An Introduction to

Finance for
Entrepreneurs
 Movement of Savings
• Direct Transfer of Funds
 Movement of Savings
• Direct Transfer of Funds

saver
 Movement of Savings
• Direct Transfer of Funds

firm
saver
 Movement of Savings
• Direct Transfer of Funds
cash

firm
saver
 Movement of Savings
• Direct Transfer of Funds
cash

firm
saver

securities
 Movement of Savings
• Indirect Transfer using Investment
Banker
 Movement of Savings
• Indirect Transfer using Investment
Banker

investment
banker
 Movement of Savings
• Indirect Transfer using Investment
Banker

investment
banker firm
 Movement of Savings
• Indirect Transfer using Investment
Banker
funds

investment
banker firm
 Movement of Savings
• Indirect Transfer using Investment
Banker
funds

investment
banker firm

securities
 Movement of Savings
• Indirect Transfer using Investment
Banker
funds

saver

investment
banker firm

securities
 Movement of Savings
• Indirect Transfer using Investment
Banker
funds funds

saver

investment
banker firm

securities
 Movement of Savings
• Indirect Transfer using Investment
Banker
funds funds

saver

investment
banker firm

securities securities
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary

financial
intermediary
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary

financial
intermediary firm
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary
funds

financial
intermediary firm
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary
funds

financial
intermediary firm
firm
securities
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary
funds

saver financial
intermediary firm
firm
securities
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary
funds funds

saver financial
intermediary firm
firm
securities
 Movement of Savings
• Indirect Transfer using a Financial
Intermediary
funds funds

saver financial
intermediary firm
intermediary firm
securities securities
 Legal Forms of
Business
1) Sole Proprietorship
• A business owned by a single
individual.
• Owner maintains title to the firm’s
assets.
• Owner has unlimited liability.

2) Partnership
• Similar to a sole proprietorship,
 Legal Forms of
Business
2a) General Partnership
• All partners have unlimited liability.

2b) Limited Partnership

• Consists of one or more general
partners, who have unlimited liability,
and
• One or more limited partners
(investors) whose liability is limited
 Legal Forms of
Business
3) Corporation
• A business entity that legally
functions separate and apart from its
owners.
• Owners’ liability is limited to the
amount of their investment in the
firm.
• Owners hold common stock
certificates, and ownership can be
 Rising Capital in
The Financial Markets
The Corporation and
Financial Markets
 The Corporation and
Financial Markets

Corporation
 The Corporation and
Financial Markets

Corporation Investors
 The Corporation and
Financial Markets

Corporation Investors

Government
 The Corporation and
Financial Markets

Corporation cash Investors

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities

Secondary
markets

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities

Secondary
markets

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities

Secondary
markets

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities

Secondary
markets
Cash flow

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities

Secondary
markets
Cash flow

tax

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities
reinvest
Secondary
markets
Cash flow

tax

Government
 The Corporation and
Financial Markets

Corporation cash Investors

securities
reinvest
Secondary
markets
dividends,
Cash flow
etc.

tax

Government
 The Corporation and
Financial Markets
• Primary Market
 The Corporation and
Financial Markets
• Primary Market
– Market in which new issues of a
security are sold to initial
buyers.
 The Corporation and
Financial Markets
• Primary Market
– Market in which new issues of a
security are sold to initial
buyers.
• Secondary Market
 The Corporation and
Financial Markets
• Primary Market
– Market in which new issues of a
security are sold to initial
buyers.
• Secondary Market
– Market in which previously
issued securities are traded.
 The Corporation and
Financial Markets
• Initial Public Offering (IPO)
 The Corporation and
Financial Markets
• Initial Public Offering (IPO)
– The first time the firm’s stock is
sold to the general public.
 The Corporation and
Financial Markets
• Initial Public Offering (IPO)
– The first time the firm’s stock is
sold to the general public.
• Seasoned New Issue
 The Corporation and
Financial Markets
• Initial Public Offering (IPO)
– The first time the firm’s stock is
sold to the general public.
• Seasoned New Issue
– A new stock offering by a firm
that already has stock that is
traded in the secondary market.
Planning the Financing
Mix
How do we want
to finance our
firm’s assets?
Debt
Preferred
Equity
 Management
and Short-Term Financing
Sources of Short-term Credit

• Unsecured
–accrued wages and taxes
–trade credit
–bank credit
–commercial paper
Sources of Short-term Credit

• Unsecured
–accrued wages and taxes
–trade credit
–bank credit
–commercial paper
Sources of Short-term Credit
• Secured
–accounts receivable loans
–inventory loans
– Bills Discounting
–Factoring
Investment
s
Decision-making Criteria

How do we
decide if a
capital
investment
project should
be accepted or
rejected?
 Example:

Suppose your firm must decide

whether to purchase a new
plastic molding machine for
Rs.1,25,000. How do we decide?
• Will the machine be profitable?
• Will our firm earn a high rate of
return on the investment?
 Payback Period

• How long will it take for the

project to generate enough cash
to pay for itself?

(125) 25 25 25 25 25 25 25 25

0 1 2 3 4 5 6 7 8

Payback period = 4 years.

 Decision-making Criteria
in Capital Investments
• The Ideal Evaluation Method
should:
a) include all cash flows that
occur during the life of the
project,
b) consider the time value of
money,
c) incorporate the required rate
 Investment Decision

• Capital Budgeting: the process

of planning for purchases of
long-term assets.
Thank you