financial requirements of a new enterprise author: alpana trehan chapter-3 © 2011, dreamtech press...

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FINANCIAL REQUIREMENTS OF A

NEW ENTERPRISEAUTHOR: ALPANA

TREHAN

CHAPTER-3

© 2011, Dreamtech Press :: Chapter 3

An enterprise needs to determine its financing requirements, before its set up.

An enterprise has two types of financial requirements: Fixed capital

Helps in purchasing the fixed assets such as land, buildings and furniture

Also called as long term capital Amount depends on the nature and size of the business Generates income and profits in long term

Working Capital Implies the amount of money required for the day-to-day

management of the business Covers expenses on raw materials, wages and salaries,

advertising, rent, fuel, electricity and water Also called as revolving capital or circulating capital

FINANCING A NEW ENTERPRISE

© 2011, Dreamtech Press :: Chapter 3 2

Long-Term Capital Refers to the capital required for a period of five years or more. Helps to finance the fixed capital and the permanent part of the working

capital. Raised through various sources, such as by issuing shares and

debentures and taking loans from financial institutions. Medium-Term Capital

Refers to the capital required for a period of two to five years. Performs various activities, such as renovation of buildings, expenditure

on advertising, and modernization of machinery. Raised through various sources, such as by issuing shares and

debentures and reinvestment of profits. Short-Term Capital

Refers to the capital required for a period of less than a year. Helps to finance the current assets and meet day-to-day expenses. Raised through various sources, such as banks, trade credit, and

installment credit.

FINANCIAL REQUIREMENTS ON THE BASIS OF PERIOD OF USE


The fixed cost includes the expenses of an enterprise that do not change with change in the levels of production.

The following are the fixed cost of an enterprise: Land and Site Development Construction Cost Plant and Machinery Technical Knowhow Utility Cost Miscellaneous Fixed Assets

FIXED COST


Purchase price of land

Legal and registration

charges

Leveling of land

Laying of internal and

approach roads

Boundary wall / fencing of

land

Gates and site office

Tube well and electrification

for project implementati

on

Any other expense of

similar nature

LAND AND SITE DEVELOPMENT


Factory buildings

• Production shed• Boiler House• Transformer room/

generator room• Workshop• Laboratory

Non-factory buildings

• Ware house• Stores• Security house• Workers’ rest room• Parking• Time office/ excise

room• Administrative block• Essential quarters for

workers• Canteen

CONSTRUCTION COST


Basic cost of equipment

Excise/ custom duty and sales tax

Transshipment cost (from vendor

to site) and insurance during

transportation

Erection and foundation cost Piping cost

PLANT AND MACHINERY


Basic cost of technology

development or purchase

Training cost for employees

Royalty paid (if lump sum)

TECHNICAL KNOWHOW


Boiler Compressor

Generator/ Transforme

r

Underground /

overhead water tank

Effluent treatment

plant

UTILITY COST


Work in Progress

Finished Goods

Inventory

Receivables

Raw Material

Inventory

DETERMINANTS OF WORKING CAPITAL


Long-term Finance

Medium-term Finance

Short-term Finance

SOURCES OF FINANCE


• A method of raising long-term funds by selling the common and preferred stock of the enterprise to the investors

Equity Financing

• An agreement between a debenture holder and the enterprise, which acknowledges that the enterprise would repay the debt at a specified date to debenture holders

Debt Financing

• The long-term loans that are raised for the duration of 3 to 10 years from financial institutions

Term Loans

SOURCES OF LONG-TERM FINANCING


• An agreement between the owner of assets, called the lessor, and the user of assets, called the lessee

Lease Finance

• Funds and loans raised from general public, employees, and other similar kind of depositors

Public Deposits

• The accumulated profit for future investments, which can be short-term or long-term in nature

Retained Earnings

• An agreement between a hiree (the owner of assets) and a hirer (the user of the assets)

Hire Purchase

SOURCES OF MEDIUM-TERM FINANCING


SOURCES OF SHORT-TERM FINANCING


•An arrangement in which the supplier allows the buyer to pay for goods and services at a later date in futureTrade Credit

•The art of payment made in advance by the customer to the enterprise for the procurement of goods and services in the future

Customer Advances

•The borrowed amount is paid in equal installments with interestInstallment Credit•The amount of money granted by the bank at a specified rate of interest for a fixed period of timeBank Loan

•An arrangement made by the bank for the clients to withdraw cash exceeding their account limitCash Credit

•An instrument used by the enterprise with high credit rating to raise money from the market

Commercial Papers

•A promissory note issued by the bank to the investors for depositing funds in the bank for a fixed period of time

Certificate of Deposits

•A document in which an individual asks the recipient to make payment for goods and services received to a third party at a future dateBills of Exchange

•A temporary arrangement with the bank that allows the organization to overdraw from its current deposit account with the bank up to a certain limit

Bank Overdraft

Reserve Bank of IndiaState Bank of IndiaBank of BarodaAndhra BankSmall Industries Development Organization (SIDO)National Small Industries Corporation Ltd (NSIC)

INSTITUTIONS PROVIDING FINANCIAL ASSISTANCE


It is a source of finance for newly established small and medium enterprises willing to raise funds.

Independently managed, dedicated pools of capital that focus on equity-linked investments in privately held, high-growth companies. ---- Gompers and Lerner (1999: 11)

Methods of Venture Funding in India: Equity Conditional Loans Income Note

VENTURE CAPITAL FUNDING


• Involves interaction between venture capitalists and entrepreneurs regarding the investments in business proposals

Deal Initiation

• Involves an initial screening of all the projects on the basis of certain criteria, such as the size of investment, geographical location, and stage of financing

Preliminary Screening

• Includes activities that are associated with evaluating an investment proposalDue Diligence

• Involves negotiation between the venture capitalist and the entrepreneur regarding the terms and conditions of the deal Deal Structuring

• Indicate the activities performed by venture capitalist after finalizing and completing the deal with the entrepreneur

Post Investment Activities

• Refers to a stage when the venture capitalist wishes to exit from the businessExiting

VENTURE CAPITAL FUNDING PROCESS


Finance is prerequisite for mobilizing the resources of an enterprise.

Financing a new enterprise essentially involves two things, namely, estimating the funds/capital requirement and deciding sources.

Estimating financial requirements for a startup enterprise involves determining the total amount of capital required for various needs of the business and deciding the sources and methods to raise it.

Venture capital is an important source of finance for newly established small and medium enterprises willing to raise funds.

RECAP


financial requirements of a new enterprise author: alpana trehan chapter-3 © 2011, dreamtech press...

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