Entrepreneurial finance

The purpose of the learning is for you to develop your own learning. There are a number of tasks that you should complete before you undertake the next section.  You can work through this section at your own pace. It is expected that you would take up to 3 hours to complete this section.  You must complete this section before you move to the next section.

 

Task 1

Open the presentation “Lecture 4 Part 1”

This presentation introduces you to the issues around managing debt and credit.

 

Task 2

Read lecture “Managing Discounts”

This document explains how to calculate if a discount is worth accepting.

 

Managing Discounts

In the last slide we mentioned that you need to calculate the cost of discounts to your business before you offer them to customers or accept them from suppliers.  The calculation is quite straight forward.  The cost is shown as a percentage per annum.

Calculating discounts to customers

To work out what the cost is you need to divide the percentage discount by the discounted amount payable.  Then divide the number of days in the year by the reduced number of days.  Then multiply both together to obtain a percentage figure (multiply the answer by 100).

A company offer 50 days’ credit to customers but has begun to experience a cash flow reduction.  In order to increase cash flow they are offering customer 2% discount on their invoice if they pay within 10 days. 

Percentage discount                                     Number of days in the year    

Discounted amount payable      ^x              reduced number of days        ^{= cost per annum}

Let us say a customer owes £100 and you discount the invoice by 2% if paid within 10 days. 

 

2             365 

98  ^X       40  ⁼       0.0204 X 9.125 = 18.6    

2 = percentage discount

98 = the new invoice total after the deduction of the 2% discount

365 = the number of days in the year

40 = the number of days discounted by paying early.

 

The cost of the discount to the business is 18.6% per annum.  To work out if this is better for the business you need to know how much it would cost the business to wait to be paid.  If the business allowed the customer to pay at the end of 50 days and borrowed money from the bank to cover expenses while waiting to be paid by the customer ay 15% then the discount is actually more expensive to the business than borrowing the money to cover expenses.

To calculate if you should pay an invoice early you do the exact same calculation.  However, the final figure relates to the amount you have saved or earnt on that discount.  In this case if you kept the money you owed to the supplier in a bank account that earns 5% interest then the discount is acceptable because the return on the money is greater than leaving the money in a bank account.

 

Task 3

You need to answer the questions in your workbook.

These questions enable you to develop your learning.

 

Task 4

Open the presentation “Lecture 4 Part 2”

This presentation introduces you to the issues around managing inventory and stock.

 

Task 5

You need to read the document “Calculating EOQ”

The document explains how to calculate EOQ.

 

Economic Order Quantity

To calculate the optimal stock level to avoid running out of product means you need to work out a number of costs.

In this example we will show you how to calculate over a 12 month period.  You need to know the number of products you sell in 12 months.  Let say you sell 700 items a month, this means you sell 8400 in a year (D).  The cost to order this stock each month is £12 (S).  The costs to store the product are calculated by dividing the total salaries relating to the storage, rent, insurance and utilities by the total value of all your stock.  In this case the total value of the stock is £78,000 and the total of salaries, rent, insurance and utilities is £9,000.  This means your cost to store the products is 11% (I).  Finally the cost of is unit of the product is £3.45 (P).  The equation is:

 

 

 

 

 

 

The calculation above shows that the optimum level of stock to hold at the start of the month to avoid running out is 728.  However, this calculation is not an absolute fix approach.  It is intended as a guide only.  Almost every business would experience fluctuations of sales each month as events influence peoples buying patterns.  So in managing your stock you need to ensure that you take into consideration these events.  Events like the weather profoundly affect food, clothing and entertainment sales.  So once you have an idea of your optimum stock or inventory level you need to then look at fine tuning the stock level based on historical information around previous sales in previous months and by looking at future events that would influence rises of falls in sales.

 

Task 6

You need to watch this online video

This video provides further insight to EOQ

 

Task 7

You need to watch this online video

This video provides further insight to managing your stock.

 

Task 8

You need to answer the questions in your workbook

These questions enable you to develop your learning.

 

Task 9

You need to complete this online quiz

This quiz allows you to see how you are progressing

 

You should undertake further reading on the topics in this section.  We recommend that you read the following:

Chapter 7: Adelman, P. and Marks, A. (2014) Entrepreneurial Finance, 6th edition, Pearson Education, New Jersey.

You will find the following links useful:

Accounting and Finance dictionary

All business

Venture Line

 

You should watch these videos

 

The next section is Lecture 5