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

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