Session 1: The Entrepreneur Finding His Resources

MODULE 3
SESSION 1:
THE ENTREPRENEUR FINDING HIS RESOURCES
Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
What Is This Session About?
This session will provide you the necessary knowledge and skills on how you will acquire sufficient
starting capital to set-up a viable business. However, not every source provides a deal that is good for the
business. Evaluating sources is critical to make good decisions
In the process of establishing business venture, you need to identify your sources of capital using
boot-strapping methods of capital seeking, evaluating sources of capital according to the Return on
Investment, and preparing an overview of necessary capital and acquired sources of capital. Those at end
of the negotiation you can make your investors to make commitment to allocate their capital to your
business.
Most business start-ups usually begin with high hopes and investor confidence. However, a few
circumstances can either make or mar any business start-up. A comprehensive research conducted by
experts has shown that business start-ups within the first year often capitulate due to a myriad of reasons.
The salient requirement for any business to prosper is nothing short of capital. This is because
capital is the basic ingredient for any business to thrive. Without adequate finance, business start-ups tend
to crumble, and this malignant obstacle often causes infant business start-up owners to seek financial
backing for their start-ups. After you must have conducted the right market data analysis research for your
start up, obtaining the required funding for your business is entirely up to you.
Here are a few tips on the procedure you can adopt, in order to source for the required funding for
your start up.
What Will You Learn?
At the end of this session you will learn on how to develop measures to manage your working
capital. & prepare a budget for your business. And we will able to identify the Principles of Actions &
Evaluate Starting Capital Options.
What Do You Already Know?
Let us start this session by understanding this quotation A quote

by Dave Ramsey “A budget is telling your money where to go instead
wondering where it went”. Try to relate the meaning of this quotation to
your daily life.
https://www.pinterest.ph/pin/24206916722016547/
Let’s Reflect
What do you feel about this quotation? What does it mean to you? How will relate on how you
manage your finances?
Let’s Study
Businesses can raise capital in either of two ways: debt, or equity. Debt is when a business borrows
money and has an obligation to pay money back over time with interest, e.g., a loan. Equity is when money
is invested into the company in exchange for ownership rights, e.g., founders investing their own money in
a start-up. Early-stage businesses rarely raise money by incurring debt because it is unclear whether or not
the company will be able to pay back any borrowed money With this in mind, it is critical for owners of
early-stage start-ups to know where they can find sources of equity funding, in addition to their own
investment. For one to get start-up capital, they have to exhibit a high level of personal initiative Here are
some of the most common sources of Avenues for finding Starting Capital to get your business up and
running. This can be done in three ways;
1. Self
This is when one decides to personally finance their

business idea. The individual will look carefully into their
idea and see areas that will bring money to the business. Many
times these areas are not so obvious so the entrepreneurs mind
seeks for funding beyond a defined box. There are a number
of ways this can happen. It can be through use of personal
savings, use of one’s pension funds, bootstrapping, utilizing
underutilized assets, etc.
Self-financing is the number-one form of financing used by most business start-ups. Self-financing
includes using your own money to invest directly in the business and using your personal assets as collateral
for outside funding.
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Personal Savings Using your own savings is that there’s no cost apart from the lost opportunity to earn
interest, but of course you need to consider the risk if things go wrong (more on that later). And unless
you’re very rich, relying only on your savings may not be enough to fund a business, especially as it grows
larger. If you have a healthy balance in your savings account, this is the most obvious source to draw on.
Thousands of business owners have also tapped their retirement funds.Utilizing underutilized assets are
things with fixed costs that are not being used as much as they could be. They are important because they
can be used more and from their owner’s perspective all additional usage is free. Money rounds or
“Paluwagan” and Maximizing benefits from suppliers.
2. Informal Sector
This is mainly though the social networks one has made through friends, family, and colleagues at work
places or people in one’s neighbourhood. These different networks can provide capital to an individual
based on not only their belief in the business idea but also the trust they have gained over a period of time.
They include among others business angels, co-operative societies and maximizing benefits from suppliers.
Family, Friends and others
Are common grounds for early-stage source of pre-seed and seed financing. When businessman
seeks capital from these sources most or all of the investors in the business have some close personal
connection to the founders for or for worse.
Business Angels
Angel Investor groups are collective angel networks that share information about potential
investment opportunities for other angels.
Money Lenders
A person whose business is lending money to others who pay interest.
3. Formal Sector
This is the most difficult of the different sources since it requires a

lot of skill, persistence and a certain level of accomplishment in society. The
formal institutions will ordinarily give more money to any start up compared
to informal sector and self-funding. However, trends show that their money
is encumbered with issues like collateral/security, past performance
financial reports and also very high interest rates. In the Philippines, the
formal sector involves among others; Banks loans, venture capitalists,
leasing companies, micro credit institutions, overdraft facilities, and
government loans. Financial Institutions & Government Programs
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A. From Financial Institutions

Is responsible for the supply of money to the market through the transfer of funds from
investors to the business in the form of loans, deposits and investments
Overdraft facilities
An overdraft facility is a credit agreement made with a bank that allows an account holder to use
or withdraw more money than they have in their account up to the approved limit. The sanctioned overdraft
limit and the interest charge will vary based on the nature of the asset offered as collateral.
Leasing
A contract outlining the terms under which one party agrees to rent property owned by another
party.
Venture Capitalists
Is a private equity investor that provides capital to businesses exhibiting high growth potential in
exchange for an equity stake.
Bank Loans
Small business loans is granted to entrepreneurs and aspiring entrepreneurs to help them start or
expand business.
Mortgages
Are loans distributed by banks to allow consumers to buy homes they can’t pay for upfront.
Micro-credit institutions
Are organizations that provide loans to low-income clients including micro companies and the self-
employed, which rationally lack access to mainstream sources of finance from banking institutions .Fund
small entrepreneurs in developing countries. These entrepreneurs run what are known as micro-enterprise.
a. From Government Programs

A grant is a sum of money given to an individual or businesses both financially, in the form
of grants, and through access to expert advice, information and services
The above 3 ways for funding a start-up are great place to start and bring the most success to the
majority of businesses.
For many, the decision about whether or not is the right time to start a business comes down to
funding. There are quite few different ways that you can go about funding a start-up, but not all are
created equal. You may have a wonderful business idea that you have perfected, but it won’t mean much
if you don’t have the funding in place to not only make your business happen, but allow it to succeed.
One wrong move when it comes to finances and you could be back to square one. It is important
to analyse all angles of your business and your future goals and then analyse each type of funding
opportunity so that you make sure you’re starting business off on the right foot.
THE 6 PRINCIPLES OF ACTION
Exploit Bootstrapping Possibilities!
Exploit bootstrapping possibilities. What probable sources do you know of?

Do not limit your options and be as creative as you can be when exploring startup
capital sources.
Raise Funds From The Right Sources.
Analyze the cost of capital from different sources. Use capital budgeting techniques like Return on
Investment to determine if the cost of capital is commensurate with your desired rate of return. Determine
credibility of your capital source.
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Make Progress While You Wait.
Sometimes investors will ask you to stay in touch and keep them abreast of your progress. This
may sounds like a blow-off but it's not. If you report back to them in a few months that you've finished your
product better or landed a few big customers, they may then decide to invest.
Be Sure That The Money Hatches Money.
Do not use funds acquired to start up a business to do something else, like buy car, take friends out
to a party, pay school fees etc. It is not ethical and will result in economic constraints like failure to pay up
your obligations when they fall due.
Pay Yourself A Salary And Use The Profits For Re-Investment.
Your business and your personal needs are two separate entities. Cash outflows from the business
should not be cash inflows to satisfy your personal needs. Include in your operational costs, how much you
will take home (salary) and use that to cater for your personal needs. Any profits from the business must be
re-invested.
Take Feedback.
If you talk to investors, you'll get feedback on your business idea. If you hear the same thing a few
times, take those comments seriously. Keep Your Eye on the Prize. Don't let looking for money stop you
from pursuing your business idea. If you spend all your time begging for money, you may not make any
progress. If you hear the same thing a few times, take those comments seriously. Smart entrepreneurs are
agile and adapt quickly. It's a great idea to have one of your partners in the business focus on fundraising
while the other partners focus on growing the business.
Other Conditions That Enhance Finding Starting Capital
Finding start-up capital is a major challenge to any

entrepreneur. However, some entrepreneurs stand a bigger
chance to find start-up capital than others. These entrepreneurs
may be favoured by their prevailing conditions. These could
include among others: Education background, Economic
conditions, Cultural and social norms, & Novelty of ideas;
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Educational Background
Studies show that in high income countries, 57% of entrepreneurs have a post-secondary education,
suggesting that in these countries education systems tend to build a suitable skill base for entrepreneurs. In
the poorest countries only 23% of the entrepreneurs have a postsecondary education. And almost 50% of
the entrepreneurs in low-income nations have not successfully completed secondary education. This implies
that although education has an influence on someone to find start-up capital, it may not hold in developing
countries. However, we should not down play the influence education has on someone’s ability to not only
understood but also to expedite the various sources. The difference in developing countries may be
explained by the fact that most of the funds are acquired from the informal sector. (GEM Uganda, 2003)
Economic Conditions
In most countries regardless of GDP per capita, people involved in business start-ups are currently
employed elsewhere. (GEM, 2004) This implies that the fact that these people earn salary, then, it is much
easier for them to set aside part of their income as savings that can later be translated into start-up capital.
Also, given the fact that they are employed, then it means they have a number of networks from friends and
colleagues at work. This automatically improves on their opportunities for finding start-up capital.
Although GEM, 2003 & 2004 showed that the Philippines was one of the most entrepreneurial
countries in the world. The nature of business start-ups was inferior to the start-ups in the developed
economies. This implies that when the country’s economic conditions are not favourable then the nature of
start-ups will not be that very competitive. Issues like the interest rates, taxes, GDP per capita, inflation,
unemployment, etc. determine the economic conditions.
Cultural and Social Norms
Cultural support is positively linked with the amount of entrepreneurial activity (GEM, 2004). In
economies where the entrepreneurial mindset is fuelled, the chances of getting start-up capital also increase.
This could mean that the society while fuelling entrepreneurship will avail the entrepreneurs with a variety
of option in which they can source funds.
Novelty Of Idea
There are increasing opportunities for new firms employing new technologies to displace less
efficient incumbents (GEM, 2004). Knowledge and Research are widely recognized as being the key to the
future. One can easily find funding for a new idea compared to one who is replicating the idea. In the
Philippines, the president’s office has set aside a special fund to promote innovative ideas, this will
automatically make it easier for entrepreneurs with new ideas to find start-up capital compared to those
who are replicating.
EVALUATING STARTING CAPITAL OPTIONS
The Risk / Return Trade-Off
This is the principle that potential return rises with

an increase in risk. Low levels of uncertainty (low risk) are
associated with low potential returns, whereas high levels
of uncertainty (high risk) are associated with high potential
returns. According to the risk-return trade-off, invested
money can render higher profits only if it is subject to the
possibility of being lost.
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Types of Risk
When most people think of "risk" they think of loss. However, there are many kinds of risk. They
include among others,
Capital Risk: Losing your invested money.
Inflationary Risk: Investment's rate of return doesn't keep pace with inflation rate.
Interest Rate Risk: A drop in an investment's interest rate.
Market Risk: Selling an investment at an unfavourable price.
Liquidity Risk: Limitations on the availability of funds for a specific period of time.
Legislative Risk: Changes in tax laws may make certain investments less advantageous.
Default Risk: The failure of the institution where an investment is made.
Because of the risk-return trade-off, you must be aware of your personal risk tolerance when
choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore,
if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance -
one that generates some profit, but still allows you to sleep at night. Risk comes in many forms, but when
talking about the risk-return trade off, the primary measure of risk is volatility, or the degree to which an
investment fluctuates in price. Different asset categories are subject to different levels of price fluctuation.
CAPITAL BUDGETING
Capital budgeting (or investment appraisal) is the planning process used to determine whether a
firm's long investment such as new machinery, replacement machinery, new plants, new products, and
research and development projects are worth pursuing.
Capital Budgeting Process:
This is the planning process used to determine whether a firm's long term investment such as new
machinery, replacement machinery, new plants, new products, and research and development projects are
worth pursuing. Many formal methods are used in capital budgeting such as: Return on Investment (ROI)
this is a measure of cash (or potential cash) generated by an investment, or the cash lost due to the
investment and the payback period.
Return on investment is a rate of profit or income
(realized or unrealized). The return is sometimes adjusted for
taxes consume a significant portion of profits or income.
Taxes are an expense which may or may not be considered
when calculating ROI. Similarly, a return may be adjusted for
inflation to better indicate its true value in purchasing power.
ROI is a measure of cash (or potential cash) generated

by an investment, or the cash lost due to the investment. It
measures the cash flow or income stream from the investment
to the investor. Cash flow to the investor can be in the form
of profit, interest, dividends, or capital gain/loss. Capital
gain/loss occurs when the market value or resale value of the
investment increases of decreases. Cash flow here does not
include the return of invested capital.
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ROI = PROFIT/INVESTMENT x 100
Example:
Cash Flow Example on Php 1,000,000 Investment
Year 1 Year 2 Year 3 Year 4
Peso 100,000 55,000 60,000 50,000
Return
ROI 10% 5.5% 6% 5%
Let’s Think About This
Determine how you can use bootstrapping approaches for your business idea. And discuss the pros and
cons of each money source.
Compare these two investments: Which one is the better investment? Which one earns a higher return on
investment? And which is the best investment option?
A. Jelmer invested Php1,000,000.00 investment to Elemenopi Company that earns Php 50,000.00 in
interest a year.
B. Jelmer invested Php 200,000.00 investment to KyuarestiCompany that earns Php 15,000.00 in
interesta year.
Let’s Try This
Provide an estimation of the investments you have to make to set-up your business. Before you
start your business you should have a clear picture of the money issues because money and profit is essential
for the success of your business. Review Action Working Sheet – Investment Plan: Determine the amount
of money you will need for your business. List the different sources and obligation in respect to the above
amount. In case one of your sources disappoints you, where else will you get the money and how much will
it be?

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MODULE 3

THE ENTREPRENEUR FINDING HIS RESOURCES

What Will You Learn?

Let us start this session by understanding this quotation A quote

This is when one decides to personally finance their

Family, Friends and others

A person whose business is lending money to others who pay interest.

This is the most difficult of the different sources since it requires a

A. From Financial Institutions

a. From Government Programs

THE 6 PRINCIPLES OF ACTION

Exploit Bootstrapping Possibilities!

Exploit bootstrapping possibilities. What probable sources do you know of?

Raise Funds From The Right Sources.

Make Progress While You Wait.

Be Sure That The Money Hatches Money.

Pay Yourself A Salary And Use The Profits For Re-Investment.

Finding start-up capital is a major challenge to any

EVALUATING STARTING CAPITAL OPTIONS

The Risk / Return Trade-Off

This is the principle that potential return rises with

Capital Risk: Losing your invested money.

Capital Budgeting Process:

ROI is a measure of cash (or potential cash) generated

ROI = PROFIT/INVESTMENT x 100

Cash Flow Example on Php 1,000,000 Investment

Year 1 Year 2 Year 3 Year 4

Peso 100,000 55,000 60,000 50,000

ROI 10% 5.5% 6% 5%

Let’s Try This

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