Financing A Financing A VentureVenture

Every Venture Needs Every Venture Needs Money!Money!

No matter it is a not-for-profit cooperative or a No matter it is a not-for-profit cooperative or a profit –making corporation, a new start-up or a profit –making corporation, a new start-up or a well-established corporation, every venture well-established corporation, every venture needs money!needs money!

All ventures must at least aim to All ventures must at least aim to BREAK-EVENBREAK-EVEN (total (total revenuesrevenues of all money flowing into a of all money flowing into a venture must venture must equal equal the total the total costscosts of providing of providing goods and services).goods and services).

Total Total REVENUEREVENUE for a venture is determined by for a venture is determined by multiplying the number of units soldmultiplying the number of units sold

Adding together all fixed and variable costs Adding together all fixed and variable costs determines total determines total COSTSCOSTS..

ProfitProfit

Profit is the major Profit is the major goalgoal of the entrepreneur! of the entrepreneur! Profit is like a scorecard for measuring success.Profit is like a scorecard for measuring success.

Profit formula: Profit formula:

Profit =(price of each unit X quantity) – costsProfit =(price of each unit X quantity) – costs

Total profit = total revenue - total costsTotal profit = total revenue - total costs The amount of profit is determined on the demand for The amount of profit is determined on the demand for

the product or service, the number of customers who the product or service, the number of customers who are willing and able to pay the price for it, and are willing and able to pay the price for it, and competition.competition.

PricingPricing

The The priceprice a venture receives for its goods a venture receives for its goods or services is used to pay for production or services is used to pay for production and distribution costs.and distribution costs.

Theoretically, a business owner can Theoretically, a business owner can charge any price he/she wants for goods charge any price he/she wants for goods and services.and services.

However, However, strategic pricingstrategic pricing takes many takes many factors into account:factors into account:

Strategic Pricing Strategic Pricing

How the How the competition competition prices the goods prices the goods and servicesand services

ExpectationsExpectations about about salessales and and expensesexpenses How much How much moneymoney the the owner wantsowner wants or or

needs to makeneeds to make What the What the marketmarket will will toleratetolerate Inventory costsInventory costs and whether the and whether the suppliersupplier

has pricing has pricing termsterms that must be followed that must be followed

Planning a Financial Planning a Financial StrategyStrategy

Developing a sound financial Developing a sound financial strategy requires a detailed plan. strategy requires a detailed plan. Venture Plans include :Venture Plans include :

1.1. Cash- Flow ProjectionsCash- Flow Projections

2.2. Income StatementIncome Statement

3.3. Balance SheetBalance Sheet

Cash Flow ProjectionsCash Flow Projections

Cash flow projections or forecast reveals Cash flow projections or forecast reveals the amounts of money expected in the amounts of money expected in revenues and expenses and their timing revenues and expenses and their timing (usually monthly)(usually monthly)

The difference between the two (cash The difference between the two (cash receipts minus cash disbursements) receipts minus cash disbursements) reveals whether the business generates reveals whether the business generates a positive or negative balance (profit or a positive or negative balance (profit or loss) in any given month.loss) in any given month.

Sample: Cash Flow ProjectionsSample: Cash Flow Projections

Estimating ExpensesEstimating Expenses

ExpensesExpenses are reasonably easy to are reasonably easy to accurately estimate by:accurately estimate by:

1.1. obtaining quotes from suppliersobtaining quotes from suppliers

2.2. Knowing when rent is to be paid and Knowing when rent is to be paid and how muchhow much

3.3. Wages (e.g., paid every second Friday)Wages (e.g., paid every second Friday)

Estimating RevenuesEstimating Revenues

Estimating revenuesEstimating revenues presents a much greater presents a much greater challenge and are more difficult to determine:challenge and are more difficult to determine:

1.1. Magnitude (how many sales)?Magnitude (how many sales)?2.2. Timing (when)?Timing (when)? Realistic estimatesRealistic estimates can be forecast with can be forecast with

market research:market research:1.1. Buying habits of target marketBuying habits of target market2.2. Sales patterns of competitorsSales patterns of competitors3.3. Exploring market tolerance for various pricing Exploring market tolerance for various pricing

levelslevels

The Balance SheetThe Balance Sheet

A A balance sheetbalance sheet is a snapshot of what is a snapshot of what a business a business ownsowns ( (assetsassets), what it ), what it owesowes ( (liabilitiesliabilities) and the difference ) and the difference between the two (between the two (assets – liabilities = assets – liabilities = net worthnet worth))

Assets- classified as “current assets” Assets- classified as “current assets” and “fixed assetsand “fixed assets””

CURRENT ASSETS – CURRENT ASSETS – are liquid are liquid meaning actualmeaning actual cash or assets to be cash or assets to be converted to cash within one year. converted to cash within one year. Most common non-cash assets are Most common non-cash assets are accounts receivable (money owed to accounts receivable (money owed to the business by its customers) and the business by its customers) and inventory (product ready or almost inventory (product ready or almost ready to be sold). ready to be sold).

FIXED ASSETS – FIXED ASSETS – Long- term or capital Long- term or capital assets not expected to be converted assets not expected to be converted into cash within one year. Common into cash within one year. Common fixed assets are land, buildings, fixed assets are land, buildings, vehicles, plant or office equipment, vehicles, plant or office equipment, furniture, etc.furniture, etc.

The Income StatementThe Income Statement

The The income statementincome statement reveals sales, reveals sales, expenses and profits (or losses) for a expenses and profits (or losses) for a period of time (usually monthly or yearly)period of time (usually monthly or yearly)

While While cash flowcash flow projections look forward projections look forward and predict the future, income statements and predict the future, income statements reflect the past.reflect the past.

Often an accountant or bookkeeper Often an accountant or bookkeeper prepare this statement.prepare this statement.

Income Income StatemenStatementt