Module-2

Financial Requirements of a
New Enterprise
Finance is the lifeblood of any business.
The mere inception of a business idea is not enough, it can only be brought to fruition
given there are enough funds to enable all such functions.
The basic function of every organization is to either manufacture and distribute goods
or offer services.
This function can only be met when there is enough money to bear all such expenses.
Definitions:

According to B.O. Wheeler, “Business finance is that activates which is concerned

with the acquisition and conservation of capital funds in meeting the financial need
and overall objective of business enterprise.”

According to Guthumann and Dougall, “The activity concerned with planning,

developing, managing, administering and increasing of the capital used for
business purposes is known as finance
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Scope of Business Finance
Business finance studies, analyses and examines wide aspects related to the acquisition of
funds for business and allocates those funds. There are various fields covered by business
finance and some of them are:

 Financial planning and control

Business firms must conduct financial analysis and planning. For planning and
management, the financial manager must understand the firm's financial status. Using this
information, he/she prepares and manages the firm's future financial status in a new
economic environment. The financial budget controls financial plans. Firms use budgets to
identify discrepancies between plans and performance and implement corrective actions.
Thus, business finance involves financial planning and control.

 Financial Statement Analysis

Business finance includes financial statement analysis. It also examines financial issues
and business promotion issues. This statement includes financial aspects of new business
promotion, administrative challenges in expansion, and necessary changes for firm
restoration.

 Working capital Budget

Working capital management involves current asset or short-term asset financial decisions.
Short-term survival is key to long-term corporate success. The business should efficiently
manage its current assets to avoid having insufficient or needless capital locked up. This
means efficient management of current assets including cash, receivables, inventory, etc.,
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 Merits
 Eases cashflow for buyers
 Frees up working capital
De-merits  Discounts for early payments
 Need for credit management  Lower operating costs
 Risk of late payment fees  Easy to set up
 Potential supply chain complications  Negotiating tool
 May affect creditworthiness  Builds relationships
 Some suppliers may refuse credit to start-ups  Fuels growth
 Expensive if payment date is missed  Gives a competitive edge
 Can help finance start-ups
Bank Loan:
 Banks provide short and medium and long-
term loans to firms of all sizes. The loan is
repaid either in lump sum or in instalments. The
rate of interest charged by a bank depends upon
factors including the characteristics of the
borrowing firm and the level of interest rates in
the economy.
 Commercial banks occupy a vital position as
they provide funds for different purposes as well
as for different time periods. Banks extend
loans to firms of all sizes and in many
ways, like, cash credits, overdrafts, term
loans, purchase/discounting of bills, and
issue of letter of credit.
 Bank credit is not a permanent source of funds.
Though banks have started extending loans for
longer periods, generally such loans are used for
medium to short periods. The borrower is
required to provide some security or create a
charge on the assets of the firm before a loan is
sanctioned by a commercial bank.
 Public deposits
 Public deposits are deposits collected directly from the
public by organisations. Interest rates on public deposits are
typically higher than those on bank deposits.
 Anyone who is interested in making a monetary contribution to
an organisation may do so by completing a prescribed form.
 In exchange, the organisation issues a deposit receipt as
proof of debt. A business’s medium and short-term financial
needs can be met by public deposits.
• The Reserve Bank of India decides the maximum rate of interest and brokerage
payable.
• The maturity period allowed is a minimum of 6 months and a maximum of 3
years.
• The deposit amount should not be more than 35% of the total paid-up capital and
general reserves or say free reserves.
• The use of such deposits is done to fulfill working capital needs and not to
purchase fixed assets as they need to be repaid within 3 years.
• The company must maintain a register of depositors that comprises all the details
relating to the public deposits.
• By 30 April, the corporation must set aside 10% of the deposits maturing by 31 March of
the next financial year. Only public deposits can be repaid with this amount.
Financial Institutions
 A financial institution connects savers and investors and helps them invest their money.
Financial institutions receive public deposits (savings) and invest them in various ways benefiting the
public and the organization.
 Financial institutions handle numerous financial transactions, including deposit acceptance, loan
issuing, and credit allocation into investment portfolios. Established by the Central and State
Governments, these organizations provide financing to businesses and are also known as
‘development banks’.

Advantages:
•Credit Creation Disadvantages:
•Provide Funds • Complex Process
•Economic Development • Restriction on the Borrower
•Infrastructural Development • System of Collateral Securities
•Promotes Regional Balances
•Employment Generation
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Estimating financial requirements
How much money do I need and when do I need it?

 raise only enough capital to reach the next milestone

 less risk means more favorable terms
 if growth exceeds expectations, funding will usually be available
 funding requirements should be anticipated in advance

Broadly two type of activities that require funds:

Startup costs Working capital Requirements

Startup costs are non-recurring
Expenditures you make only once to setup your new venture includes
 Company registration expenses (Legal Fee, Lawyer fee, License etc.,)
 Plant, Equipment, office (Real estate, Vehicle, Machinery, Security etc.,)
 Marketing (Branding, Website development, Initial advertising etc.,)
 Promotional Activities
 Insurance
 Employee Training
Working capital includes
The recurring costs that need to be incurred for running the enterprise.
 Utility Bill payments
 Employee Salaries
 Taxes Accrued
 Loan repayments and interests accrued there on
 Website maintenance and updates
 Payments made to suppliers of stock or raw materials and its conversion in to
finished goods.
Managing Cash Flow
 Cash flow management is tracking and controlling how
much money comes in and out of a business in order to
accurately forecast cash flow needs.
 It’s the day-to-day process of monitoring, analyzing, and
optimizing the net amount of cash receipts—minus the
expenses.
 It’s all about managing your business
finances responsibly, so there’s enough cash to grow.
The most effective way to track your company’s cash flow is through a cash flow
statement.
It enables you to get an overall view of all money that has come in and out of your
business’s bank account.
Keeping track of your cash position is much more significant and fundamental to
keeping your company afloat.
The statement is normally split into three parts:
 Cash from operating activities
 Cash from investing activities
 Cash from financing activities

 Manage Cash Flow Effectively- How??

 Break Even Analysis

 Break-even point (BEP) is a term that refers to the situation where a company’s
revenues and expenses were equal.
 It means that there were no net profits or no net losses for the company .
 BEP may also refer to the revenues that are needed to be reached in order to
compensate for the expenses incurred during a specific period.
 Break even Analysis (BEA) is also termed as Cost-Volume-Profit (CVP) analysis. It
looks at how profit changes when there are changes in Variable costs, Sales Price,
Fixed costs and Quantity.
 A breakeven point indicates at what level cost & revenue are in equilibrium.
 A firm in this condition, is not losing or making a money.
 The Break-even point (BEP) of a firm can be found out in two ways. It may be
determined in terms of Physical Units, i.e., Volume of output or it may be determined
in terms of Money value i.e., value of sales.
 In the break-even charts, the concepts like total fixed cost, total variable cost, and
the total revenue are shown separately. The break even chart shows the extent of
profit or loss to the firm at different levels of activity.
Assumptions Underlying BEA

 All costs can be separated in to Fixed and Variable components

 Fixed cost remains constant at all volumes of output
 Variable costs will fluctuate in direct proportion to volume of output.
 Selling price will remain constant
 Product-mix will remain unchanged
 The no. of units of sales will coincide with units produced so that there is no
opening or closing stock.
 Productivity per worker will remain unchanged
Uses of Break-even Analysis:
 It helps in determination of selling price which will give the desired profits.
 It helps in the fixation of sales volume to cover a given return on capital employed.
 It helps in forecasting costs and profit as a result of change in volume.
 It helps in making inter-firm comparison of profitability.
 It helps in determination of costs and revenue at various levels of output.
 It is an aid in management decision making, forecasting, long-term planning and
maintaining profitability.
Limitations of BEP
 Everything is kept constant. Selling price is constant and cost function is linear,
which is not the case.
 Other factors like technological changes, management efficiency, etc. ignored.
 Does not work for multiple products.
 The simple form of BE chart makes no provisions for taxes, particularly corporate
income tax.
 Because of so many restrictive assumptions underlying the technique, computation
of a BEP is considered an approximation rather than a reality.
 Fixed Cost
Variable Cost

Definition Costs that vary/change depending on the Costs that do not change in relation to
company’s production volume production volume

When Production Increases Total variable costs increase Total fixed cost stays the same

When Production Decreases Total variable costs decrease Total fixed cost stays the same

Examples Direct Materials (i.e. kilograms of wood, tons Rent

of cement)

Direct Labor (i.e. labor hours) Advertising

Insurance

Depreciation
Output in Total Total Fixed Total Total Cost Profit/ Loss
Units Revenue Cost Variable Cost
0 0 150

50 200

100 400

150 600

200 800

250 1000

300 1200
The below table shows the fixed costs, variable costs, total costs, and profit generated when a certain number of units are sold
 Determination of BEP
 The formula for calculating the Breakeven point is

BEP = Total fixed cost (in units)

Contribution per unit
OR
BEP = Total fixed cost (in Value)
P/V ratio
(or) fixed cost/contribution *selling price per unit

Where, P/V ratio = Contribution x 100

Sales
Profit=Revenue - TC Cost, Revenue =total sales*selling price
Contribution per unit = Selling Price per unit- Variable Cost per unit
Examples:

1. Suppose the fixed cost of a factory in Rs.10,000/- the selling price is Rs.4/- and the
average variable cost is Rs.2/- . The break even point is ?

2. If Total Sales is Rs.600 and TVC is Rs. 450 & TFC is Rs.150, Then determine BEP?

3. Solve this problem

TFC = INR 2,00,000
Variable cost = INR 6 per unit
Selling price = INR 10 per unit
BEP???
Suppose the fixed cost of a factory in Rs.10,000/- the selling
price is Rs.20/- and the average variable cost is Rs.15/- . The
break even point is ?
BEP (UNITS)
BEP (Value)
If BEP=1000 units, then find new S.P
If sales are 10% above Break even value? Calculate net profit
Suppose the fixed cost of a factory in Rs.10,000/- the selling price is Rs.20/- and the average variable
cost is Rs.15/- . The break even point is ?
1. BEP (UNITS)= F.C/Contribution per unit
10,000/5=2000units
2. BEP (Value) =F.C/contribution*selling price per unit
10000/5*20
40,000/-
3. if BEP=1000 units, then find new S.P
1000UNITS=10000/S.P-V.C
S-V.C=10000/1000=10
S-15=10
S=10+15=25
New S.P= 25/-

4. If sales are 10% above Break even value? Calculate net profit
BEP value =40000
New sales ( 40000*10%=4000)
40000+4000= 44000
(-)V.C 30000+10%= 33000
11000
(-)T.F.C 10000
Profit 1000
4. Fixed factory overhead cost = 60000
Fixed selling overhead cost =12000
Variable manufacturing cost per unit = 12
Variable selling cost per unit = 3
Selling price per unit = 24
Find break even point in term of sales value and in unit
Also find Number of units that must be sold to earn a profit of Rs.90000 ??​
Break even = 8000 Units B.E In value = Rs.192000/-
To earn a profit of Rs.90000/- 18000 Units are to be sold Fixed cost = 60000+ 12000 = 72000
Explanation: To Break even = Total Fixed cost/Contribution per unit
= 72000/9 = 8000 Units
Selling Price = 24 In Value = 8000 * 24 = Rs.192000/-
No. of units that has to be sold to get a profit of
Less Variable selling cost = 3 Rs.90000/-
= (Fixed cost + Desired profit) / contribution per unit
Less Variable Manufacturing Cost = 12 = (72000 + 90000) / 9 = 18000 Units
-------------
Contribution = 9
From the following data, you are required to calculate
1)p/v ratio
2)break even sales with the help of p/v ratio
3) sales required to earn a profit of Rs.450000
fixed expenses Rs.90000
variable cost per unit ?
direct material Rs.5 direct labor Rs.2
direct overheads=100% of direct labor
selling price per unit Rs.12
Step 1: Calculate the Variable Cost per Unit

Variable Cost per Unit = Direct Material Cost per Unit + Direct Labor Cost per Unit + Direct Overheads per Unit

Direct Overheads per Unit = (100% of Direct Labor Cost per Unit) = 100% * Rs 2 = Rs 2

Variable Cost per Unit = Rs 5 + Rs 2 + Rs 2 = Rs 9

Step 2: Calculate the Contribution Margin per Unit

Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

Contribution Margin per Unit = Rs 12 - Rs 9 = Rs 3

Step 3: Calculate the P/V Ratio (Profit-Volume Ratio)

P/V Ratio = (Contribution Margin per Unit / Selling Price per Unit) * 100

P/V Ratio = (Rs 3 / Rs 12) * 100 = 25%

Step 4: Calculate the Break-Even Sales

Break-Even Sales (BES) = Fixed Expenses / P/V Ratio

BES = Rs 90,000 / 0.25 = Rs 360,000

Step 5: Calculate Sales Required to Earn a Profit of Rs 450,000

Sales Required = (Fixed Expenses + Desired Profit) / P/V Ratio

Sales Required = (Rs 90,000 + Rs 450,000) / 0.25 = Rs 21,60,000

 Venture capital funds are
pooled investment funds
that manage the money of
investors who seek private
equity stakes in startups
and small- to medium-
sized enterprises with
strong growth potential.
These investments are
generally characterized as
very high-risk/high-return
Source: Market Business News opportunities.
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Venture Financing
•Seed Round. A Seed Round generally supplies a company with a modest amount of capital
provided from venture sources intended to help a company transition from initial idea
implementation to functioning as a going concern. A range of types of investors participate in
Seed Rounds -- from angel investors to venture capital firms. The structure of Seed Rounds
varies significantly based on context.
•Series A. A Series A round is typically the first significant round of venture capital
investment. Because this is still an early stage of investment, investors generally look to
receive returns commensurate with relatively high risk.
•Series B, Series C and Beyond. Subsequent rounds of financing serve a range of purposes.
Some financings support successful companies in efforts to grow and scale. Other rounds
support relatively mature companies as they seek to expand into new markets or make
themselves more attractive acquisition targets. Still other rounds serve to shore up companies
that have experienced some success but also hit stumbling blocks. Pricing and returns for these
rounds vary significantly based on context.
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Workplace and Visual Management Andon is a Japanese term meaning “light” or “lamp”
Andon are typically colur coded in this way

VISUAL MANAGEMENT

a Japanese word meaning

"the actual place" where
value is created.
Gamba walk –
managers/staff walk to the
floor
Taiichi Ohno an executive
at Toyota, led the
development of the concept
of the Gemba Walk
Opportunity Identification

Which helps in solving

quality issues through
data Collection,
identification of root
cause and measuring
results.

7 QC Tools
Process Layout and workstation improvement Value-stream mapping, also known as
material- and information-flow mapping, is
a lean management method for analyzing
the current state and designing a future
state for the series of events that take a
product or service from the beginning of
the specific process until it reaches the
customer. A value stream map is a visual
tool that displays all critical steps in a
specific process and easily quantifies the
time and volume taken at each stage. Value
stream maps show the flow of both
materials and information as they progress
through the process

It is a lean manufacturing method that

helps reduce overproduction by processing
orders based on customer demand and
avoiding bulk production in batches.
In Cellular Manufacturing, production work
stations and equipment are arranged in a
sequence that supports a smooth flow of
materials and components through the
production process with minimal transport or A pull system is a Lean
delay. Implementation of this lean method manufacturing strategy that relies
often represents the first major shift in on customer demand to facilitate
production activity, and it is the key enabler of the production of goods.
increased production velocity and flexibility, as
well as the reduction of capital requirements.
Continuous Improvement

• Poka means mistake yoke means proofing

• Automatic error detector
• When a part is having same defect repeatedly
• When a same mistake done by different workers in any process
which can result in product output
• Prepares flow charts then solve the problem

JIDOKA
Automation with human intelligence
If the quality or equipment problem arises the
machine will be detect the defect on its own
Equipment performance measurement & Improvement

Measures how good a manufacturing operation performing

in respect of performance of in a given time
Quality Management
Inventory Management & Process Standardization

Kanban is a visual
method for controlling
production as part of
Just in Time (JIT) and
Lean Manufacturing

Copass ,management