Unit 4 - Finance Final Entrepreneurship.docx

Unit 4 - Finance Final Entrepreneurship

1. Sources of Finance

• Internal Sources: Funds from within the business; examples include:

  • Retained profit

  • Personal funds

• External Sources: Funds from outside the business; examples include:

  • Loans

  • Venture capital

• Types of Finance:

  • Debt Financing: Borrowing money, including bank loans and overdrafts.

  • Equity Financing: Selling shares of ownership, often through angel investors or venture capital.

  • Grants & Subsidies: Government support that does not require repayment.

  • Trade Credit: Delayed payments owed to suppliers.

2. Financial Statements & Accounting

Balance Sheet

• Definition: Snapshot of a company’s financial position at a specific point in time.

• Key Components:

  • Assets:

    • Fixed Assets: Equipment, buildings, vehicles

    • Current Assets: Cash, accounts receivable, inventory

  • Liabilities:

    • Current Liabilities: Accounts payable, taxes

    • Long-term Liabilities: Bank loans, mortgages

  • Owner’s Equity: Net assets, comprising share capital and retained profit.

• Formula: Assets = Liabilities + Owner’s Equity

Income Statement (Profit & Loss Account)

• Definition: Shows a company’s profitability over a specified period.

• Key Components:

  • Sales Revenue: Earnings from sales.

  • Cost of Goods Sold (COGS): Direct costs of production.

  • Gross Profit: Calculated as Sales Revenue - COGS.

  • Expenses: Indirect costs, including salaries and marketing.

  • Net Profit: Gross Profit - Expenses.

  • Retained Profit: Net Profit - Taxes - Dividends.

3. Profitability Ratios

• Gross Profit Margin (GPM):

  • Formula: (Gross Profit / Sales Revenue) × 100

  • Measures: Efficiency in managing production costs.

• Net Profit Margin (NPM):

  • Formula: (Net Profit / Sales Revenue) × 100

  • Measures: Efficiency in managing all expenses.

Ways to Improve Profitability:

• Increase Sales Revenue: Implement effective marketing strategies, adjust prices.

• Reduce Costs:

  • Lower production costs.

  • Negotiate better terms with suppliers.

  • Reduce indirect costs.

4. Cash Flow & Management

• Cash Flow Definition: Movement of money in and out of a business.

• Key Components:

  • Cash Inflows: Sales revenue, loans, capital investments.

  • Cash Outflows: Rent, salaries, loan repayments.

• Cash Flow Forecasting:

  • Predicting future cash movements to avoid cash shortages.

• Improving Cash Flow:

  • Reduce Outflows: Eliminate unnecessary expenses, negotiate longer payment terms.

  • Increase Inflows: Offer discounts for early payments, enhance sales strategies.

  • Alternative Finance Sources: Utilize overdrafts, sell assets.

5. Break-even Analysis

• Break-even Point: Level where total revenue equals total costs, resulting in neither profit nor loss.

• Formula:

  • Break-even Quantity = Fixed Costs / (Selling Price - Variable Cost per Unit)

• Margin of Safety: The gap between actual sales and break-even sales.

Effect of Price & Costs:

• Raising Prices: Increases revenue but may lead to decreased demand.

• Reducing Costs: Lowers the break-even point.

6. Revenue Models

• Unit Sales: Selling individual products (e.g., retail).

• Advertising: Revenue from advertisements (e.g., YouTube, social media).

• Subscription: Charging for ongoing access to services (e.g., Netflix, Spotify).

• Licensing: Selling usage rights for a product (e.g., software).

• Franchising: Granting rights to operate under a brand (e.g., McDonald's).

• Freemium: Offering basic services for free with paid upgrade options (e.g., LinkedIn, Dropbox).

7. Business Ethics in Finance

• Ethical Principles:

  • Integrity: Honesty and transparency in financial reports.

  • Objectivity: Avoidance of conflicts of interest.

  • Confidentiality: Safeguarding private financial information.

• Unethical Practices:

  • Insider Trading: Trading based on confidential information.

  • Window Dressing: Manipulating financial statements for better presentation.

  • Greenwashing: Misleading claims about sustainability.

Multiple-choice questions (MCQs)

1. Which of the following is an internal source of finance?

   • a) Bank loan

   • b) Trade credit

   • c) Retained profit

   • d) Venture capital

2. What does the balance sheet show?

   • a) Profitability of a business over a year

   • b) Cash inflows and outflows over time

   • c) A company’s financial position at a point in time

   • d) Only a company’s liabilities

3. What is the formula for Gross Profit Margin?

   • a) (Net Profit / Sales Revenue) × 100

   • b) (Gross Profit / Sales Revenue) × 100

   • c) (Net Profit / Expenses) × 100

   • d) (Sales Revenue / COGS) × 100

4. Which of the following improves cash flow?

   • a) Increasing inventory levels

   • b) Delaying payments from customers

   • c) Reducing expenses

   • d) Taking more loans

5. What is break-even quantity?

   • a) Sales revenue needed to cover costs

   • b) Total profit of a business

   • c) Net cash inflow from operations

   • d) The maximum number of units a company can sell

6. Which financial statement reports net profit?

   • a) Balance sheet

   • b) Income statement

   • c) Cash flow forecast

   • d) Revenue model

7. What is an example of ethical financial behavior?

   • a) Insider trading

   • b) Accurate financial reporting

   • c) Window dressing

   • d) Greenwashing

8. What does the income statement show?

   • a) Business profits over a period

   • b) Cash balances

   • c) A company's assets and liabilities

   • d) Business costs only

9. How can a business improve net profit margin?

   • a) Increase production costs

   • b) Increase indirect costs

   • c) Reduce expenses

   • d) Lower selling prices

10. Which revenue model is used by streaming services like Netflix?

• a) Advertising

• b) Freemium

• c) Subscription

• d) Licensing