Dr Noor Muhammad noormuhammad@giki.edu.pk

1. To understand various sources of finance for a business.

1. Banks

2. Angel finance

3. Venture capital finance

4. Crowd funding

2. Main financial highlights

2

Deakins and Freel (2009)

Own capital

Family/friends

Informal investors

Banks

Venture capital

Retained profits

Institutional investors

Stock market

Seed Young Growing Mature

1. Can be easily secured.

2. Short-term and traditional loans.

3. You control your business.

4. However, loan applications are difficult to assess.

5. Borrowers and lenders have conflicting interests and information.

6. Adverse selection

7. Moral hazard

1. The amount

2. Purpose and duration

3. Repayment plan and source

4. Security/collateral

5. Commitment (owners contribution)

6. The people

7. Profitability (for the bank)

Paul Burns (2007)

Character Ability Management Purpose Amount Repayment Insurance

The 5 Cs of Credit Analysis

1. Capacity to repay

2. Capital invested

3. Collateral offered

4. Conditions of loan

5. Character impression

1. High net worth individuals.

2. Increasingly important source of funding for small firms.

3. UK Business Angels invest up to 1 billion annually.

4. Make an average of two investments every three years.

5. 90 percent are satisfied with their investments.

6. They provide not only finance but experience and business skills.

7. Business Angels invest in the early stage of business.

1. Invests in specific industries.

2. Buys between 20% to 40% of a company but in some cases will buy up to 70% or even more.

3. Long range funding (5-10 years).

4. Bridge funding between the entrepreneurs personal sources and the stock market floatation.

What Do Venture Capitalists Look For?

1. Intangible factors

2. Competent management

3. Competitive edge

4. Growth industry

5. Viable exit strategy

1. A new form of funding started in 2009 in USA (http://www.kickstarter.com/)

2. Brings together people with business ideas and people with money

3. This model looks like e-bay where buyers and sellers can interact with each other under set rules and regulations

11

http://www.kickstarter.com/

1. Forecast Turnover

2. Forecast Cash Flows

3. Forecast Profit & Loss Account

4. Funding requirements (start-up costs)

Sales = Rs (A)

Minus Variable Costs: Materials = Rs

Wages = Rs

Other = Rs

Total Variable Costs: Rs

Gross Profit/Contribution: Rs (B)

Fixed Costs (Overheads): Wages/salaries (including taxes) = Rs Rent = Rs Heating/light/power = Rs Advertising = Rs Insurance = Rs Transport/travel = Rs Phone = Rs Stationary = Rs Maintenance = Rs Depreciation = Rs Local taxes = Rs Other = Rs

Total Fixed Costs = Rs (C)

Net Profit = Rs

Minus dividends = Rs

Profit retained in the business = Rs

Break-Even = Total fixed costs x Sales

Gross profit

C x A

B

PETERS AND CO - CASHFLOW YEAR 1

JAN FEB MAR APRIL MAY JUNE JULY AUGUST SEPT OCT NOV DEC TOTALS

INCOME 0 0 1000 2000 3000 3000 3000 8000 8000 8000 12000 12000 60000

CAPITAL 30000 0 0 0 0 0 0 0 0 0 0 0 30000

TOTAL INCOME 30000 0 1000 2000 3000 3000 3000 8000 8000 8000 12000 12000 90000

EXPENSES

DRAWINGS 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 72000

HEALTH INSURANCE 90 90 90 90 90 90 90 90 90 90 90 90 1080

NHI PAYMENTS 677 677 677 677 677 677 677 677 677 677 677 677 8124

STAFF COSTS 0 0 0 0 0 0 0 0 0 0 0 0 0

OVERHEADS 1142 1142 1142 1142 1142 1142 1142 1142 1142 1142 1142 1142 13704

RENTAL ITEMS 3963 0 0 3963 0 0 3963 0 0 3963 0 0 15852

FURNITURE 2000 0 0 0 0 0 0 0 0 0 0 0 2000

CARS 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 12000

TRAVEL 333 333 333 333 333 333 333 333 333 333 333 333 3996

HARDWARE 270 270 270 270 270 270 270 270 270 270 270 270 3240

SOFTWARE 608 608 608 608 608 608 608 608 608 608 608 608 7296

PI COVER 4500 0 0 0 0 0 0 0 0 0 0 0 4500

MARKETING 333 333 333 333 333 333 333 333 333 333 333 333 3996

BROCHURE 1500 0 0 0 0 0 0 0 0 0 0 0 1500

VAT (REBATE) 0 0 0 -4029 0 0 -2629 0 0 -2629 0 0 -9287

INTEREST/CHARGES 0 -303 0 0 467 0 0 1449 0 0 2055 0 3668

TOTAL PAYMENTS 22416 10150 10453 10387 10920 10453 11787 11902 10453 11787 12508 10453 143669

NET CASH FLOW 7584 -10150 -9453 -8387 -7920 -7453 -8787 -3902 -2453 -3787 -508 1547

OPENING BALANCE 0 7584 -2566 -12019 -20406 -28326 -35779 -44566 -48468 -50921 -54708 -55216

CLOSING BALANCE 7584 -2566 -12019 -20406 -28326 -35779 -44566 -48468 -50921 -54708 -55216 -53669

Thank you