Chapter 5 - Finance Flashcards
Finance
Finance is the study and application of those concepts and theories, which use capital as the part of wealth that is devoted to obtaining further wealth
Cash flow principles
Communication: This involves sharing your cash flow projection with your peers. Since they share the responsibility in spending and reaching the targets
in the business, it is important so that they understand the impact of their decisions.
Impact of financing: Where financing or debt is used to finance the business, the repayment of these debts must be noted when calculating the projected
cash flow of a business.
Consistency and accuracy: You need to do cash flow projections consistently and ensure that they are as accurate as possible. This will assist you to keep sufficient cash reserves in your business to manage its operating expenses.
Incremental increase in cash flow: The cash flow should improve gradually
overtime for the business to be viable and sustainable overtime.
Monitoring and risk identification: Daily monitoring of cash flow will allow you to check whether the inflow and outflow of cash match your projections.
Being results orientated: While all the principles above aim to reduce the chances of business failure, the principle of being results orientated specifically assists with ensuring business success.
Net cash flows
The net cash flow is the total cash inflow minus the total cash outflow of a
company over a set period of time, which may be monthly, quarterly or annually
Negative cash flow
Negative cash flow if the balance
of cash decreases over the given period of time.
Positive cash flow
Positive cash flow is desirable as it shows growth and that the strategy is working. The amount of positive cash flow will show how well the strategy is
working
Budgeting
Budgeting means setting financial targets to achieve in the future. There are five main steps in the budgeting process, namely:
Setting up the business targets
Accumulating the historical data
Preparing the business plans and strategies
Compiling everything into the master budget
Setting up budgets three months to a year in advance.
Forecasting
The forecast provides a company with a projection of what is expected. A forecast is prepared a few months after the start of the financial year, or during the
business planning process.
The process of forecasting includes:
Analysing the results of the past month
Revision of business plans and strategies
Forecasting prepared based on the revised plans
Preparing the final forecast report for the upcoming financial year
Some funders may require a three year forecast in your business plan.
Financial statements
Financial statements are the records that sketch out the financial activities of businesses, individuals or other entities. It is standard practice for businesses to present financial statements that stick
to Generally Accepted Accounting Principles (GAAP) to ensure that these statements can be understood globally
Statement of financial performance
The statement of financial performance shows the financial results of the operations of the business for a period of time. The statement is separated into three sections: Net sales Cost of sales Operating expenses.
Satement of financial position
The statement of financial position is a financial statement that sums up a
corporation’s liabilities and assets and the shareholders’ equity at a precise point
in time. It is very much like a snapshot of the business at a specific moment. Should include assets = owners equity + liabilities
Statement of cash flows
The statement of cash flows reveals how much cash comes in and goes out of the company per quarter or year.
Accrual accounting
Accrual accounting is one difference which can be observed on the statement of financial performance.
Accrual account requires companies to trace expenses and revenues when there is a transaction, not when cash is exchanged.
Sourcing finance part 1
The portions that need funding ought to be divided into two types, namely:
Long-term capital requirements
Short-term capital requirements.
Sourcing finance part 2
- Own capital - A common way of funding a business is to use one’s own money. This can be used
for both short-term- and long-term working capital. - Debt - Debt is a strategy which involves borrowing money from an investor or lender under the agreement that the complete amount will be paid back in the future, usually with interest.
- Funds from an investor - An investor is an individual or entity that buys assets with the intention of
obtaining a financial return. The types of assets that investors buy vary widely, but can include bonds, stocks, commodities, real estate and collectibles. - Collateral or surety - Collateral or surety usually forms part of a contract for a loan. Collateral provides
security to the lender that you will repay the loan. When entrepreneurs agree to collateral for a loan, they place personal assets that are at least the value of the
loan, under risk in order to obtain the loan. - Bootstrapping your business - Bootstrapping refers to a method where entrepreneurs start their businesses by investing nearly nothing. This means that entrepreneurs are taking the minimum
amount of financial risk. Dreyer (2010) notes that the entire focus of bootstrapping is on reducing risk
through creatively adjusting the business model to a low risk model. He points out that, with bootstrapping, the entrepreneur needs to make use of his surplus time, effort and skills in order to turn limited resources into a profit
Guidelines for controlling spend at start up
- Focus on cash flow - Ensure there is a positive cash flow in the business. Negative cash flow will reduce
your chances of growing your business. - Forecast from bottom up - Most entrepreneurs look at the total market size, and then forecast downwards.
- Sell then test - Do not try to sell perfect products or services to your customers. Perfection results in procrastination.
- Forget the perfect team - Initially it will be very expensive to get the perfect team. Rather get young,
energetic people that are hungry to learn. - Start by providing a service - By providing services, instead of products, not only do you reduce your operating costs, you also test what your customers want, and whether they want what you
offer. - Focus on results - Focus on delivery and results rather than expending resources on
product costs. - Understaff - Do not be overoptimistic on what results you expect. Rather be pessimistic and understaff the business
- Go to the source - Find out where your suppliers get the materials from, and see if you are willing
and able to obtain your resources directly from the source - Skill up - Learn how to do the critical things in the business in which you have little or no
knowledge.
Tips on starting your own business
Do not blame others for incomplete tasks.
Take responsibility for your work.
Never plan for failure, but reduce risks and learn from small failures instead.
Every new start-up business experiences setbacks and turmoil, but it is important to be steadfast in the face of adversity.
If an idea does not work well, be prepared to change it, and immediately test how the market receives your idea.
Keep challenging your limits. This is how you will come to know what else you can achieve.
Bootstrappers always need to be open minded and creative, and should look for opportunities that will best benefit their companies at any moment in time,
while also having the ability to reject non-compatible opportunities.
Be willing to make quick decisions in order to achieve their goals.
Always look for low-hanging fruit, such as reselling or upselling to existing customers.
Set up expenditure budgets three months in advance, and plan and taper your spending.
You should always present great integrity and add tremendous value.
Weight should be given to even very small details and little things. Little things in business matter a lot. Thus you must always understand your small business
needs.
Find a person who thinks like you do and is well experienced. Take him/her
on as your mentor and adapt his/her ideology and insights into your business.
Create a web site that is professional looking.
Be present on social media by creating a page for your business, and start to create a following that way.
Business models of bootstrappers are very different from those of financed companies. Bootstrapping is more about intelligence, perseverance and
creativity than willpower.
Liability
Liability refers to the obligations that the business has that arise from transactions or events in the past. Liability is usually recorded in a written agreement, such as a contract. This agreement binds the business to perform a certain activity for a fixed time frame. Settling a liability can result in the transfer or use of assets, provision of
services, or any other economic benefit.
Limited liability
Limited liability refers to situations where the financial liability of a person is limited up to a fixed sum or term (period of time). Limited liability also relates
directly to the type of business you have. A company registered as a (Pty) Ltd is a private limited company. This means there is limited liability between directors. The key concept behind limited liability is that, in the case of legal suits, the claimant sues the company and not the individual owners or investors.
