Financing A Venture

Every Venture Needs Money!  No matter it is a not-for-profit cooperative or a profit –making corporation, a new start-up or a well-established corporation, every venture needs money!  All ventures must at least aim to BREAK-EVEN (total revenues of all money flowing into a venture must equal the total costs of providing goods and services).  Total REVENUE for a venture is determined by multiplying the number of units sold  Adding together all fixed and variable costs determines total COSTS.

Profit  Profit is the major goal of the entrepreneur!  Profit is like a scorecard for measuring success. Profit formula: Profit =(price of each unit X quantity) – costs Total profit = total revenue - total costs  The amount of profit is determined on the demand for the product or service, the number of customers who are willing and able to pay the price for it, and competition.

Pricing  The price a venture receives for its goods or services is used to pay for production and distribution costs.  Theoretically, a business owner can charge any price he/she wants for goods and services.  However, strategic pricing takes many factors into account:

Strategic Pricing  How the competition prices the goods and services  Expectations about sales and expenses  How much money the owner wants or needs to make  What the market will tolerate  Inventory costs and whether the supplier has pricing terms that must be followed

Planning a Financial Strategy  Developing a sound financial strategy requires a detailed plan. Venture Plans include : 1.Cash- Flow Projections 2.Income Statement 3.Balance Sheet

Cash Flow Projections  Cash flow projections or forecast reveals the amounts of money expected in revenues and expenses and their timing (usually monthly)  The difference between the two (cash receipts minus cash disbursements) reveals whether the business generates a positive or negative balance (profit or loss) in any given month.

Sample: Cash Flow Projections

Estimating Expenses  Expenses are reasonably easy to accurately estimate by: 1.obtaining quotes from suppliers 2.Knowing when rent is to be paid and how much 3.Wages (e.g., paid every second Friday)

Estimating Revenues  Estimating revenues presents a much greater challenge and are more difficult to determine: 1.Magnitude (how many sales)? 2.Timing (when)?  Realistic estimates can be forecast with market research: 1.Buying habits of target market 2.Sales patterns of competitors 3.Exploring market tolerance for various pricing levels

The Balance Sheet  A balance sheet is a snapshot of what a business owns (assets), what it owes (liabilities) and the difference between the two (assets – liabilities = net worth)  Assets- classified as “current assets” and “fixed assets ”

CURRENT ASSETS – are liquid meaning actual cash or assets to be converted to cash within one year. Most common non-cash assets are accounts receivable (money owed to the business by its customers) and inventory (product ready or almost ready to be sold). FIXED ASSETS – Long- term or capital assets not expected to be converted into cash within one year. Common fixed assets are land, buildings, vehicles, plant or office equipment, furniture, etc. FIXED ASSETS – Long- term or capital assets not expected to be converted into cash within one year. Common fixed assets are land, buildings, vehicles, plant or office equipment, furniture, etc.

The Income Statement  The income statement reveals sales, expenses and profits (or losses) for a period of time (usually monthly or yearly)  While cash flow projections look forward and predict the future, income statements reflect the past.  Often an accountant or bookkeeper prepare this statement.

Income Statement