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Embed code for: Understanding Ent Finance - By Dr. AmitSrivastava
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Understanding Entrepreneurial Finance
Dr. Amit Srivastava
Startup Protothon, JUIT, May 16, 2017
An entrepreneur is an individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value.
Whether entrepreneurial efforts succeed or fail, an entrepreneur’s mission is to find economic opportunities, convert them into valuable products and services, and have their worth recognized in the marketplace.
Entrepreneurship is the process of changing ideas into commercial opportunities and creating value.
The word “Entrepreneur” first used by Richard Cantillon in his book – “E ssai sur la Nature du Commerce au General ( Essay on the Nature of Commerce)”, published in 1755.
He combined two Latin words – “ entre” means to swim out and “ prendes ” means to grasp, understand or capture .
He defined is as a “risk taker”.
Later on, in 1800, a French Economist Jean- Baptiste Say, used the word.
Jean-Baptiste Say in his Treatise on Political Economy defined the entrepreneur as someone who “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.”
Sources of Entrepreneurial Opportunities
Societal trends or changes
Demographic trends or changes
Technological trends or changes
Crises and “bubbles”
Few Important Finance Terminologies
These are the economic resources a business has, including the products it has in inventory, the office furniture and supplies purchased for use, and any trademarks or copyrights it owns.
These assets count toward the value of a business, since they could be sold if the business experienced difficult times.
This includes any debt accrued by a business in the course of starting, growing and maintaining its operations, including bank loans, credit card debts, and monies owed to vendors and product manufacturers.
Liabilities can be divided into two major types: current, which refers to immediate debts (e.g. money owed to suppliers), and long-term debt, which refers to liabilities (e.g. loans and accounts payable).
Business expenses are the costs the company incurs each month in order to operate, including rent, utilities, legal costs, employee salaries, contractor pay, and marketing and advertising costs.
To remain financially solid, businesses are often encouraged to keep expenses as low as possible.
4. Cash Flow
Cash flow is the overall movement of funds through your business each month, including income and expenses.
Businesses track general cash flow to determine long-term solvency.
A business’ cash flow can be determined by comparing its available cash balance at the beginning and end of a specified period.
5. Bottom Line
This is the total amount a business has earned or lost at the end of the month.
The term can also be used in the context of a business’ earnings either increasing or decreasing.
6. Financial Report
A financial report is a comprehensive account of a business’ transactions and expenses, created to give a business oversight of its financial matters.
A financial report may be prepared for internal use or external sources, such as potential investors.
7. Financial Statement
Similar to a financial report, a financial statement lists all of a business’s financial activities.
However, a financial statement is generally a more formal document, often issued by a lending institution.
8. Cash Flow Statement
A cash flow statement shows the money that entered and exited a business during a specific period of time.
It generally covers four main categories: operating activities, investing activities, financing activities and supplemental information.
9. Income Statement
Also known as a “profit and loss statement,” an income statement shows the profitability of a business during a period of time.
The income statement looks at a business’ revenues and expenses through all of its activities.
10. Balance Sheet
A business’ balance sheet gives a snapshot of the company’s financial situation at a given moment.
This includes the cash it has on hand, the notes payable it has outstanding and owner(s) equity in the business.
11. Profit and Loss
To remain financially healthy, a business must have a regular profit that exceeds its losses.
Profits and losses are usually itemized on a profit and loss statement, also known as the income statement defined above.
In business finance terms, the money a business has in its accounts, assets and investments is known as capital.
In business, there are two major types of capital: debt and equity.
13. Accounts Receivable
Accounts receivable (A/R) is the amount a business is owed by its clients.
Usually the client is notified by invoice of the amount owed, and if not paid, the debt is legally enforceable.
On a business’ balance sheet, accounts receivable is often logged as an asset.
Over time, a business’ assets decrease in value due to the time that has passed since it was purchased.
It is a non-cash expenditure, so, actually the amount is available with the company.
When a business seeks funding from investors, those investors want to know the overall worth of that business.
This is accomplished through a valuation, which is an estimate of the overall worth of the business.
There are different ways of valuing a business.
16. Return on Investment (ROI)
The entrepreneur has committed capital investment into a certain combination of assets, from which the company generates sales.
Those sales cover the costs of operations and hopefully produce a profit.
That profit, divided by the total funds invested in the company (the assets), equals the ROI to the entrepreneur.
17. Internal Rate of Return(IRR)
Unlike the simple division used to find the ROI, the IRR compares the net expected returns over the useful life of a project being reviewed by management to the funds spent on that decision (or project).
All projects must meet a certain IRR in order to be acceptable for investment by the company.
If a project cannot meet a minimum IRR, then don't invest in it.
18. Working Capital
Money required for managing day-to-day operations.
Current assets are those short-term funds represented by cash in the bank, funds parked in near-term instruments earning interest, funds tied up in inventory, and all those accounts receivable waiting to be collected.
Subtracting the company's current liabilities from these current assets shows how much working capital (your firm's truest measure of liquidity) is on hand and its ability to pay for decisions in the short-term.
19. Systematic risk
Some risks facing the company are not unique to that business in that market, but are faced by all firms operating in the broader, general marketplace.
These so-called "systematic" risks can not be avoided.
20. Non-Systematic risk
The risks that are entirely unique to your company, products, buyers, promotional programs, billing, pricing, IT system and so on are nonsystematic risks specific to your firm.
Although there's little you can do to avoid or mitigate exposure to systematic risk, it is possible to use various diversification strategies to offset risks that are unique to your business.
21. Break-Even Point
This is the point in the annual output where the number of units sold produces enough profit to cover all the costs of operations.
Types of Financing
Four main types:
Debt (mainly from banks)
Types of Financing – Risk Profile
Startup Protothon, JUIT, May 16, 2017, May 16, 2017
Subtracting the company's current liabilities from these current assets shows how much working capital (your firm's truest measure of liquidity) is on