Entrepreneurship Series

Finance

Finance Concepts

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

Finance Concepts

Debt The business borrows the money

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

Finance Concepts

Equity The business gives up a percentage

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

Debt vs. Equity

The equity investor could make an investment back many times over if the business prospers.

The debt investors get only a contracted rate of interest or return.

The equity investor cannot force the business into bankruptcy to get back the original investment. If a business is forced into bankruptcy, debt investors get paid off first from the sale of business assets. Equity investors have claim on what ever is left over has been paid.

If the loan repayment is not made, the lender can force the business into bankruptcy that is force the business to shut down to get loan back, even if that loan is only a fraction of what the entire business is worth.

The equity investor assumes greater risk than the debt lender.

The payments are predictable.

The equity holder has a say in the direction of the business.

Lender has no say in the future or direction of the as long as the loan payments are made.

Equity means that in return for money, the investor receives a percentage of ownership in the company.

To finance through debt, the Entrepreneur goes to a person or to an institution that has money, and borrows it, signing an agreement to repay the sum with interest.

EquityDebt

Simple Accounting

Whatever be the nature of enterprise, some method of accounting is recommended.

This helps to keep control over the cash that flows in and out of the business.

A simple method of accounts is the Receipts & Payments Account.

Simple Accounting

Receipts – Money coming in Payments – Money going out Balance – Difference between

money coming in and money going out (how money you have)

Receipts & Payment Exercise

Payments (Rs.) Receipts (Rs.) Balance (Rs.)1-Jan Own Funds 1000 10005-Jan Loan from bank 4000 50007-Jan Cooking Equipments 2000 30008-Jan Furniture Purchase

10-Jan Raw materials 15-Jan Sales 16-Jan Sales 17-Jan Sales 18-Jan Party order Sales 20-Jan Purchased gas 22-Jan Sales 24-Jan Sales 26-Jan Holiday for Republic Day 27-Jan Sales 28-Jan Sales 29-Jan Electric bill 30-Jan Wages 31-Jan Repaid to bank

Cash & BankDate Details

Receipts & Payment Exercise

Receipt Rs. Payments Rs.

To Opening Balance 0 By Cooking Equipment 2000

To Own Capital 1000 By Furniture Purchase 1000

To Sales 7050 By Raw Material 1500

To Recived Loan from Bank 4000 By Purchased Gas 350

By Electric Bill 750

By Wages 2000

By Repaid to Bank Loan 1000

By Closing Balance as on 31 Jan 3450

TOTAL 12050 TOTAL 12050

The Balance Sheet

Assets – All items of worth owned by a business, such as cash, inventory, furniture

1. Current Assets – Can be sold within one year

2. Fixed assets (long-term) – Mostly permanent. Examples are buildings, machines, factories, etc.

The Balance Sheet

Liabilities – All debts owed by the business such as bank loans and loans from family and friends.

1. Current liabilities - Those that must be paid in a fairly short period, usually within a year.

2. Long-term liabilities - Those that are to be paid over a period longer than one year.

The Balance Sheet

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

The Magic Formula

Assets – Liabilities = Owner’s Equity

OR

Assets = Liabilities + Owner’s Equity

The Balance Sheet

Example Balance Sheet LIABILITIES ASSETS

[1] Owner’s Equity Rs. [4] Fixed Assets Rs. Own Capital Plant & Machinery Profit Building

Subtotal Owner’s Equity Subtotal Fixed Assets [5] Current Assets [2] Long-term Liabilities Debtors

Bank loan Cash & Bank Subtotal Current Assets [3] Current Liabilities

Creditors Subtotal Debt = [2] + [3] Total Liabilities = [1] + [2] + [3] Total Assets = [4] + [5]

Profit & Loss Statement

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

Sales is how much money the enterprise receives for selling its products or services.

Costs are what you pay for producing the product.

Profit is what money you make after all costs/expenditures are subtracted from sales.

Profit & Loss ExerciseProfit & Loss Account

Period of 1 Jan - 31 Jan

EXPENDITURE INCOME

Debit Description Rs. Credit Description Rs.

To Opening Balance of Stock

0 By Sales

To Purchases

To Electric Bill

To Wages

To Gas

SUBTOTAL COSTS

Profit for January = Sales – Costs

TOTAL= Costs + Profit

TOTAL