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small business is one “that is independently owned and operated, not dominant in the field, and does not engage in any new marketing or innovative practices.” An entrepreneurial venture is one …. [where] the principle goals…. are profitability and growth and the business is characterized by innovative strategic practices.
with fewer than 100 employees were responsible for over half of the new employment generated economy-wide during 1976-1982. The bulk of these jobs was generated by fewer than 15% of the firms in question.
.“For those who dare to dream the dreams. and then are foolish enough to try to make those dreams come true”.
Seed Stage (“pre-startup” or “R&D” stage) Startup Stage Early-Growth Stage Expansion Stage Rapid-Growth Stage Sustained-Growth Stage Bridge (Mezzanine) Stage .
Our Course Seed Stage Angel Investor Start-up Stage An Entrepreneurial Venture Expansion Stage Venture Capitalists Initial Public Offerings Valuation .
Failure in gathering and evaluating information on business before start-up.000 companies go under with loss to creditors. Poor accounting skills. Poor cash managers. Poor knowledge for sources of capital.000 terminations and 70. . 800. Failures because of: inadequate knowledge of business. How often does business fail? 900.000 enterprises opening in a typical year.
. Evaluating the Opportunities. Harvesting and Distributing Value. Developing the Business Concept Assessing Required Resources. Acquiring Necessary Resources. Managing the venture.
or integration? Will the profit stream be durable in the face of probable obstacles? Does the product or service meet a real need? . What are the dimensions of the “window of opportunity”? Is the profit potential adequate to provide satisfaction return? Does the opportunity open up additional options for expansion. diversification.
reachable. and open to change? Will suppliers control critical resources and capture rents for profits? Will buyers be so strong as to demand uneconomic concessions? . Can barriers to entry be created? Are customers identifiable.
and relationships does the entrepreneurial group already possess? Who are the likely suppliers of missing resources? What skills and resources must be a part of the internal organization? What amount of each resources or skill is required? What is unique about the proposed business concept? What quality trade-off can be made among the required skills and resources? What are the major requirements for regulatory compliance? What critical checkpoints will mark the lowering of risks? . resources.What skills.
What mechanisms for control of each critical skill or resources are available? What are the critical motivations of potential providers of required sources and skills? Can incentive be structured to meet these motivations? Will the opportunity produce a return adequate to meet resources providers’ needs and provide the entrepreneurial reward? .
Does the management concept include both the critical internal and external elements of the organization? How will employees be attracted and selected? How will the entrepreneurial role evolve? .
Is there a specific mechanism for harvesting? Has the venture been structured financially and legally to maximize the after-tax yield from harvest? What condition should trigger harvest? What conditions could preclude a harvest? How will responsibilities to other participants be fulfilled at harvest? .
Real Sector The Firm Financial Sector Corporate Investment Corporate Financing Decisions: Utilization of Funds Decisions: Acquisition of Funds Business Markets Financial Markets The Firm's Balance Sheet __________________________________________________________ Cash A/P A/R Other Current Inventory Liabilities _________________ _____________________ Products Total Current Assets Total Current Liabilities Customers Competitors Savers/ Employees Investors Tangible Assets Technology Fixed Assets: Plant & Equipment Capital: Debt Preferred Stock Common Equity --Retained Earnings --Common Stock _____________________ Total Liabilities & Equity ________________ Total Assets .
Financial . Management is defined as the planning for. Managers make investment decisions that generate earnings so that investors get a return on investment. acquiring. and utilization of funds in a manner that maximizes the firm’s economic efficiency. Financing (sources of funds) must equal the investment in assets (use of funds).
Capital $$ Firm’s Income Statement Revenue -Expenses -Taxes Net Income Retained Earnings? Dividends? Securities $$ Financial Sector Savers/Investors: -Individuals -Corporations -Partnerships -Banks Return on Investment . Transactions Firm’s Balance Sheet Assets Liab.The Corporate Finance View of the World: Commercial Sector -Customers -Products -Technology -Competitors Bus.
Limited liability in the corporation: investors can lose only the total amount they invested in the common stock. . The corporation has advantages over the other forms or organization: Unlimited lives that extend beyond the lives of the founders or original managers. Simple transferability of ownership: investors and managers are two separate groups. so investors can buy or sell the common stock without disrupting corporate operations.
the stock market can monitor these firms better than it can the other forms of organization. . Because of the requirements to disclose information that publicly-traded corporations face. The stock market monitors the publicly-traded corporation’s performance: Stock price changes signal whether managerial decisions are good (stock price goes up) are bad (stock price goes down).
In response. the firm can: Change strategies. Declare bankruptcy. . The stock market disciplines the firm by causing the stock price to decline. The Board of Directors can replace the managers ( this is called internal governance). The firm can be merged/taken over (this is called the market for corporate control).
Shareholders commit part of their wealth to the firm when they buy the firm’s common stock. To maximize the stock price of the firm. In the Theory of Finance. the appropriate goal of the firm is to maximize the value of shareholder wealth. Equivalent ways of stating this goal are: To maximize the market value of the firm. .
moral hazard: asymmetric information. Investors Investor monitor the firm. and the firm incurs monitoring costs. Are bank loan officers' salaries a monitoring cost? . Observability. annual reports. If managers’ actions cannot be observed directly. then periodic disclosure must be made: Disclosure: information sets become more symmetric. SEC and other regulatory reports consume resources. & Investors cannot observe everything managers do. relations staffs. Managers have more information about the firm.
stock options or stock purchase programs (like at 85% of the market price) transform managers into owner/managers. Agency problems can be solved if the interests of managers and investors are aligned. This entails bonding costs. The bonding cost is the loss of wealth suffered by other shareholders when the stock is sold “cheap. managers would behave in the shareholders' best interests. For example. But managers are buying into the firm at below-market prices. if both managers and investors have the same incentives.” . Agency theory suggests if managers are bonded to the firm.
live in an imperfect world. Bank loans also contain restrictions. Financial For contracting solutions are often used. . example. bond indenture contracts often contain restrictive covenants that limit the behavior of managers. like no new mortgages on the assets. These We costs cause shareholder wealth to be less than if managers didn't pose a moral hazard. or a minimum current ratio requirement. like limitations on paying dividends. A perfect world of symmetric information no moral hazards is not attainable. the amount of additional borrowing.
but that is different: stock can be retired but it does not mature. and common stocks have legal ties to the firm via the firm's charter. and borrowings must be repaid. Stocks can be repurchased by the firm. or ownership. interest in the firm. Bonds are loan contracts. Stocks are variable income securities that have infinite lives. pay a set amount of interest each period. . Dividends are not guaranteed and stock never matures—as long as the firm is alive.A closer look at financial contracting. Stocks represent an equity. Bonds are fixed income securities that have finite lives: bonds have a fixed maturity date.
taking risk is a good thing since it creates new wealth (new products. In the Theory of Finance. there should be rewards for bearing risk. new technologies.A basic principle of Finance: more risk should be rewarded with a higher return.) Thus. . etc.
and other Derivatives . Options.Expected Return Risk-free Rate: kf Risk premium Time value of money ______________________________________________________________Risk Treasury Bonds Corporate Bonds Common Stock New Ventures. Futures.
Startup. Economics’ Stage Definitions: Early Stage A relatively small amount of capital provided to prove a concept. First Stage. . Financing for product development and initial marketing. no product sales. Financing for initial commercial manufacturing and sales. management team assembled. maybe involving product development but not initial marketing. business plan written. Venture Seed. market research done.
. Third Stage. Expansion Second Stage. and working capital. Management/Leveraged Turnaround later-stage Buyout (MBO/LBO) and companies: buying out existing firms or financing firms with operational or financial difficulties. often repaid from IPO proceeds. likely to have no profits. Financing for plant expansion. marketing. Bridge Stage. Financing for firm expected to go public in 6-12 months. Working capital financing provided.
• Willing to take risks. • Differ from managers through their overriding responsibility to sue the resources of the organization to accomplish their goals. . • Differ from many small-business owners in their strong desire to make their business grow.WHAT IS AN ENTREPRENEUR? Entrepreneur Person who seeks a profitable opportunity and takes the necessary risks to set up and operate a business.
CATEGORIES OF ENTREPRENEURS .
Americans start approximately 550. • Motivated by dissatisfaction with organizational work world. • In an average month.REASONS TO CHOOSE ENTREPRENEURSHIP AS A CAREER PATH • More than 11 percent of Americans run their own business. . • May believe their ideas are opportunities to meet customer needs.000 new businesses.
Being Your Own Boss
• Example: Liz Lange, founder and CEO of Liz Lange Maternity. • Had idea for upscale maternity wear. • Borrowed $50,000 and opened an office to sell her designs. • Now has annual sales exceeding $10 million.
• Two-thirds of all millionaires are self-employed. • Path to riches is uncertain due to high failure rate.
• Over last decade, large companies have downsized, eliminating more jobs than they created. • Key difference from traditional job is that an entrepreneur’s job depends on the decisions of customers and investors and cooperation of one’s own employees.
Quality of Life
Lifestyle Entrepreneur Person who starts a business to reduce work hours and create a more relaxed lifestyle. • Yet, most entrepreneurs work long hours and at the whims of their customers. • Many define quality of life by their ability to fulfill social objectives.
THE ENVIRONMENT FOR ENTREPRENEURS
• Market products abroad and hire international talent. • Growing internationally.
• Universities are helping students launch businesses. • Students who graduate from entrepreneurship programs are three times as likely as others to be self-employed and to help start new businesses. .Education • One hundred U. colleges and universities offer entrepreneurship majors. • Some programs teach entrepreneurship to young people. 73 offer an emphasis in entrepreneurship.S. hundreds of others offer courses.
provide attentive customer service. and project professional images. Demographic and Economic Trends • New opportunities: • Aging of U.S.Information Technology • Helps entrepreneurs work quickly and efficiently. • Emergence of Hispanics as nation’s largest ethnic group. . population. • Entrepreneurs also produce and market products that apply new information technology. • Growth of two-income families. • Internet also presents a challenge because customers can check prices and buy online from large or small companies anywhere in the world. increase sales.
CHARACTERISTICS OF ENTREPRENEURS .
. High Energy Level • Hard work of the entrepreneur compensates for small staff and limited resources available.Vision • An overall idea for how to make their business a success. Need to achieve • Enjoy the challenge of reaching personal goals and are dedicated to personal success.
. Creativity • Typically conceive new ideas for products and services and devise innovative ways to overcome difficult problems and situations. Tolerance for Failure • Try and try again when others would give up and view setbacks and failures as learning experiences.Self-confidence and Optimism • Believe in their own ability to succeed and instill optimism in others.
Internal Locus of Control • Believe they control their own fates and take personal responsibility for success and failure. .Tolerance for Ambiguity • Take uncertainty in stride but not reckless gamblers.
• Identify future needs for products that no one yet offers. • Conduct marketing research to determine potential profitability. • List the types of businesses that match your interests and abilities.STARTING A NEW VENTURE Selecting a Business Idea • Two most important considerations: • Finding something you love to do and are good at. . • Choose a business that offers profit potential. • Learn as much as you can about the appropriate industry. • Evaluate existing goods and services and ways you can improve them. • Guidelines for selecting an idea that is a good entrepreneurial opportunity: • List your interests and abilities. • Determining whether your idea can satisfy a need in the marketplace.
• Some buy successful businesses to build on their success. • Necessary permits and licenses secured. Buying a Franchise • Less risky than starting a new firm. • May be easier to get financing. but requires careful and energetic preparation.Buying an Existing Business • Advantages: • Employees already in place serve established customers and deal with familiar suppliers. . • Good or service is known in the marketplace. • Turnaround entrepreneurs buy struggling businesses and improve them to generate profits.
Creating a Business Plan • Forty-seven percent of the most recent Inc. • Still advisable because it helps an entrepreneur prepare enough resources and stay focused on key objectives.com • Kaufman eVenturing • MoreBusiness. 500 CEOs did not create a formal written plan. • AllBusiness.com .
• Isabella Capital and Springboard Enterprises focus on women. Angel investors Wealthy individuals who invest directly in a new venture in exchange for an equity stake. Hispanic Chamber of Commerce aids minority-owned businesses.S. • Angel networks match business angels with entrepreneurs. • U. • May benefit entrepreneur with a good idea and skills but little or no money.Equity Financing Equity financing Funds invested in new ventures in exchange for part ownership. Venture capitalists Business firms or groups of individuals that invest in new and growing firms in exchange for an ownership share. .
• Example: 3M • Researchers spend 15 percent of their time working on their own ideas without approval from management. • Helps firms retain valuable employees.INTRAPRENEURSHIP Intrapreneurship Process of promoting innovation within the structure of an existing organization. • Pacing programs are company-initiated projects that focus on a few products and technologies in which company sees potential for rapid marketplace winners. • A skunkworks project is initiated by an employee who conceives an idea and then recruits resources from within to turn it into a commercial product. .
Development of Fund Concept Secure Commitments from Investors Year 0 Screen Business Plans Generate Deal Flow Closing of Fund First Capital Call Evaluate and Conduct Due Diligence Negotiate Deals and Staging Additional Capital Calls Invest Funds 2-3 years 4-5 years Value Creation and Monitoring – Board service – Assist with external relationships – Performance evaluation and review – Help arrange additional financing – Recruitment management 2-3 years or more Harvesting Investment – IPO – Acquisition – LBO – Liquidation Distributing Proceeds – Cash – Public Shares – Other 7-10 years plus extensions .
Working Capital Management .
. accounts receivable and payable and cash. Current assets – Current liabilities It measures how much in liquid assets a company has available to build its business. The management of working capital involves managing inventories. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. A short term loan which provides money to buy earning assets. Allows to avail of unexpected opportunities.
.An increase in working capital indicates that the business has either increased current assets (that is received cash. or other current assets) or has decreased current liabilities. for example has paid off some short-term creditors.
Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. If current assets are less than current liabilities. also called a working capital deficit. Management of Working capital refers to management of CA as well as CL. . an entity has a working capital deficiency. Short term financial management concerned with decisions regarding to CA and CL.
When trying to attain greater efficiency. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. it is important not to focus exclusively on income and expense items. whose improvement can free up valuable financial resources . but to also take into account the capital structure. Businesses face ever increasing pressure on costs and financing requirements as a result of intensified competition on globalized markets.
Active working capital management is an extremely effective way to increase enterprise value. . Process optimization then helps increase profitability. Optimizing working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs. thereby increasing liquidity for strategic investment and debt reduction.
inventories. and payables.The fundamental principles of working capital management are reducing the capital employed and improving efficiency in the areas of receivables. .
. Investment in CA and level of CL have to be geared quickly to changes in sales. Investment in CA represents a substantial portion of total investment.
Gross Working Capital Net working Capital .
. Referred as “Economics Concept” since assets are employed to derive a rate of return. debtors etc.Total Current assets Where Current assets are the assets that can be converted into cash within an accounting year & include cash .
CA – CL Referred as ‘point of view of an Accountant’. . It indicates liquidity position of a firm & suggests the extent to which working capital needs may be financed by permanent sources of funds.
CURRENT ASSETS Inventory Sundry Debtors Cash and Bank Balances Loans and advances CURRENT LIABILITIES Sundry creditors Short term loans Provisions .
This is referred to as “Operating or Cash Cycle” . thus there is a need for working capital in the form of CA so as to deal with the problem arising from lack of immediate realization of cash against goods sold. to inventory . to accounts receivable & back into cash “. As profits earned depend upon magnitude of sales and they do not convert into cash instantly. . It is defined as “The continuing flow from cash to suppliers.
Thus operating cycle creates the need for working capital & its length in terms of time span required to complete the cycle is the major determinant of the firm’s working capital needs. Thus needs for working capital arises from cash or operating cycle of a firm. . Which refers to length of time required to complete the sequence of events.
1. 2. 3. Conversion of cash into inventory Conversion of inventory into Receivables Conversion of Receivables into Cash .
Phase 3 Cash Receivables Phase 2 Inventory Phase 1 .
PERMANENT WORKING CAPITAL VARIABLE WORKING CAPITAL .
THE MINIMUM LEVEL OF INVESTMENT IN CURRENT ASSETS THAT IS REQUIRED TO CONTINUE THE BUSINESS WITHOUT INTERRUPTION IS REFERRED AS PERMANENT WORKING CAPITAL. . THERE IS ALWAYS A MINIMUM LEVEL OF CA WHICH IS CONTINOUSLY REQUIRED BY A FIRM TO CARRY ON ITS BUSINESS OPERATIONS.
THIS IS THE AMOUNT OF INVESTMENT REQUIRED TO TAKE CARE OF FLUCTUATIONS IN BUSINESS ACTIVITY OR NEEDED TO MEET FLUCTUATIONS IN DEMAND CONSEQUENT UPON CHANGES IN PRODUCTION & SALES AS A RESULT OF SEASONAL CHANGES. .
in order to attain a set of objectives oriented towards the growth and stability of the economy. lending by commercial banks etc. Monetary policy is the process by which the govt. or monetary authority of a country controls (i) the supply of money.. and (iii) cost of money or rate of interest. central bank. (ii) availability of money. and (iii) cost of money or rate of interest. Monetary policy involves variations in money supply . or monetary authority of a country controls (i) the supply of money.central bank. in order to attain a set of objectives oriented towards the growth and stability of the economy. (ii) availability of money. Monetary policy is the process by which the government. interest rates .Monetary theory provides insight into how to craft optimal monetary policy. .
Clear. written guidelines that set (1) the terms and conditions for supplying goods on credit . Also called collection policy. and (4) steps to be taken in case of customer delinquency . and pay for them at a later date.Credit gives the customer the opportunity to buy goods and services. Thus in consumer installment loans. Where delinquency means Failure to repay an obligation when due or as agreed. (2) customer qualification criteria (3) procedure for making collections . missing two successive payments will normally make the account delinquent .
. Usually results in more customers than cash trade. Gain goodwill and loyalty of customers. and pay for them only after the harvest. Stimulates agricultural and industrial production and commerce. Farmers can buy seeds and implements. People can buy goods and pay for them at a later date. Can charge more for goods to cover the risk of bad debt. Can be used as a promotional tool. Increase the sales.
Risk of bad debt. Risk of Bankruptcy. People can buy more than they can afford. . High administration expenses. More working capital needed.
Money Supply Bank Rate Reserve Ratios Interest Rates Selective Credit Controls Flow of Credit .
Money supply = Notes and coins with public + Demand deposits with Commercial papers . This is the sum total of money public funds and can be used for settling transactions to buy and sell things and make other payments constitutes the money supply of a nation.
This leads to a general tightening in economy. . Whereas decrease in bank rate has the opposite effect and leads to general easing of credit in the economy.1934. An increase in bank rate makes it more expensive for commercial banks to borrow . Standard rate at which bank is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under Reserve bank of India Act. The rate of interest charged by central bank on their loans to commercial banks is called bank rate(Discount rate). This exerts pressure to bring about the rise in interest rates (lending rates) charged by commercial banks on their lending to public.
they prefer to use open market operations to implement their monetary policy . The reserve ratio is sometimes used as a tool in the monetary policy. borrowing. These reserves are designed to satisfy withdrawal demands. and interest rates .Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves. and would normally be in the form of fiat currency stored in a bank vault(vault cash). The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. influencing the country's economy. or with a central bank.
These are of 2 types:Cash reserves Liquidity reserves . 2. 1. Thus central bank makes it legally obligatory for commercial banks to keep a certain minimum percentage of deposits in reserve.
. CASH RESERVE RATIO THIS IS DEFINED AS A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio.
. Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in India. It is the amount which a bank has to maintain in the form: Cash Gold valued at a price not exceeding the current market price. Unencumbered approved securities (G Secs or Gilts come under this) valued at a price as specified by the RBI from time to time.
Presently the SLR is 24% with effect from 8 November. the liabilities of the bank which are payable on demand anytime. .e. The maximum and minimum limits for the SLR are 40% and 25% respectively. the floor rate of 25% for SLR was removed. This percentage is fixed by the Reserve Bank of India. To ensure solvency of banks. The objectives of SLR are: To restrict the expansion of bank credit. 2008. and those liabilities which are accruing in one months time due to maturity) of a bank. To augment the investment of the banks in Government securities. Following the amendment of the Banking regulation Act(1949) in January 2007. A reduction of SLR rates looks eminent to support the credit growth in India. The quantum is specified as some percentage of the total demand and time liabilities ( i.
concessive or ceiling rates of interest are made applicable to advances for certain purposes ao to certain sectors to reduce the interest burden and thus facilitate their development. Also. Further obj. rates of interest for extending credit against commodities covetred under selective credit control.This is generally done by stipulating min. behind fixing rates on deposits are to avoid unhealthy competition amongst the banks for deposits and keep the level of deposit rates in alignment with lending rates of banks for deposits. .
These are Qualitative instruments which are aimed at affecting changes in the availability of credit with respect to particular sectors of the economy. . Thus selective controls are called selective because they are aimed at movement of credit towards selective sectors of the economy.
The general instruments such as Reserve ratios. They are called so because they influence the nation’s money supply and general availability of credit. Quantitative instruments are called quantitative because they affect the total volume(quantity) of money supply and credit in the country. Bank rate and open market operations. .
. The most widely used qualitative techniques are selective control and moral suasion. selective credit controls relate to tools available with the monetary authority for regulating the distrubution or direction of bank resources to particular sectors of economyin accordance with broad national priorities considered necessary for achieving the set. While the general credit controls operate on the cost and total volume of credit .
Industry norm approach Economic modeling approach Strategic choice approach .
LIKE IF MAJORITY OF FIRMS HAVE BEEN GRANTING 3 MONTHS CREDIT TO A CUSTOMER THEN OTHERS WILL HAVE TO ALSO FOLLOW THE MAJORITY DUE TO FEAR OF LOSING CUSTOMERS. THIS APPROACH IS BASED ON THE PREMISE THAT EVERY COMPANY IS GUIDED BY THE INDUSTRY PRACTICE. .
THIS APPROACH RECOGNISES THE VARIATIONS IN BUSINESS PRACTICE AND ADVOCATES USE OF STRATEGYIN TAKING WORKING CAPITAL DECISIONS. THE PURPOSE BEHIND THIS APPROACH IS TO PREPARE THE UNIT TO FACE CHALLENGES OF COMPETITION & TAKE A STRATEGIC POSITION IN THE MARKET PLACE. .
. THE EMPHASIS IS ON STRATEGIC BEHAVIOUR OF BUSINESS UNIT.THUS THE FIRM IS INDEPENDENT IN CHOOSING ITS OWN COURSE OF ACTION WHICH IS NOT GUIDED BY THE RULES OF INDUSTRY.
General nature of business Production cycle Business cycle Credit policy Production policy Growth and expansion Profit level Operating efficiency .