7. BUSINESS LIFE CYCLE AND FINANCE
Huge capital needed
when risk is the highest
and reputation the lowest
As business grows,
more capital needed
to finance operations
Demand for
innovation requires
more investment
8. ONLY FEW CONCEPTS
• Capital
• Long term – Production capacity, intellectual property
• Short term – working capital, trade financing
• Profitability
• Revenue – Pricing, discount
• Cost – Fixed, variable, sunk
• Cash flow
• The bloodline of business
• Cash flow does not equal to profitability
• Return to entrepreneurs
• Salary
• Dividend
• Equity value
• Need to distinguish between business and personal
9. CAPITAL
• Savings
• Family and friends
• Business partners
• Crowd funding
• Developmental agencies
• Customers
• Financial institutions
• Alongs
• Need to match funding arrangements with cash flow from business
• Long term investment with long term funding
• Working capital and trade needs with short term funding
10. PROFITABILITY
Sales 100,000 100%
If number of products sold is 5,000
Cost of sales
Unit price 20
Materials 20,000 Unit cost 9
Labour 10,000 Unit gross profit 11
Depreciation 10,000 Break even point 4,727
Royalty 5,000 Unit contribution margin 13
45,000 45%
Gross profit 55,000 55%
Less: Overhead
Salary 15,000
Rental 12,000
Depreciation 10,000
Establishment 15,000
52,000 52%
Profit 3,000 3%
To enhance profitability:
• Increase volume of sales
• Increase price
• Reduce cost
11. CASH FLOW
Opening trade receivables 20,000 Opening trade creditors 15,000
Sales 100,000 Purchases 20,000
120,000 35,000
Closing trade receivables (15,000) Closing trade creditors (5,000)
Cash collection 105,000 Cash payment 30,000
Cashflow:
Cash collection 105,000
Cash payment (30,000)
Salary (25,000)
Royalty (5,000)
Rental (12,000)
Establishment (15,000)
Capital loan* (25,000)
Net cash flow (7,000)
* Loan of RM 200,000 paid over 8 years for property, plant and equipment having economic life of 10 years
12. RETURN TO ENTREPRENEURS
If investment is 100,000
Return on equity 3%
Equity value (asume PE 8) 24,000
This is just a simple
computation of the value of
equity based on price to earning
approach.
More sophisticated approaches
are available but eventually
will be determined by willing
buyer willing seller basis
13. OBSERVATIONS
• Many entrepreneurs have skills in production, marketing and
operations but may not have financial management capabilities
• Basics financial management tools such as understanding unit
cost, profit margin, break even point and cash flow are
important
• Having an annual budget is useful but budget will become
obsolete very fast, the ability to project performance are
important to understand possible outcomes and responses
• Instead of spending on audit (historical performance) it would
be wiser to spend more on management accounting services to
understand key financial management indicators, manage risks
and make business more competitive