets
covering short periods within the year can be paramount to succeeding in business.

One of the most demanding expenses with the least amount of flexibility is payroll. Employees
expect to get paid in a timely manner, no matter what. If a business doesn’t generate sufficient
funds by the date payroll hits, it either has to borrow or delay paychecks. Both situations must
be avoided since employees don’t like to float their company, and banks will demand
exorbitant interest rates for short-term bridge loans.

Cash flow can be interrupted very quickly, especially if a business works on thin profit
margins. This risk frequently becomes apparent when a small business wins a big account and
then desperately needs to manage cash until the big payment comes in. Often the business
resorts to emergency borrowing to get through, eroding the potential profits before they’ve
been earned. Cash management, added to financial management planning, would anticipate
this issue and have reserves ready or a diversified enough portfolio so that the new account’s
demands are offset by other more regular revenues coming in already.

Leveraging Assets
When starting a business, a good number of small business owners think of assets from the
perspective of the store address/building, equipment for production, maybe the company car
and furniture. It’s not the most creative perspective, but that’s often a reflection of an
understanding of what can be a business asset. Strategic asset collection will often be far more
diversified, bringing in larger assets to the companies that are there for production as well as
investment. These assets can then be used for additional business growth and financial
leveraging.

Assets can serve as leverage in two different ways, but both are effective at raising money.
First, assets can be used as collateral to secure loans. Second, assets increase the equity in a
business (if they were not financed by loans in the first place), so additional investor or public
financing can be raised against that equity if the business is structured accordingly.
Understanding what leveraging options are available for a business is an important aspect of
financial planning.

Compromising too much of a company’s assets for capital is essentially handing over
ownership. Many small business owners with really good ideas and products have learned this
lesson the hard way and then seen their life’s work taken away by an investor or new
management.

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Taxation
Businesses don’t survive very long if proper tax management is ignored in their financial
planning. The government can be very unforgiving when it believes that insufficient taxes are
being paid on income or, worse, taxes are being avoided intentionally. The way tax laws are
written at both the state and federal levels, there isn’t much room for error. Not paying
attention to these rules, as well as appropriate tax planning to take advantage of available
opportunities to save, means a business can end up losing money or end up paying penalties
and tax interest. Both can eat away at the lifeblood of a company and a bad tax audit can
bankrupt a business completely. Financial planning basics need to take into account how taxes
work and what the company can do to stay on the right side of the law.
Long-Term Business Structure
Most small businesses start off as sole proprietorships or partnerships. These are common
forms of business structure that are easy to initiate and fit the size of the company during its
initiation. However, over time the business will grow and additional structure will be needed.
For liability reasons, ownership and management will want to restructure the business so that
it becomes its own entity versus a personal financial extension of the owners.

Financial planning has a big influence in this field helping decision-makers choose and plan
out the best way to evolve the company to the next stage. Whether it’s simply merging sole
proprietorships into a partnership or taking the big dip and becoming a full-blown S-
corporation, there are hoops to jump through and challenges to navigate, as well as missteps
to avoid legally. This is not a situation where business owners want to go in blindly, just
guessing what something might be and then hoping to fix things as the business moves along.

Seventeen tips to manage your small business finances

1. Properly manage your accounting. You can hire a good bookkeeper or purchase
DIY accounting software. It is crucial that you keep accurate track of your income and
costs.

2. Review your costs. Keep track of all of your small business expenses. These can add
up quickly, but reviewing them allows you to fine-tune where your money goes.

3. Make financial projections. Having clear financial projections is important. Your

main business plan will help you to anticipate and address possible future obstacles.

4. Don’t get slack on invoicing.

 Send out invoices as soon as possible after providing goods or services.

 Set payment terms of seven days to make sure that payments are not forgotten
or lost in the process.
 Always follow up on sent invoices. You can make this easy by creating set
templates for email or SMS follow-ups.
 Reference invoice numbers and cross-reference these with payments.

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5. Keep a separate business bank account. Mixing business money with your
personal finances is a recipe for unexplained losses and tax-headaches. Keeping your
business’s money separate will make gauging profitability easier and help you to keep
proper track of your expenses.

6. Keep track of personal loans to your business. Keep accurate records of what
you loan to your business. When your business starts making money, you can easily
pay back the director’s loan first before paying tax on the remaining profit.

7. Make sure to pay yourself first. This doesn’t mean sucking up all the profit the
moment you make it; start with 10% of the earnings. This is a good way to set aside
money consistently and to test the profitability of your business. It also provides a
safety net for unexpected expenses.

8. Remain frugal. Even though you pay yourself, don’t get sucked up in the benefits of
business ownership even if you can afford it. Set your salary as low as possible and
offer government-mandated benefits only. What you save now will give you more
flexibility in future lean months.

9. Keep traveling costs minimal. Most hotel and travel costs should be spent on a
place to simply lay your head at night and a way to get from meeting to meeting. Don’t
overspend on luxurious travel and accommodation. This sets a bad precedent to
employees and can be an unnecessarily large cost with little return. Plan your business
trips as if you were paying for them yourself.

10. Don’t let legal fees get out of hand.

 Make your expectations clear to your lawyer when procuring their services.
 Choose the billing option that is the most cost-effective for your business, for
example, hourly or per project.
 Ask whether it is possible to defer payment until the project is funded.

11. For the more simple necessities, consider DIY legal documents. There are
various kinds available online.

12. Take care when expanding. Make sure expansion is done steadily and wisely.
Pushing large amounts of money into expansions that are too quick and too drastic can
be disastrous.

13. Take control of your own marketing and public relations. Follow a PR and
marketing strategy to make sure efforts are intentional and focused.

14. Consider renting instead of buying. Leasing equipment instead of buying helps
you avoid maintenance costs and can also prevent you from overpaying on equipment
only needed for a specific period of time. You could also consider renting your office
space, as it makes relocation and expansion easier.

15. Don’t wait too long before seeking a loan. An easy mistake to make is waiting
until your business is in financial trouble before applying for loans or other credit. This
is exactly when you will be least likely to receive financing. Consider applying for a
business loan when your financials are still in a good state. This way the loan can be
used for expansion or as an emergency line of credit instead of rescue.

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 16. Make sure you have enough capital. Small businesses tend not to have enough
capital to get themselves through the startup phase. To prevent this, have three
months’ living expenses saved plus the amount you are expecting to need for the first
three months’ business expenses. Plan as if you expect to receive no business revenue.

17. Don’t spend prematurely. Don’t go big on business cards, sign writing, marketing
materials, cars or inventory before any actual revenue comes in. This can create a cash
flow blockage.

Advantages of Financial Management

A fine financial management structure depicts how an entrepreneurship business is doing and
why. A well-organized system for bookkeeping is critical to establish procedures to manage
and control finances. Financial management is the system to place digits to work for a
successful business. Financial management is used to formulate the decision that improves
business operations and make it more successful

Financial management makes you a better macro manager. These are the advantages gained if
you ace financial management:

1. Turning your business with proactive management.

2. Debts for business are easily approved.
3. Quick formulation of an efficient financial plan for sharing with investors.
4. Accessibility to good tools for making critical financial decisions.
5. Investing money on fixed assets wisely.
6. Efficiently maintain inventory and accounts receivable, develop working capital for
short-terms.
7. Clear knowledge of growth orientation and setting goals for sales.
8. Improvement in margin of gross profit by effective pricing of your services and cutting
the effective costs of direct labor, supplier prices. All of these measures affect costs of
products.
9. Cutting down of administrative expenses and general costs plus a more efficient
business management.
10. Planning for taxes.
11. Planning in advance for worker settlement.
12. Executing sensitivity analysis with the diverse fiscal variables involved.

Developing a System for Financial Management

The first step is to create the financial statements. For proactive management, you need a plan
in which a monthly generation of financial statements is done. This statement needs to
include:

 Income statement
 Balance sheet
 Cash flow statement

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All of this information can be extracted from bookkeeping, invoices, bank statements, and
invoice receipts.

Master Financial Business Management with these 6 Tips from the Best
Entrepreneurs

1. Profit Doesn’t Characterize Success

In financial management for entrepreneurs, profitability doesn’t indicate success. Rather,
growth indicates that a business is excelling and on the right path. Profit is the ultimate goal
for sound entrepreneurs but growth of the business is critical to determine how the business is
doing.

2. Identify what Metrics Affect the Business

Identify the financial metrics which are universal and applicable to every business. Closely
look into your specific business and identify specific metrics that affect your particular
company. The universal metrics are revenue, operating expense, money on hand, gross
margins, etc.

3. Don’t Drop Capital on Dumb Mistake

Efficient bookkeeping will help you in assessing your mistakes and where you are losing
money. Identify all of the areas where money wastage is avoidable because early profits are
more worthy in entrepreneurship.

4. Carry out a Cost Review

An audit of the business should be done because you cannot monitor all of your employees all
of the time. This should be done at least quarterly to have a close look on your expenses and
how to justify them. Audits also reduce the risk of fraud.

5. Make your Time Count

Entrepreneurs have to do many tasks themselves due to small budgets. They have to maintain
bookkeeping, run payrolls, etc. Entrepreneurs do things themselves to save money but, in
reality, this time should be spent in growth of their business. Use technology to save your time.
The monthly financial statement can be generated through the latest automated software
package especially designed for accounting. These are to be used with your manual
bookkeeping system. To save your time, you can also employ internal or external bookkeepers
to provide you with monthly financial statements.

6. Build a Method to Track Success with Time

Every entrepreneur must have a system to assess success over time. This system is used to
validate the financial management system and to reset goals, if needed.

Conclusion
To grow a successful business as a sound entrepreneur, you must have a deeper understanding
of your financial management system. Sabrina Parsons, CEO of Live Plan, believes “budgeting,
forecasting, and planning are not just for start-ups. If you do this for an ongoing business,
you’re going to grow 30 percent faster, you’re going to be more successful and your numbers
are going to mean more.”
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Sources of Finance

Sources of finance or capital requirements for establishing a business enterprise and ensuring
its smooth working can be classified under two broad or main categories, viz. fixed capital and
working capital. These two types of capital constitute the aggregate funds necessary to procure
physical assets and secure monetary arrangements for starting and operating a business
enterprise.

Sources of finance for establishing and running a business enterprise may be classified under
the following major heads :

A. Fixed/Long Term Capital

Funds required to acquire fixed assets or meeting the cost of project is termed as fixed or long
term capital. The total amount of fixed capital is determined through project capital cost
estimate. To meet the cost of the project, the following long term sources or of fixed capital are
available to the business entrepreneurs:

(1) Equity Capital : Equity capital refers to ownership capital which do not carry any special
or preferential right in respect of annual dividend or the return of capital in the event of
winding up of a company. The liability of equity shareholders is limited to their capital
contribution only. The holders of the equity capital also have voting rights. Equity capital
provides strength to the financial structure of the company. It is also called risk or venture
capital for it enables the enterprise to absorb all sorts of financial stress and strains. It acts as
the base. It represents permanent capital. However, the cost of equity capital is relatively high.
Equity capital is required for purchasing fixed assets, such as, land, building, machinery,
furniture, equipment etc.

(2) Preference Capital: Preference capital is the capital on which the preferential
shareholders carry the following preferential rights over other classes of shareholders :

(i) A preferential right as to payment of dividend over other class of shareholders, and (ii) A
preferential right as to repayment of capital in case of winding up of the company in priority to
other classes of shares. Preference shares may be (a) cumulative or noncumulative, (b)
participating or non-participating, (c) redeemable and non-redeemable, and (d) convertible
and non-convertible. Preference shares have the merit of not being a burden on finances for
the preference dividend is payable only when there are profits. If the company runs into losses,
it can defer the payment of dividend or omit to pay dividend. Preference shares are cheaper as
compared to financing to equity shares.

(3) Debentures: Debentures are creditorship securities representing long term

indebtedness of a company. It is contractual obligation on the company to pay a fixed amount
on a specified date at stated rate of interest at regular intervals. Debenture holders do not
carry any voting rights and no share in the prosperity of the company. They are of the
following types that commonly used in India, viz., (i) convertible debentures, (ii) partially
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convertible debentures, and (iii) non-convertible debentures, (iv) secured debentures, and (v)
unsecured debentures.

(4) Term Loans: Term loans are an important source of finance. Term loans are those
loans which are provided by specific financial institutions for specific period usually ranging
from 10 to 25 years. They carry a fixed rate of interest are repayable in installments. Term
lending institutions generally insist on promoters’ contribution margin money from
entrepreneurs. They also grant a moratorium period during which the repayment of capital is
not provided for. This period generally corresponds to the gestation period. The institutions
providing term loans have been mostly established by the Government. These institutions
have been set up both at the all India level and state level.

Following are the important financial institutions operating at all India level:

1. Industrial Finance Corporation of India Ltd.

2. Industrial Credit and Investment Corporation of India (ICICI).
3. Industrial Development Bank of India (IDBI).
4. National Bank for Agriculture and Rural Development.
5. Industrial Reconstruction Bank of India.
6. ICICI Securities and Investment Limited.
7. Export and Import Bank of India (EXIM BANK).
8. Unit Trust of India.
9. Industrial Investment Bank Limited (IIBL).
10. Life Insurance Corporation of India.

(5) Retained Earnings: Reserves and surpluses build over the past are called retained
earnings. These earnings can be reinvested in business for modernisation and expansion etc.
From the owner as well as cost of capital point of view, it is a source, similar to equity share
capital. However, it should be noted that over a period of time, the retained earnings get
developed into working capital. The cost of retained earnings is very cheap compared to cost of
equity.

(6) Deferred Credit: Normally, the suppliers of machinery provide deferred credit
facility under which the payment of machinery is made over a period of time. The interest rate
on deferred credit and period of payment vary rather widely. Normally, the suppliers’ offering
deferred credit facility ask for bank guarantee from the buyer.

(7) Capital Subsidy: The central and state Governments are providing subsidies to
industrial units located in backward areas. The Central Government and the state subsidies
vary on the fixed investment in the project, and depend on the location of the project.

(8) Public Deposits: Financing through public deposits originated in the Cotton Textile
Industry mostly localised in the then State of Mumbai, particularly in Mumbai and
Ahmadabad. The mills used to accept deposits from the public for a short period when the
production season begins. These deposits used to be paid after the cloth produced was sold

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and the proceeds realised. In course of time, the system became operative throughout the
country. It also resulted in malpractices being adopted by unscrupulous management. The
deposits were not returned in time nor the interest paid. In many cases the borrowers
disappeared after accepting public deposits. Hence, the Companies Act regulated the
acceptance of public deposits by introducing section 58 A. Now rules for acceptance of public
deposits have been made more stringent and heavy penalties have been laid down for not
paying interest or returning the deposits.

(9) Unsecured Loans — Unsecured loans are provided by promoters to fill the gap
between the promoters’ contribution required the financial institutions and the equity capital
subscribed by the promoters. These loans are considered as subsidiary to the institutional
loans.

(10) Foreign Currency Term Loans — Financial institutions also provide foreign
currency term loans to meet the foreign currency expenditure towards import of plant,
machinery and equipment and also towards payment of foreign technical know-how fees.

B. Short Term Finance/Capital

Short term sources of finance are used to meet the working capital requirements of the
business enterprise. In other words, short term finance/capital is that which is used in
conducting the daily operations of the business enterprise. The sources of short term
finance/capital may be summarised as under:

(1) Loans from Commercial Banks: Short term financial needs are working capital
need. In order to meet short term financial requirements it is usual to take financial assistance
from commercial banks. Commercial banks, private sector banks and even foreign banks
provide short term and medium term financial assistance.

Banks usually provide assistance in the form of:

(i) Overdraft,
(ii) Cash credit, and
(iii) Loans and advances.
Some banks also provide short term financial assistance by discounting bills receivable.
Commercial banks usually charge a high rate of interest and insist on security as they cannot
risk investor’s funds.

(2) Sundry Creditors—Trade credit available against purchase of materials to meet the
working capital needs of the business enterprise is called trade credit provided by sundry
creditors. It is considered as the largest source of short term finance/capital. In an advanced
economy, most buyers are not required to pay for goods on delivery. They are allowed a short
term credit period before payment is due. Trade credit is made available to buyer on an
informal basis without creating any charge on assets. Trade credit mode of short term
financing depends on the terms and conditions of trade credit, reputation of the buyer,
financial position of the seller and volume of purchases to be made by the buyer.

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(3) Cash Advances from Customers—Manufacturers engaged in producing costly
goods involving considerable length of manufacturing time usually demand cash advance from
their customers at the time of accepting their orders. It is a cost free source of short term
finance.

(4) Indigenous Bankers — Indigenous bankers are private money lenders engaged in the
business of financing small and local business units. They provide short-term finance and
charge exorbitant rates of interest. They are costly source of small term of finances.

(5) Short-term Borrowings —A business enterprise may resort to short term borrowings
in case of emergency or pressing needs. Short term borrowings may include loans from friends
and relatives, loans from directors or sister business units. They are normally for a period up
to six months. The cost of these funds is usually quite nominal.

(6) Owner’s Own Funds—The owner’s funds go partly to meet expenses towards
acquisition of fixed assets like land, building, plant, machinery, equipment etc. Remaining
amount is called margin money which is used to meet the working capital requirements of the
business enterprise.

Venture Capital Funding (VCF)

In India, venture capital was at first the province of developmental financial institutions such
as the Industrial Development Bank of India (IDBI), the Technical Development and
Information Corporation of India (now known as ICICI), and the State Finance Corporations
(SFCs). The first origins of Modern Venture Capital in India can be traced to the setting up of a
Technology Development Fund (TDF) in the year 1987-88, financed by a levy on all payments
for technology imports. TDF was meant to provide financial assistance to innovative and high-
risk technological programs through IDBI.

Private venture capital began to emerge when the economic liberalisation process began in
1991. Sources of funds were the financial institutions, foreign institutional investors or
pension funds and high net-worth individuals.
.
Important Features of venture capital
The important features of venture capital funds are that they are a long-term investment.
Investors of venture capital hope that the company they are backing will prosper and that after
five to seven years from making the investment, it will multiply and become profitable enough
to sell its shares in the stock market. For that period of time the investors don’t get any
returns. But finally they get the returns for their waiting. The investor hopes to sell his share
for many times more than what he paid for, but if the entrepreneur fails the complete
investment is lost.

The term venture capital comprises two words “venture and capital.” The venture means a
course of proceeding, the outcome of which is uncertain but which is accompanied by risk of
danger of loss. Capital means resources to start business. Thus, ‘venture capital implies

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committing resources (capital) to enterprise that has risk and adventure i.e., funds made
available for financing of new business ventures from scratch is called ‘venture capital’.

According to Journal of Central Bank,U.K., “Venture capital is an equity by which an investor

supports an entrepreneurial talent with finance and business skills to exploit market
opportunities and thus obtain long term market gains.”

Documents required to be filed for raising financial assistance from

entrepreneur capital fund.

The following document required to be filed by a new entrepreneur for raising financial
assistance from entrepreneur capital fund.

1. Copy of temporary registration certificate from District Industry Centre.

2. Copy of letter/permission for obtaining permission to establish industrial shed.
3. Copy of the letter for obtaining license from Industries (Development & Regulation)
Act.
4. Copy of clearing certificate from Environment Protection Act.
5. Copy of the letter taking electric connection.
6. Copy of the letter for water supply connection.
7. Copy of Feasibility Report.
8. Copy of the letter of the certificate of Promotor’s Contribution.
9. Copy of the letter containing description of total financial requirement.
10. Copy of the letter stating amount of risk involved in the project.
11. Copy of the certificate if the entrepreneur belong to scheduled caste, ex-serviceman
or widow or any other reserved class.
12. Copy of the letter containing technical details of the project.
13. Copy of the letter stating that all legal requirements have been complied for
establishing new enterprise.
14. Copy of the letter if the industrial unit is to be established in backward and
undeveloped area.
15. Any other essential document.

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