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.

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