3.3. Startups in Ethiopia Ethiopia does not have a sufficient financing system for entrepreneurs, but in the past ten years, many young people have become more inclined to start their own ventures. It has been ensured that startups are asset-light and solve an end-user pain point, making them attractive to the investing community, but there is still a perception challenge with creditworthiness. Proponents of start-up business models argue that traditional parameters to gauge a business include visibility of revenues, profitability, and gross margins, a lack of understanding of a business model, and time to reap desired results. Losses of start-ups founded on viable ideas are largely due to a lack of sufficient marketing, employee expenses, and expenses related to technology, and are largely funded by equity. Financing is required for growth. Banks and other funding entities stay away from funding start-ups due to a lack of understanding and risk aversion. Ethiopia's startup ecosystem is ranked 105th globally, with Addis Ababa being the highest-ranked city. The StartupBlink Global Startup Ecosystem Map shows 12 fintech companies, 11 software and data startups, and 7 foodtech businesses. In 2020, Ethiopian startups raised USD 2.25 million in announced investment, up from USD 0.65 million in 2019. The figure excludes grants, prize money, and non-equity assistance, according to the Baobab Network, a technology accelerator built for Africa. For comparison, financial technology firms raised more than USD 8 million in 2021. On the other hand, Disrupt Africa’s African Tech Startup Funding Report 2020 announced that Addis Ababa is the only Ethiopian city among the top 500 and in the global top 1000 startup-friendly cities. Despite a series of reforms to startup businesses in Ethiopia, bureaucratic challenges regarding the various types of permits, registrations, and licenses required to do business in Ethiopia remain unresolved or even it is getting worse. These include obtaining investment licenses, business licenses, and tax registrations. Recently, Ethiopia's Ministry of Innovation and Technology and Job Creation Commission jointly produced a statement to address the challenges faced by startups. According to those statements, a draft proclamation has been developed, and a National Startup Council and an Innovation Fund are intended to be established by Ethiopia's Startup Act. If approved by the council of ministers, this will ease the launch, expansion, and scaling of startups. According to the preamble of the draft proclamation, it is made with the view that it is necessary: • To create an innovative ecosystem in Ethiopia which is able to effectively and efficiently promote innovation and job creation; • To remove barriers to entrepreneurship by easing the for establishing, running, expanding, and closing a business; and • To encourage and support entrepreneurs who establish startup to launch businesses which that create job opportunities, and i

1. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
0
Chapter 1
Introduction to
Financial
Management

2. 1-1 1-1
1
Key Concepts and Skills
• Know the basic types of financial
management decisions and the role of
the financial manager
• Know the financial implications of the
different forms of business organization
• Know the goal of financial management
• Understand the conflicts of interest that
can arise between owners and
managers

3. 1-2 1-2
2
Chapter Outline
• Finance: A Quick Look
• Business Finance and The Financial
Manager
• Forms of Business Organization
• The Goal of Financial Management
• The Agency Problem and Control of the
Corporation
• Financial Markets and the Corporation

4. 1-3 1-3
3
Basic Areas Of Finance
• Corporate finance
• Investments
• Financial institutions
• International finance

5. 1-4 1-4
4
Investments
• Work with financial assets such as
stocks and bonds
• Value of financial assets, risk versus
return, and asset allocation
• Job opportunities
– Stockbroker or financial advisor
– Portfolio manager
– Security analyst

6. 1-5 1-5
5
Financial Institutions
• Companies that specialize in financial
matters
– Banks – commercial and investment, credit
unions, savings and loans
– Insurance companies
– Brokerage firms
• Job opportunities

7. 1-6 1-6
6
International Finance
• This is an area of specialization within each of
the areas discussed so far
• It may allow you to work in other countries or
at least travel on a regular basis
• Need to be familiar with exchange rates and
political risk
• Need to understand the customs of other
countries; speaking a foreign language
fluently is also helpful

8. 1-7 1-7
7
Why Study Finance?
• Marketing
– Budgets, marketing research, marketing financial
products
• Accounting
– Dual accounting and finance function, preparation
of financial statements
• Management
– Strategic thinking, job performance, profitability
• Personal finance
– Budgeting, retirement planning, college planning,
day-to-day cash flow issues

9. 1-8 1-8
8
Business Finance
• Some important questions that are
answered using finance
– What long-term investments should the firm
take on?
– Where will we get the long-term financing to
pay for the investments?
– How will we manage the everyday financial
activities of the firm?

10. 1-9 1-9
9
Financial Manager
• Financial managers try to answer some, or
all, of these questions
• The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting, and data processing

11. 1-10
1-10
10
Financial Management
Decisions
• Capital budgeting
– What long-term investments or projects
should the business take on?
• Capital structure
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management
– How do we manage the day-to-day
finances of the firm?

12. 1-11
1-11
11
Forms of Business Organization
• Three major forms in the United States
– Sole proprietorship
– Partnership
• General
• Limited
– Corporation
• S-Corp
• Limited liability company

13. 1-12
1-12
12
Sole Proprietorship
• Advantages
– Easiest to start
– Least regulated
– Single owner keeps
all of the profits
– Taxed once as
personal income
• Disadvantages
– Limited to life of owner
– Equity capital limited to
owner’s personal
wealth
– Unlimited liability
– Difficult to sell
ownership interest

14. 1-13
1-13
13
Partnership
• Advantages
– Two or more owners
– More capital available
– Relatively easy to
start
– Income taxed once as
personal income
• Disadvantages
– Unlimited liability
• General partnership
• Limited partnership
– Partnership dissolves
when one partner dies
or wishes to sell
– Difficult to transfer
ownership

15. 1-14
1-14
14
Corporation
• Advantages
– Limited liability
– Unlimited life
– Separation of
ownership and
management
– Transfer of ownership
is easy
– Easier to raise capital
• Disadvantages
– Separation of
ownership and
management (agency
problem)
– Double taxation
(income taxed at the
corporate rate and
then dividends taxed
at personal rate, while
dividends paid are not
tax deductible)

16. 1-15
1-15
15
Goal Of Financial Management
• What should be the goal of a corporation?
– Maximize profit?
– Minimize costs?
– Maximize market share?
– Maximize the current value of the company’s
stock?
• Does this mean we should do anything
and everything to maximize owner wealth?
• Sarbanes-Oxley Act

17. 1-16
1-16
16
The Agency Problem
• Agency relationship
– Principal hires an agent to represent its
interests
– Stockholders (principals) hire managers
(agents) to run the company
• Agency problem
– Conflict of interest between principal and
agent
• Management goals and agency costs

18. 1-17
1-17
17
Managing Managers
• Managerial compensation
– Incentives can be used to align management and
stockholder interests
– The incentives need to be structured carefully to
make sure that they achieve their goal
• Corporate control
– The threat of a takeover may result in better
management
• Other stakeholders

19. 1-18
1-18
18
Example: Work the Web
• The Internet provides a wealth of
information about individual companies
• One excellent site is finance.yahoo.com
• Click on the Web surfer to go to the site,
choose a company and see what
information you can find!

20. 1-19
1-19
19
Figure 1.2

21. 1-20
1-20
20
Financial Markets
• Cash flows to the firm
• Primary vs. secondary markets
– Dealer vs. auction markets
– Listed vs. over-the-counter securities
• NYSE
• NASDAQ

22. 1-21
1-21
21
Quick Quiz
• What are the four basic areas of finance?
• What are the three types of financial
management decisions, and what questions
are they designed to answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
• What are agency problems, and why do they
exist within a corporation?