PROFESSIONAL

PRACTICES
By: Muhammad Hassaan Rabbani
CAPITAL INVESTMENT
 Capital
 wealth in the form of money or other assets owned by a person or organization or available for a purpose such as
starting a company or investing.
 Customers will not pay until service is provided
 Owner has to buy things to make product and also live
 You provide websites
 Mostly clients other companies
 Delays in getting paid
 Need enough cash to live
 Additional expenses to make website/startup

 If business is to develop a package/product

 More time needed to build
 More money needed
WHY CAPITAL IS NEEDED
 Cash needed for
 Salaries
 Rent, heating, lighting
 Equipment, consumables
 Costs of marketing and advertising
 Miscellaneous expenses (stationary, travelling etc)
 Interest on loan (if borrowed)
BUSINESS PLAN
 First step in raising a money is to produce a business plan
 Your plan for potential funders
 Convince them that plan is well thought and realistic

 Plan should contain

 a description of what the company will be doing, together with information to show that it is
technically feasible and that the founders of the company have the necessary expertise;
 a prediction of the financial performance of the company. This will include budgets, cash flow
predictions, and projected balance sheets and profit and loss accounts.
 a description of the market the company is aiming at, an estimate of its size, and an assessment of the
competition. It might contain statements like the following:
BUSINESS PLAN
 The company’s target market will be small firms providing repair and maintenance
services to householders, within a radius of 15 miles of the centre of Lahore. So far as can
be estimated from the data provided by the Lahore Chamber of Commerce, there are
around 1,200 such firms in the area, only 16 of which have websites. There are two other
companies offering website design and hosting services in the area but neither appears
interested in this market.
SOURCE OF FUNDS – GRANTS
 Grants:
 A grant is a sum of money given to the company; while the company is obliged to demonstrate that it
has been used for the purposes for which it was given
 it is not intended that the grant should ever be paid back to the
 Grants are only available from government (local or national) and EU sources or, very occasionally,
from charities.
 Usually, grants are limited to a certain proportion of the money spent on a particular development and
are conditional upon the remainder being raised from other sources
SOURCE OF FUNDS – GRANTS
 Grants depends on
 where the company is located
 how many people it expects to employ
 government policy at the time

 Grants are usually

 intended to assist with capital investment, typically investment in premises and equipment;
 subject to a number of conditions, in particular the raising of capital from other sources;
 limited to a certain proportion of the capital investment that the company can prove it has made.
SOURCE OF FUNDS – GRANTS
 Grants depends on
 where the company is located
 how many people it expects to employ
 government policy at the time

 Grants are usually

 intended to assist with capital investment, typically investment in premises and equipment;
 subject to a number of conditions, in particular the raising of capital from other sources;
 limited to a certain proportion of the capital investment that the company can prove it has made.

 Smaller and Larger Grants

 Different programs for grants
 Short term solution
SOURCE OF FUNDS – LOANS
 The major sources of finance are loans and the sale of equity. A loan is a sum of money lent to
the company; interest is payable on it, at a rate that may be fixed or variable, and the loan is
usually for a fixed period
 The company has to pay back the loan eventuallyIn most cases, security is required for the
loan. Incase of liquidation, lender to recover the loan from the sale of company assets
 In other words, the company agrees that if it fails to make repayments, the lender is entitled to
sell some of the company’s assets in order to make up for the shortfall
 It often happens that small companies do not have sufficient assets to cover the loan they are
looking for. In this case, the lender may ask for personal guarantees from the directors of the
company; this may mean that the directors have to use their own homes or other property as
security for the loan
SOURCE OF FUNDS –
OVERDRAFT LOANS
 There are 2 major types of loans
 Over draft
 Long term

 It often happens that small companies do not have sufficient assets to cover the loan they are
looking for. In this case, the lender may ask for personal guarantees from the directors of the
company; this may mean that the directors have to use their own homes or other property as
security for the loan
 While overrdrafts are the most flexible and usually the cheapest way to borrow, there is a price
to be paid. A bank can withdraw overdraft facilities without warning, possibly for reasons of
general policy that have nothing to do with the borrower. Many small companies have been
forced into liquidation unnecessarily as a result of such action by banks
SOURCE OF FUNDS – LONG
TERM LOANS
 Long-term loans
 Fixed period
 Fixed rate
 Provided the borrower pays the interest on time, the lender cannot call in the loan. The borrower must
repay the capital at the end of the period.
 Soft-loans
 Interest rates lower
 Only for start-ups

 Loans are usually provided by banks or similar institutions. Even if a soft loan is available as part
of a government initiative, it will usually be channelled through a commercial bank. In some
instances, start-up companies are able to borrow money from relatives or friends of the founders –
or, indeed, the founders may be able to lend the company money themselves. In such cases, it is
important that the loan is put on the same sort of formal basis as a commercial loan
SOURCE OF FUNDS –
OVERDRAFT LOANS
 There are 2 major types of loans
 Over draft
 Long term

 It often happens that small companies do not have sufficient assets to cover the loan they are
looking for. In this case, the lender may ask for personal guarantees from the directors of the
company; this may mean that the directors have to use their own homes or other property as
security for the loan
 While overrdrafts are the most flexible and usually the cheapest way to borrow, there is a price
to be paid. A bank can withdraw overdraft facilities without warning, possibly for reasons of
general policy that have nothing to do with the borrower. Many small companies have been
forced into liquidation unnecessarily as a result of such action by banks
SOURCE OF FUNDS –
CORPORATE BONDS
 A bond is a debt obligation, like an Iou. Investors who buy corporate bonds are lending
money to the company issuing the bond. In return, the company makes a legal commitment
to pay interest on the principal and, in most cases, to return the principal when the bond comes
due, or matures.
SOURCE OF FUNDS – EQUITY
CAPITAL
 Money paid in exchange for share in company

 The founders of a new company often find the initial capital from their own resources or from friends
and family, but few are able to continue raising capital in this way. If a company looks to have good
prospects but needs to raise more capital, it will usually need to resort to business angels or venture
capitalists.

 Business angels are wealthy individuals who provide equity capital for start-up companies and small
firms that are seeking to grow rapidly. They are usually interested in investing in firms operating in areas
of which they have some experience and, as well as providing capital
SOURCE OF FUNDS – EQUITY
CAPITAL

Authorized capital is the maximum value of the shares that a company is legally authorized to issue to
the shareholders. Whereas, paid-up/issued capital is the amount that is actually paid by the
shareholders to the company.

 Both business angels and venture capitalists aim to make money by helping the company to expand and
become successful and then selling their shares at a profit. Of course, many of their investments will not
be very successful and a significant number may fail completely
GEARING OR LEVERAGE

The relationship between loan capital and equity capital in a company is important. It is known as gearing
or leverage
 Shareholders are at a much greater risk of getting a poor return on their capital or even losing it
completely than are lenders but, in compensation for this, they stand to make a greater profit than lenders
if all goes well
 Suppose a company is started with a share capital of £100, owned by its two founders, and that it has a
fixed-term loan of £100,000, at an interest rate of 10 per cent. If in its first year the company makes an
operating profit of £10,000, the interest charges will consume all the profit and the shareholders will
receive nothing. If the company’s operating profit doubles, to £20,000, the lender will still receive £10,000
but, neglecting taxation and assuming that all the profit is distributed to the shareholders, the shareholders
will receive £10,000, a very handsome return on an investment of £100. Furthermore, as the profits
increase, the value of the company, and hence the value of the shares, increases. If the company is sold, the
shareholders will get much more than their original £100 investment, but the lenders will still only be
entitled to their original £100,000, plus interest
GEARING OR LEVERAGE

High level of gearing is undesirable
 From point of view of shareholders
 Too much money committed to loan/interest payments

 From point of view of lenders

 Shareholders may encourage to trade recklessly