1. BOOK 2, CREATING THE ENTEPRRISE
• Financing
• Managing Costs and Profits
• Managing Risks
2. CHAPTER 5: FINANCING
The learning objectives are as follows:
1. Determine the situations that need financing
2. Identify the different sources of financing and weigh the
advantages and disadvantages of each
3. Analyze financing alternatives
3. Seed Capital Stage
There are various stages of financing that the new enterprise may have to
go through. At the inception stage, the entrepreneur may need to
conceptualize, design and develop a new product or service. The
entrepreneur may need to show proof that the business idea will work. To
do this, the entrepreneur may need to write a business plan. The
entrepreneur may need to hire a few people or outsource the production
of the product or the rendering of the service. Finally, the entrepreneur
may need to pilot test this product to show that it will actually work in the
marketplace. At this stage, Seed Capital is needed. The seed capital can
come from the pockets of the entrepreneur or from well-meaning friends
and loving family members.
4. Start-Up Financing Stage
After the business idea has been proven and the business plan prepared,
the entrepreneur may need to formally organize the venture or the
enterprise. Investors, other than family or friends, may have to be invited
especially after the prototype has been tested and good market results
obtained. At this stage, we need Start-up Financing. It may come from
investors other than family and friends. Loans may come from banks,
lending institutions and the equity may come from angel investors or
other financiers.
5. Commercial Financing Stage
As the enterprise proves its viability, the
entrepreneur may be emboldened to grow and
expand. At this point, the entrepreneur may need
larger financing. Larger financing from the banks
and lending investors or larger financing from the
original equity investors. And still, if more funds are
needed, the enterprise may float additional
common shares in an initial public offering. This
initial public offering will raise the equity shares of
the company at the commercial financing stage. To
get a better grip on the financing needs of an
enterprise, the entrepreneur may need to do a
detailed cash flow showing the amounts and timing
of cash inflows and cash outflows over the weeks,
months, quarters and years. It is wise for the
entrepreneur to be conservative in doing these
6. Source of Financing
Business start-ups need equity funds from the
owners of the business. If a start-up business is
to be incorporated, the law demands that the
business states its authorized capital stock.
In a small business start-up, the equity
financing usually comes from individuals, family
members and friends. Larger businesses may
need to tap a much larger group of investors.
In seeking the financial assistance of family and
friends, it is wise to approach them as if they
were outside investors who would want to
learn much about the business. Transparency
sets the tone for the running of the business,
which may experience its ups and downs.
7. Analyzing Financing Alternatives
In assessing whether a particular investment
opportunity is better than another, we should exclude
financing costs from the analysis. Financing
complicates the analysis because they would create
different cash flows and different income statements,
as occasioned by the principal or interest payments or
payment of dividends. Thus, when comparing
investments, it would be prudent to actually assume
that they are all financed by owner's equity.
8. CHAPTER 6: MANAGING COSTS AND PROFITS
The learning objectives are as follows:
1. Understand the entrepreneurial approach to accounting
2. Discern the four financial statements (balance sheet, income
statement, cash flow statement and funds flow statement)
3. Determine the different types of cost, its purpose and behavior
13. Direct versus Indirect Costs
Managers responsible for certain products or departmental services may want to
determine what costs are directly traceable to the production of these specific
goods or services. These managers would want to know what their direct costs
are. There may be costs that are shared by several products or departments and
cannot be attributed to any one of them. These are indirect costs.
Variable Costs versus Fixed Costs
Managers want to know what costs would necessarily, directly and
proportionately increase as their sales volume (or production levels) increased
and what costs would generally remain the same. The former would constitute
variable costs while the latter would comprise the fixed costs. This distinction
between variable and fixed costs is important for two purposes.
14. Controllable versus Uncontrollable Costs
In evaluating managers in charge of responsibility centers, it would not be
fair and just if they were made accountable for costs not within their
managerial control. Thus, the management accountant would be
requested to separate costs that the manager could control and be
accountable and responsible for.
15. CHAPTER 7: MANAGING RISKS
The learning objectives are as follows:
1. Identify the major areas of risk that entrepreneurs face
2. Have a basic understanding of assessing and managing risks
3. Determine the strategies for risk containment
16. Assessing and Managing Risks
Upon identifying the different risks that the
enterprise might encounter along the way, the
entrepreneur should see to it that he or she has his or
her priorities straight in terms of risk management.
Expected Monetary Value is an indicator of the
probabilities of risks, which can be computed by
multiplying these probabilities with the cost
implications (or revenue losses) of the risks. However,
quantifying the extent of the potential damage might
prove to be a daunting task for the entrepreneur. For
this reason, the Framework for Risk Assessment and
Management might be used by the entrepreneur
17. Strategies for Risk Containment
Crafting strategies for risk containment depends largely on the extent the
entrepreneur could quantify all the risks involved in entering into a business
venture. The entrepreneur must determine what are the consequences and
implications of those risks on the business if they ever happened. For each
of the risk areas, there are several antidotes and risk containment strategies
that may be considered.
