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

You need to open and listen to the “Lecture 6 Ratio Analysis” presentation

This presentation introduces ratios and how they help manage finances in a business.

 

Task 2

You need to read the Ratio Examples lecture

This document gives examples on how to calculate various ratios.

Ratios

The ratios below are all using data from the cash flow, profit and loss and balance reports at the bottom of the page.

Gross profit – profit after cost of sales and before income tax.  You calculate your Gross Profit by subtracting the cost of sales from the total income minus sales to value added tax (net income).

Net income – cost of sales = gross profit

86540 – 16765 = 69775

Gross profit is £69,775 or 80.63%

Net profit before tax – Profit after all expenses are deducted but before tax is paid.  You calculate your net profit by deducting all expenses from your gross profit

Gross profit – expenses = net profit before tax

69775 – 62861 = 6914

The net profit is £6,914 or 7.99%

Current ratio – a measure of liquidity – the higher the ratio the more likely you are to pay your bills

Total current assets / current liabilities

18048/2000 = 9.04 or they have 9 times more assets than debt

Quick ratio – similar to current but usually does not include inventory like the current ratio, except it provides a more accurate of your ability to pay your bills in the short term.

Liquid current assets (cash)/ current liabilities

1408/2000 = 7.02 or you have 7 times more cash than debt

Net working capital – Money after liabilities are met to invest in the ongoing functioning of the business Sources of working capital are increased net profit, increased noncurrent liabilities (loans), increased stockholders’ equity, decreased noncurrent assets (sell assets you are not turning over such as car, equipment)

Current assets – current liabilities = net working capital

14048 – 2000 = 16048

The net working capital is £16,048

Total asset turnover – calculates the amount of sales produced for every pound’s worth of assets. It measures a company’s level of efficiency in the use of its assets for the purpose of revenue generation.

Total revenue / average total assets

86540/18048 = 4.79 or for every £1 of assets you generate £4.79 worth of sales

Debt to equity – The debt-to-equity ratio measures the amount of capital contributed by creditors and the amount of capital contributed by shareholders. It shows whether shareholders’ equity can pay to creditors in the event of a closing the business

Total liabilities / total equity

2000 / 24048 = 0.08 or your liabilities are 8% of your equity

Return on investment – shows the percentage return on money invested in a business, it can be used to determine the best investment for your money, very useful for deciding if you want to start the business. 

Net profit / total assets

6914 / 18048 = 38%

Return on equity – tells you how much profit a business earned in comparison to the value of its owners’ equity. 

Net profit / owners’ equity

6914/ 24048 = 28.75%

 

Task 3

You need to read the “Breakeven Analysis” text.

This shows you have to calculate the break-even point for a business.

 

Break-even Analysis

Before you start your business you need to know where your breakeven point is in your business.  This gives you a guide to manage your business and during the start-up phase can help you identify important factors you may need to adapt and change in order to make the business a success.

This analysis gives you a set of controls that allow you to see how you are going.  It is astonishing just how few start-ups do not know what their break-even point is.

There are two factors you could consider; you could calculate the revenue or income you need to break even, or the number of units sold.  Deciding which one to use is significant because it depends on a couple of factors.  If you have a business that is selling hundreds of different items then calculating the income or revenue is much easier.   If you are selling just a few items or if they are perishable, or you are a manufacturing products then you might want to work out how many units you sell.

To find the break-even in the number of units you need to sell you can use the following formula

FC = fixed costs such as rent, insurance, wages

P = the selling price for each unit

VC = variable costs such and the raw materials used to make the products and utilities

 

Before you begin the calculation you need to work out what the actual fixed and variable costs are.  In this example we are using the following amounts based on a weekly ratio.

FC =  £1200

P = £1.85

VC = £0.90

 

 

 

To break-even on the number of units you need to sell 1263 units per week

 To find the break-even in terms of revenue or income we use the same information with one small change.  We calculate the difference between the price per unit sold and the variable costs as a percentage.

 

 

 

The business needs to generate £2500 in sales a week to break-even.

 

Task 4

You need to answer the questions in your Workbook

These questions will build your knowledge of entrepreneurial finance

 

Task 5

You need to watch the following videos: Ratio 1; Ratio 2; Ratio 3

These videos will give you a deeper understanding of ratios

 

Task 6

You need to open and listen to the “Module Review” presentation.

This presentation summarises the module content

 

Task 7

You need to answer the questions in your Workbook

These questions will build your knowledge of entrepreneurial finance

 

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

Chapters 4 & 5: 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 the following videos

Ratio 4

Ratio 5

 

This is the last lecture