source of capital

1. 1
DBE 904: Advanced Entrepreneurship
and Innovation
Topic: Sources of Capital

2. Source of Start Up Capital
• It costs money to start a business.
Funding a business is one of the first —
and most important — financial choices
most business owners make.
• How you choose to fund your business
could affect how a business is
structured and run.

3. Determining financial needs of a small
business (MSMs)
• Before you seek financial assistance, you should
thoroughly assess your current financial situation.
• Ask yourself the following questions to determine
your business financial needs:
– Do you need more capital or can you manage the
existing cash flow? If you are having trouble
paying your obligations on time, you need an
infusion of working capital

4. Determining financial needs of a small
business (MSMs)
• Ask yourself the following questions to
determine your business financial needs:
– What is the nature of your need? Do you need
money to start or expand your business or as
a cushion against risk
–How urgent is your need? Whenever possible,
it’s better to anticipate your needs rather than
looking for money under pressure. Plan ahead
and secure financing well in advance of crisis

5. Determining financial needs of a small
business (MSMs)
• Ask yourself the following questions to
determine your business financial needs:
–How great are your risks? All businesses carry
risk, and the degree of risk will affect both the
cost of your loan and available financing
alternatives.
–In what state of development is your business?
Needs are generally more critical during
transitional stages-start up and expansion being
two of the most urgent and costly

6. Determining financial needs of a small
business (MSMs)
• Ask yourself the following questions to
determine your business financial needs:
– For what purpose will the capital be used? The
leader will tend to know your specific intentions
for the money, to assure themselves that your
business will thrive and that repayment is
reassured
– What is the state of your industry? Whether your
industry is depressed, stable or quickly growing
will have a distinct effect on your search of funding

7. Determining financial needs of a small
business (MSMs)
• Ask yourself the following questions to
determine your business financial needs:
– Is your business seasonal or cyclical? Season
funding-short term, Cyclical-loan to support
business throughout (For example, construction)
– How strong is your management team? Leader will
be looking for strong managerial presence
– How does your need for financial mesh with your
business plan? All leaders will want to see a solid,
well thought business plan for the startup and
growth of your business

8. Start up financing
• Startup capital is used to finance pre-
operational costs like business name,
memorandum of association, fixed assets
like chairs, tables and other furniture.
• One also needs to have working capital. This
is the circulating capital required to buy raw
materials, meets labour expenses and cost
of assets used on day to day basis.

9. Sources of Capital
• There are two general types of financing
available: debt financing and equity financing.
• Debt financing is a financing method involving
an interest-bearing instrument, usually a loan,
the payment of which is only indirectly related
to the sales and profits of the venture.
• Typically, debt financing (also called asset-based
financing) requires that some asset (such as a
car, house, inventory, plant, machine, or land) be
used as collateral.

10. Sources of Capital- Debt
• Debt financing requires the entrepreneur to pay
back the amount of funds borrowed as well as a
fee usually expressed in terms of the interest
rate. There can also be an additional fee,
sometimes referred to as points, for using or
being able to borrow the money.
• If the financing is short term (less than one
year), the money is usually used to provide
working capital to finance inventory, accounts
receivable, or the operation of the business.

11. Sources of Capital- Equity
• Equity financing does not require collateral
and offers the investor some form of
ownership position in the venture.
• The investor shares in the profits of the
venture, as well as any disposition of its
assets on a pro rata basis based on the
percentage of the business owned.

12. Sources of financing
• Personal savings: Many people use personal savings to start their
businesses
• Friends and family: Money borrowed from friends and family should
be paid back in time. These can only invest money they can afford to
lose. If business fails, the relationship can become irreversibly
damaged
• Banks: You must have a good credit history. Most businesses are
funded through personal loans, mortgages. Care should be taken to
ensure that interests on bank loans is manageable.
• Angels: People with money who are looking for an investment that
will give them better returns
• Savings and credit societies(SACOS): Savings and credit societies like
Elimu, Mwalimu, Sacco etc.
• Microfinances: Microfinances also fund MSMES. Microfinances like
Kenya Women Trust Fund ( KWFT) may fund women to start MSMES.

13. Sources of financing

14. Basic Financial Reports
• Financial reports consist of financial statements.
• The financial statements represent a formal
record of the financial activities of an entity.
• These are written reports that quantify the
financial strength, performance and liquidity of a
company.
• The four main types of financial statements are:
Statement of financial position, income
statement, cash flow statement and statements
of changes in equity.

15. Statement of financial position
• Statement of financial position, also known as
balance sheet, presents the financial position of an
entity at a given date. It consists of three elements
as indicated below:
• a) Assets; something a business owns or controls
(e.g. cash, inventory, plant and machinery, etc.)
• b) Liabilities: something a business owes to
someone (e.g. creditors, bank loan etc.)
• c) Equity: what the business owes to its owners.
This represents the amount of capital that remains
in the business after its assets are used to pay off its
outstanding liabilities. Equity therefore represents
the difference between the assets and liabilities.

16. Income Statement
• Income statement known as the profit and
loss statement, reports the company’s
financial performance in terms of net profit
or loss over a specified period.
• a) Income: what the business has earned
over a period e.g. sales, revenue, dividend
income etc.
• b) Expenses: The cost incurred by the
business over a period e.g. salaries and
wages, depreciation, rental charges etc.

17. Cash flow statement
• Cash flow statement presents the movement in
cash and is classified into the following
statements:
• a) Operating activities: represents the cash flow
from primary activities of a business
• b) Investing activities: represent cash flow from
purchase and sale of assets other than
inventories
• c) Financing activities: represents cash flow
generated or spent on raising and repaying share
capital and debt together with payments of
interest and dividends

18. Statements of changes in equity
• Statements of changes in equity, also known as
the statement of retained earnings, detail the
movement in owner’s equity over a period.
• The movement in owner’s equity is derived from
the following components:
• a) Net profit or loss during the period as
reported in the income statement
• b) Share capital issued or repaid during the
period
• c) Dividend payments
• d) Gains or losses recognized directly in equity

19. Projected financial statements
• Projected financial statements are summary of
various components projections of revenues and
expenses for the budget period. They indicate
the expected net income for the period.
• Projected financial statements are an important
tool in determining the overall performance of a
company. They include the balance sheet,
income statement and cash flow statements to
indicate the company performance.

20. Preparing projected financial statements
• Preparing projected financial statement
requires careful analysis. Prior to preparing
projected financial statement, an analyst
studies the financial history of the company.
There may be some draw backs, which the
company may have encountered down the
years. To eradicate these, an analysis is
conducted

21. Factors considered while preparing
projected financial statements:
• Whether the company’s operational activities are up to the mark
• If the company is well equipped financially
• Conditions of the market- if the market is in the process of growth, is
at equilibrium or shriveling up.
• Status of the company in relation to the other companies in the
industry
• Strengths, weakness prevailing in the management of the company,
economic cycle of the company, accompanying hazards in the
production of goods
• Role of the management’s performance in company growth
• Risks associated with operational activities
• Company’s past performance records
• By carefully studying the various trends in the company’s past
performances, the analyst tries to predict the company’s performance
in future

22. Financial Ratio Analysis
• Financial ratios are mathematical comparisons of financial accounts or
categories.
• These relationships between the financial statements accounts help
investors, creditors and internal company management understand
how well a business is performing and areas needing improvement.
• Financial ratios are the most common and widespread tools used to
analyze a business’s financial standing.
• Ratios are simple to understand and easy to compute. They can also be
used to compare different companies in different industries.
• Financial ratios don’t take into account the size of a company or the
industry.
• Ratios are just a raw computation of financial position and
performance.
• Financial ratios are divided into six main categories: liquidity, solvency,
efficiency, profitability, market prospect, investment leverage and
coverage

23. Break even analysis
• An analysis to determine the point at which revenue received equals
the cost associated with receiving the revenue.
• Break even analysis calculates what is known as margin of safety, the
amount that revenues exceed the breakeven point. This is the amount
that revenues can fall while still staying above the breakeven point.
• Break even analysis is a supply- side analysis; that is, it only analyzes
the cost of the sales. It does not analyze how demand may be
affected at different price levels.
• For example, If it costs $50 to produce a widget, and there are fixed
costs of $1,000, the breakeven point for selling the widgets would be:
• If selling for $100:20 widgets (calculated as $1,000/ (100-50) =20)
• If selling for $200:7 widgets (calculated as $1,000(200-50) =6.7)
• In this example, if someone sells the products for a higher price, the
breakeven point will come faster.
• What the analysis does not show is that it may be easier to sell 20
widgets at $100 each than 7 widgets at $200 each. A demand-side
analysis would give the seller that information.

24. Managing cash flows
• Small business owners share their tips for managing cash
flows and keeping on top of finances
• Selling targets is a great way to prepare and maintain cash
flow forecast. This can be updated weekly, to provide an
accurate outlook for the next six to twelve months.
• Establishing clear payment terms from the outset is
important.
• For example, a construction firm working on government
projects, may have the government commit to pay within
30 days for every phase of the project completed
• Invoice quickly, MSMEs should invoice clients as soon as
the work is completed.
• If invoicing is delayed, entry of the cash into the business
account is also delayed which is advantage to the business

25. Managing cash flows
• Make payments easy for customers. Avoid being
paid by cheque as it will result in delays before the
money arrives in your bank account. Online
payments are a much better option
• Offer clients fixed rate payment packages.
• One way MSMEs can ensure good cash flow is by
offering periodic payment packages like billing for
water payment or power payment. This way the
firm can plan spending and business growth easily.
• Use technology to manage cash flow.
• Technology can make it much easier to manage cash
flow
• Do not focus on profit, focus on cash flow

26. Managing cash flows
• MSMEs should have cash flow plans from
day one. If your cash flow is in order, your
profits will be in order
• Train an employee to monitor your cash flow
• Allocate a dedicated person to track the
money going in and out
• Keep the bank informed
• Banks can offer business useful services like
overdrafts or credit, particularly when they
are starting out

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28. Are Micro, Small and Medium
Enterprises(MSMEs) Necessary?
Social Benefits:
a) MSMEs generate employment at the local level,
which is much needed for a developing country like
ours with a heavy population load.
b) With MSMEs generating employment and wealth
creating avenues, equitable distribution of income is
possible to some extent with their help.
c) Also, MSMEs check monopoly of strong players to a
large extent by producing substitutes, which are
cheaper and affordable.
d) Infrastructure development in rural and semi– urban
areas has also been possible because of MSMEs.

29. Are Micro, Small and Medium
Enterprises(MSMEs) Necessary?
Social Benefits:
e) MSMEs have helped in rural development.
Agriculture provides employment for only few
months in a year. MSMEs provide employment
round the year.
f) MSMEs have improved employment
opportunities and many MSMEs are in
under/semi developed areas, even in villages.
This keeps a check on the exodus of workers to
metros and urban zones.
g) MSMEs help to establish the linkage between
agriculture and industry to harness the potential
of both the sectors.

30. What are the steps of starting an MSME?
1. SWOT Analysis
a) YOU – Strengths & Weaknesses
b) Your Business – Opportunities & Threats

31. What are the steps of starting an MSME?
SWOT?
Strengths Weakness
• What do you do well?
• What unique resources can you
draw on?
• What do others see as your
strengths?
• What could you improve?
• Where do you have fewer
resources than others?
• What are others likely to see as
weaknesses?
Opportunities Threats
• What opportunities are open to
you?
• What trends could you take
advantage of?
• How can you turn your strengths
into opportunities?
• What threats could harm you?
• What is your competition doing?
• What threats do your weaknesses
expose you to?

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Cross
SWOT
Opportunity Max-Max Mini-Max
Weakness
Strength
Threat Max-Mini Mini-Mini
Here’s How
Strengths–Opportunities(Max-
Max): Use your internal strengths
to take advantage of opportunities.
Strengths-Threats(Max-Mini): Use
your strengths to minimize
threats.
Weaknesses-Opportunities(Mini-
Max): Improve weaknesses by
taking advantage of opportunities.
Weaknesses-Threats(Mini-Mini):
Work to eliminate weaknesses to
avoid threats.
What are the steps of starting an MSME?
Cross SWOT.

33. What are the steps of starting an MSME?
2. Environmental Scanning

34. What are the steps of starting an MSME?
Possible changes in the business
environment
Impact assessment
PEST Factors(Descriptions)
Assessment
（O）
Opportunity
（T)Threat
Logical
reasoning
Political
（P）
Economic
（E）
Social
（S）
Technologica
l
（T）

35. What are the steps of starting an MSME?
3. Product Selection
4. Market Survey
5. Preparation of Project Report
6. Form of Ownership

36. What are the steps of starting an MSME?
7. Route to Start –
a) Franchising
b) Ancillarizing
c) Acquisitioning
d) Building from Scratch
8. Finance
9. Man Power
10. Site Location.

37. What are the steps of starting an MSME?
11. Provisional Registration
12. Licenses & Approvals
13. Power Connection
14. Machinery – Procurement&
Installation
15. Recruitment
16. Raw Materials Procurement

38. What are the steps of starting an MSME?
17. Trial Production
18. Marketing
19. Quality Assurance
20. Monitoring
21. Permanent Registration

39. Q Explain characteristics of the legal forms that a micro,
small or medium enterprise (MSME) can take.
What are some of the legal forms of SMEs?
• Sole Proprietorship
• General Partnership
• Limited Partnership
• Limited Liability Partnership (LLP)
• Corporation
• Limited Liability Company (LLC)
• Trust

40. Sole Proprietorship.
A Sole Proprietorship is one individual or
married couple in business alone. Sole
proprietorships are the most common form
of business structure. This type of ownership
is simple to form and operate, and may
enjoy greater flexibility of management, less
legal regulation, and fewer taxes. However,
the business owner is personally liable for all
debts incurred by the business.

41. General Partnership .
A General Partnership is composed of two or
more persons (usually not a married couple)
who agree to contribute money, labor, or skill
to a business. Each partner shares the
profits, losses, and management of the
business, and each partner is personally and
equally liable for debts of the partnership.
Formal terms of the partnership are usually
contained in a written partnership
agreement.

42. Limited Partnership .
A Limited Partnership is composed of one or
more general partners and one or more
limited partners. The general partners
manage the business and share fully in its
profits and losses. Limited partners share in
the profits of the business, but their losses
are limited to the extent of their
investment. Limited partners are usually not
involved in the day-to-day operations of the
business.

43. Limited Liability Partnership (LLP) .
A Limited Liability Partnership (LLP) is
similar to a General Partnership except
that normally a partner does not have
personal liability for the negligence of
another partner.

44. Corporation .
A Corporation is a more complex business
structure. As a chartered legal entity, a
corporation has certain rights, privileges,
and liabilities beyond those of an individual.
Doing business as a corporation may yield
tax or financial benefits, but these can be
offset by other considerations, such as
increased licensing fees or decreased
personal control. Corporations may be
formed for profit or nonprofit purposes.

45. Limited Liability Company.
A Limited Liability Company (LLC) is
composed of one or more individuals or
entities through a special written
agreement. The agreement includes:
provisions for management, ability to assign
interests, and distribution of profits and
losses. Limited liability companies are
permitted to engage in any lawful, for-profit
business or activity other than banking or
insurance.

46. Trust.
A Trust is an unincorporated business
with the property being held and
managed by the trustees for the
shareholders. The trustees are considered
employees since they work for the trust.

47. Thank You.
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