entrepreneurship_notes

Sources of Finance for Business

1. Capital vs. Revenue Expenditure

• Capital Expenditure:

  • Involves the purchase of fixed assets such as:

    • Property

    • Machinery

    • Intangible assets

  • Meant for long-term use (more than 12 months).

• Revenue Expenditure:

  • Involves daily operational costs, including:

    • Staff salaries

    • Premises costs

    • Selling and distribution expenses

    • Finance costs

2. Sources of Finance

• Internal Sources:

  • Funds generated within the business, e.g.,

    • Retained profits

    • Owners’ equity

• External Sources:

  • Funds raised from outside the business, such as:

    • Crowdfunding

    • Venture capital

    • Equity financing (selling shares)

3. Types of Financing

• Bootstrapping:

  • Self-funding from personal savings or income.

• Crowdfunding:

  • Raising small amounts of money from a large number of people, typically online.

• Equity Financing:

  • Selling shares of the company to raise funds.

• Venture Capital:

  • Investment from investors seeking high returns, often in high-growth startups.

4. Financial Management

• Definition:

  • Planning and monitoring of financial resources to achieve long-term goals.

• Focus Areas:

  • Profitability

  • Growth

  • Efficiency

  • Liquidity

  • Solvency

Revenue Models for Startups

1. Revenue Model Definition

• A revenue model explains how a business generates income and profits.

• Indicates the strategy for earning money from goods or services.

2. Popular Revenue Models

• Unit Sales Model:

  • Revenue from selling products or services, primarily used by retail businesses.

• Advertising Revenue:

  • Earnings from ads placed on platforms or content.

• Data Revenue:

  • Selling valuable data to third parties.

• Intermediation:

  • Earnings by facilitating transactions between buyers and sellers.

• Licensing:

  • Earning by permitting others to use intellectual property.

• Franchising:

  • Selling rights to others to operate under the business's name.

• Subscription:

  • Ongoing fees for continuous access to a product/service.

• Professional:

  • Charging for time and expertise (e.g., consultants, lawyers).

• Utility and Usage:

  • Charges based on product or service usage (e.g., pay-per-use).

• Freemium:

  • Offering basic services for free while charging for premium features.

3. Pricing Strategies

• Competition-led Pricing:

  • Aligning prices with competitors.

• Loss Leader:

  • Pricing products below cost to attract customers.

• Introductory Offer:

  • Discounted pricing for initial users.

• Skimming:

  • High pricing for new products with little competition.

• Psychological Pricing:

  • Pricing based on perception of value by customers.

• Bundled Pricing:

  • Offering a group of products/services at a discounted rate.

Conclusion

• Understanding these concepts is crucial for startups to effectively manage finances and develop sustainable revenue generation strategies.