SOURCES OF FUNDS - ENTREPRE 2024 09.pptx

source of fund and how to earn more online

1. ENTREPRENEURIAL FINANCING PRESENTATION BY CPA VICENT LAURIAN [email protected] [phone]

2. WHAT IS FINANCING? Financing is the process of providing funds for business activities, making purchases, or investing. Financial institutions, such as banks, are in the business of providing capital to businesses, consumers, and investors to help them achieve their goals.

3. Financing is a way to leverage the time value of money (TVM) to put future expected money flows to use for projects started today. Financing also takes advantage of the fact that some individuals in an economy will have a surplus of money that they wish to put to work to generate returns, while others demand money to undertake investment (also with the hope of generating returns), creating a market for money.

4. Types of Financing Equity Financing " Equity " is another word for ownership in a company. For example, the owner of a grocery store chain needs to grow operations. Instead of debt, the owner would like to sell a 10% stake in the company for $100,000, valuing the firm at $1 million. Companies like to sell equity because the investor bears all the risk; if the business fails, the investor gets nothing.

5. At the same time, giving up equity is giving up some control. Equity investors want to have a say in how the company is operated, especially in difficult times, and are often entitled to votes based on the number of shares held. So, in exchange for ownership, an investor gives his money to a company and receives some claim on future earnings. Some investors are happy with growth in the form of share price appreciation ; they want the share price to go up. Other investors are looking for principal protection and income in the form of regular dividends .

6. Advantages of Equity Financing Funding your business through investors has several advantages, including the following: The biggest advantage is that you do not have to pay back the money. If your business enters  bankruptcy , your investor or investors are not  creditors . They are part-owners in your company, and because of that, their money is lost along with your company. You do not have to make monthly payments, so there is often more cash on hand for operating expenses. Investors understand that it takes time to build a business. You will get the money you need without the pressure of having to see your product or business thriving within a short amount of time.

7. Disadvantages of Equity Financing Similarly, there are a number of disadvantages that come with equity financing, including the following: How do you feel about having a new partner? When you raise equity financing, it involves giving up ownership of a portion of your company. The riskier the investment, the more of a stake the investor will want. You might have to give up 50% or more of your company, and unless you later construct a deal to buy the investor's stake, that partner will take 50% of your profits indefinitely. You will also have to consult with your investors before making decisions. Your company is no longer solely yours, and if the investor has more than 50% of your company, you have a boss to whom you have to answer.

8. Debt Financing Most people are familiar with debt as a form of financing because they have car loans or mortgages. Debt is also a common form of financing for new businesses. Debt financing must be repaid, and lenders want to be paid a rate of interest in exchange for the use of their money. Some lenders require collateral . For example, assume the owner of the grocery store also decides that they need a new truck and must take out a loan for $40,000. The truck can serve as collateral against the loan, and the grocery store owner agrees to pay 8% interest to the lender until the loan is paid off in five years. Debt is easier to obtain for small amounts of cash needed for specific assets, especially if the asset can be used as collateral. While debt must be paid back even in difficult times, the company retains ownership and control over business operations.

9. Advantages of Debt Financing There are several advantages to financing your business through debt: The lending institution has no control over how you run your company, and it has no ownership. Once you pay back the loan, your relationship with the lender ends. That is especially important as your business becomes more valuable. The interest you pay on debt financing is  tax deductible  as a business expense. The monthly payment, as well as the breakdown of the payments, is a known expense that can be accurately included in your forecasting models.

10. Disadvantages of Debt Financing Debt financing for your business does come with some downsides: Adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, including the debt payment. For small or early-stage companies, that is often far from certain. Small business lending can be slowed substantially during recessions. In tougher times for the economy, it's more difficult to receive debt financing unless you are overwhelmingly qualified.

11. SOURCES OF FINANCING Putting all your eggs in one basket is never a good business strategy. This is especially true when it comes to financing your new business. Not only will diversifying your sources of financing allow your start-up to better weather potential downturns, but it will also improve your chances of getting the appropriate financing to meet your specific needs. Keep in mind that bankers don't see themselves as your sole source of funds. And showing that you've sought or used various financing alternatives demonstrates to lenders that you're a proactive entrepreneur. Whether you opt for a bank loan, an angel investor, a government grant or a business incubator, each of these sources of financing has specific advantages and disadvantages as well as criteria they will use to evaluate your business.

12. Sources of Start-up Financing 1. Personal investment When starting a business, your first investor should be yourself—either with your own cash or with collateral on your assets. This proves to investors and bankers that you have a long-term commitment to your project and that you are ready to take risks.

13. 2. Love money This is money loaned by a spouse, parents, family or friends. Investors and bankers considers this as " patient capital ", which is money that will be repaid later as your business profits increase. When borrowing love money, you should be aware that: Family and friends rarely have much capital They may want to have equity in your business A business relationship with family or friends should never be taken lightly

14. 3. Venture capital Venture capital is a form of early-stage financing sought by companies with high-growth ambitions and significant capital requirements. It is provided by venture capital companies or institutional investors rather than by individuals. Venture capital is different from other early-stage investments like angel investing and “love money” (provided by family and friends) because it is less patient—or in other words, it has stricter payback terms.

15. 3. Venture Capital Contd ….. Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business.

16. 4. Angels Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge. Angels tend to finance the early stages of the business.

17. 4. Angels contnd …. In exchange for risking their money, they reserve the right to supervise the company's management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency. Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels.

18. 5. Business incubators Business incubators (or "accelerators") generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization and hosting and sharing services. .

19. 5. Business incubators contnd …. Generally, the incubation phase can last up to two years. Once the product is ready, the business usually leaves the incubator's premises to enter its industrial production phase and is on its own. Businesses that receive this kind of support often operate within state-of-the-art sectors such as biotechnology, information technology, multimedia, or industrial technology.

20. 6. Government grants and subsidies Government agencies provide financing such as grants and subsidies that may be available to your business. Criteria Getting grants can be tough. There may be strong competition and the criteria for awards are often stringent. Generally, most grants require you to match the funds you are being given and this amount varies greatly, depending on the granter. For example, a research grant may require you to find only 40% of the total cost.

21. Generally, you will need to provide: A detailed project description An explanation of the benefits of your project A detailed work plan with full costs Details of relevant experience and background on key managers Completed application forms when appropriate Most reviewers will assess your proposal based on the following criteria: Significance Approach Innovation Assessment of expertise Need for the grant

22. Some of the problem areas where candidates fail to get grants include: The research/work is not relevant Ineligible geographic location Applicants fail to communicate the relevance of their ideas The proposal does not provide a strong rationale The research plan is unfocused There is an unrealistic amount of work Funds are not matched

23. 7. Bank loans Bank loans are the most commonly used source of funding for small and medium-sized businesses. Consider the fact that all banks offer different advantages, whether it's personalized service or customized repayment. It's a good idea to shop around and find the bank that meets your specific needs. In general, you should know bankers are looking for companies with a sound track record and that have excellent credit. A good idea is not enough; it has to be backed up with a solid business plan. Start-up loans will also typically require a personal guarantee from the entrepreneurs.

24. FINANCIAL STATEMENTS A financial statement is a quantitative way of showing how a company is doing. Three different ways of representing the financial state of a company: Cash Management (can the company meet its obligations?) Profitability (Is it making money?) - the income statement Assets versus Liabilities (what is the value of the company? Who owns what?) - the balance sheet Each one of these questions is answered by our Financial Statements.

25. The Primary Financial Statements (The Big Four) Basic financial four statements are: Balance Sheet Currently known as “Statement of Financial Position) Income Statement Currently known as “Statement of Comprehensive Income” or “Financial Performance” Statement of Changes in Net Assets Also known as “Statement of Changes in Equity” Statement of Cash Flows

26. The above primary financial statements answer basic questions including: What is the company’s current financial status? What was the company’s operating results for the period? How did the company obtain and use cash during the period?

27. 1. Balance Sheet (Financial Position) Summary of the financial position of a company at a particular date. It is composed of: Assets : cash, accounts receivable, inventory, land, buildings, equipment and intangible items Liabilities : accounts payable, notes payable and mortgages payable Owners’ Equity : net assets after all obligations have been satisfied

28. Thus, by the use of the balance sheet we, are able to answer the questions: What are the resources of the company? What are the company’s existing obligations? What are the company’s net assets? This forms the Accounting Equation as illustrated in the figure:

29. Balance Sheet Limitations: Assets recorded at historical value (A historical cost/value is a measure of value used in accounting in which the value of an asset on the balance sheet is recorded at its original cost when acquired by the company) Only recognizes assets that can be expressed in monetary terms Owners’ equity is usually less than the company’s market value ACTIVITY Prepare a balance sheet using the given trial balance or notes to the financial statements

30. 2. Income Statement (Comprehensive Income/Financial Performance) Shows the results of a company’s operations over a period of time. What goods were sold or services performed that provided revenue for the company? What costs were incurred in normal operations to generate these revenues? What are the earnings or company profit? Thus, the Income Statement is composed of the following three: Revenues Assets (cash or AR) created through business operations Expenses Assets (cash or AP) consumed through business operations Net Income or (Net Loss) Revenues - Expenses

31. 3. Statement of Changes in Equity It shows the accumulated/ending retained earnings as illustrated in the following figure: An additional financial statement that identifies changes in retained earnings from one accounting period to the next. Beginning retained earnings + Net income – Dividends paid = Ending retained earnings N et income results in: Increase in net assets Increase in retained earnings Increase in owners’ equity Dividends result in: Decrease in net assets Decrease in retained earnings Decrease in owners’ equity

32. 4. Statement of Cash Flows Reports the amount of cash collected and paid out by a company in operating, investing and financing activities for a period of time. How did the company receive cash? How did the company use its cash? Complementary to the income statement. Indicates ability of a company to generate income in the future.

33. Cash inflows Sell goods or services Sell other assets or by borrowing Receive cash from investments by owners Cash outflows Pay operating expenses Expand operations, repay loans Pay owners a return on investment

34. Match Classification of Cash Flows Operating activities – Transactions and events that enter into the determination of net income. Investing activities – Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans. Financing activities – Transactions and events whereby resources obtained from, or repaid to, owners and creditors.

35. Operating Activities

36. Investing Activities

37. Financing Activities

38. CASH OUTFLOWS Operating Activities Financing Activities Investing Activities CASH INFLOWS Financing Activities Operating Activities Investing Activities Statement of Cash Flows

39. Statement of Cash Flows Analysis Operating Investing Financing General Explanation Building up pile of cash, Possibly looking for Acquisition Operating cash flow being Used to buy fixed assets And pay down debt Operating cash flow and sale of fixed assets being used to pay down debt. Operating cash flow and borrowed money being used to expand 1. 2. 3. 4. + + + + + ─ + ─ + ─ ─ +

40. 5. Notes to the Financial Statements Notes are used to convey information required by GAAP (Generally Accepted Accounting Principles) or to provide further explanation Four general types of notes : Summary of significant accounting policies: assumptions and estimates. Additional information about the summary totals. Disclosure of important information that is not recognized in the financial statements. Supplementary information required by the FASB or the SEC. FASB is an acronym for the Financial Accounting Standards Board , a private independent body established in 1973 that sets accounting standards. Its main function is to enhance GAAP organization and improve the existing accounting and reporting standards using an inclusive and transparent process. That way, companies are less likely to make false financial statements to swindle investors. The SEC ( Securities and Exchange Commission, based in US) is a government agency that protects investors and ensures fair and efficient capital markets. It ensures investment brokers, stock exchanges, and other market participants comply with US securities laws. It also regulates the disclosures of publicly held companies to help investors make informed decisions.

41. What Are The Fundamental Concepts and Assumptions? Separate Entity Concept Arm’s-Length Transactions Cost Principle Monetary Measurement Concept Going Concern Assumption

42. Entity ─ The organizational unit for which accounting records are maintained. Separate entity concept ─ The activities of an entity are to be separate from those of its individual owners. Proprietorship Partnership Corporation 1. Separate Entity Concept

43. The Cost Principle All transactions are recorded at historical cost . Historical cost is assumed to represent the fair market value of the item at the date of the transaction because it reflects the actual use of resources by independent parties.

44. The Monetary Measurement Concept Accountants measure only those economic activities that can be measured in monetary terms. Listed values may not be the same as actual market values: Inflation Measurement issues

45. The Going Concern Assumption An entity will have a continuing existence for the foreseeable future.

46. Why Use Accrual Accounting? GAAP – Generally Accepted Accounting Principles Business requires periodic, timely reporting Accrual-basis accounting better measures a firm’s performance than does cash flow data.

47. The Time Period Concept The life of a business is divided into distinct and relatively short time periods so the accounting information can be timely, generally 12 months or less.

48. Define Accrual Accounting A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid. Provides a more accurate picture of a company’s profitability. Statement users can make more informed judgments concerning the company’s earnings potential.

49. Revenue Recognition Revenues are recorded when two main criteria are met: Cash has either been collected or collection is reasonably assured. The earning process is substantially complete  

50. The Matching Principle All costs and expenses incurred in generating revenues must be recognized in the same reporting period as the related revenues. This process of matching expenses with recognized revenues determines the amount of net income reported on the income statement. costs and expenses related revenues

51. Cash-Basis Accounting Revenues and expenses are recognized only when cash is received or payments are made. Mainly used by small businesses. Not an accurate picture of true profitability.

52. During 2010, Crown Consulting billed its client for $48,000. On December 31, 2010, it had received $41,000, with the remaining $7,000 to be received in 2011. Total expenses during 2010 were $31,000 with $3,000 of these costs not yet paid at December 31. Determine net income under both methods. Cash-Basis Accounting Cash receipts $41,000 Cash disbursement 28,000 Income $13,000 Accrual-Basis Accounting Revenues earned $48,000 Expenses incurred $ 31,000 Income $17,000 Accrual vs. Cash-Basis Accounting

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