CHAPTER 7

FINANCING ASPECTS IN A SMALL

BUSINESS
 Identify Understand
source of the need of
financing financing

Recognize Preparing the

financial Financial
institutions for Plan
small business
support
FINANCING YOUR BUSINESS

Understand the need of

financing
Identify source of
financing
Financial institutions for
small business support
Preparing the financial
plan
Understand Total
the need of capital
financing required

Product Break-Even
cost analysis
 Item Amount Notes
COMPONENTS OF PROJECT COST
1. Establishment Costs
5. Business premises
Purchase price of existing
business One month's rent

Purchase price of franchise Lease bond

2. Professional Advisors Legal fees for lease preparation

Legal Fit-out costs

Accounting Signage

Training courses Telephone installation

Website development Utilities installation

Graphic design fees Insurance premium

6. Operations
3. Licences and
Registrations Business cards, letterheads
Licenses and permits Business travel and accommodation
Business name registration Office supplies
Professional association fees Opening inventory and raw materials

4. Plant and Equipment Pre-opening advertising and promotion

Computer equipment Wages and salaries
Vehicles Contingency
Mobile phones Working capital, 2-3 months
Office furniture
Total Establishment Costs (RM)
Photocopier (1+2+3+4+5+6)
Fax machine
Manufacturing equipment
Tools
 PRODUCT COST
Two types of cost :
Fixed cost and Variable cost

Fixed Cost: A periodic cost that remains more or less

unchanged irrespective of the output level.
Examples of fixed costs include rent, management
staff or loan payments.

Variable Cost: The cost that varies with the level of

output. Those costs that vary depending on a
company's production volume; they rise as
production increases and fall as production
decreases.

Common variable cost: include raw materials,

packaging, and labor directly involved in a
company's manufacturing process.
 BREAK-EVEN ANALYSIS
A price at which the business is not making
either a profit or a loss.

How many do I need to sell,

to at least cover my cost?

Break-Even Point = Fixed Costs How much should I

(Unit Selling Price - Variable Costs) sell per unit?

Break-Even Price = Total Fixed Costs + Total Variable Cost

Number of Units
 LETS DO A SIMPLE QUIZ

Example:
Let say as a new start up you have committed to fixed
cost amounted to RM8,000
(rent RM5,000 & salary RM3,000)
The variable cost per unit = RM4
You intend to sell at RM12 per unit.
How much do you need to sell to reach Break-Even?
HI EXPERTS! LETS DO ANOTHER QUIZ

Let say as a new start up you have committed to fixed cost

amounted to RM8,000 (rent RM5,000 & salary RM3,000)
A supplier offers you a product at the price of RM6, but you need
to buy in bulk of 2,000 units.
How much the price do you need to sell the product to reach
Break-Even?
 A price at which the business is not making either a profit or
Break-Even Price a loss. Selling below than break-even price would incur a
loss

The total amount of money required to setup the

business is termed as the capital required or
sometimes known as the project costs.
The total capital comprise of the fixed capital and
Total Capital required working capital.
The fixed capital is the amount of money required
to purchase equipment, land and buildings.
Working Capital is an amount of money required to
produce the products.
SOURCES OF FINANCING
Borrowing
Personal
from friends
savings
and family

Suppliers
Credit card
credit

Debt
Financing
 SOURCES OF FUNDS

Item Amount Notes

Personal savings - Owner 1
Personal savings - Owner 2
Personal savings - Owner 3
Loans from family and friends - Name 1
Loans from family and friends - Name 2
Supplier credit
Bank loans
Equity Financing
Total Funds Available (RM)
 DEBT FINANCING
Debt financing involves borrowing money, generally in the
form of a loan from a bank or other financial institution or
from commercial finance companies, to fund your business.
 The bank or lending
institution (such as the
SMECORP /
MARA) has no say in The business
the way you run your relationship ends
company and does not once the money
have any ownership in is paid back
your business.

Advantages of The interest on

Debt Financing the loan is tax
deductible.

Principal and interest

are known figures you
can plan in a budget Loans can be short
(provided that you do term (e.g: working
not take a variable rate capital, overdraft
loan). facility, etc) or long
term (e.g: asset
financing loan, etc).
 DISADAVANTAGES OF DEBT FINANCING

Money has to paid back within a fixed amount of Debt financing could leave the business vulnerable
time. during hard times when sales take a drop.

If you took on too much on debt and run into cash Debt can make it difficult for a business to grow
flow problems, you would have trouble paying the because of the high cost of repaying the loan.
loan back.

If you carry to much debt you will be seen as a " The business assets have to be held as collateral
high risk" by potential investors - which would limit to the leader. and the owner of the company is
your future ability to raise capital through equity often required to personally guarantee repayment
financing. of the loan.
 This type of financing can
come from your personal
savings, family and friends
as well your partners.

Equity financing involves

Equity bringing in investors or
partners who provide capital
Financing in exchange for a share of
ownership of the business.

These investors or partners

generally invest because they
expect to make a profit when
the business becomes
successful.
ADVANTAGES OF EQUITY FINANCING

Investors take a long-

term view, and most do You won't have to You will have more cash
not expect a return on channel profits into loan on hand for expanding
their investment repayment. the business.
immediately.

It is less risky than a loan

There is no requirement You tap into the
because you do not have
to pay back the investor's network, which
to pay it back, and it is a
investment if the may add more credibility
good option if you cannot
business fails. to your business.
afford to take on debt.
DISADVANTAGES OF EQUITY FINANCING

It may require returns that could exceed the rate you would have paid for a bank
loan.

The investor would require some ownership of your company and a percentage of
the profits. You may not want to give up this kind of control.

You will have to consult with investors before making big (or even routine)
decisions -- and you may disagree with your investors.

In the case of irreconcilable disagreements with investors, you may need to cash
in your portion of the business and allow the investors to run
the company without you.

It takes time and effort to find the right investor for your company.
 Preparation of
Financial
Planning

Pro Forma Pro Forma

Income Balance
Statement Sheet

Pro Forma
Cash
Flow
How it was started?
 Sales
Budget
Production
Budget

Direct Labor Cost Pro Forma

Budget
Income
Statement

Selling And
Administrative Expense
Budget
Factory Overhead Cost
Budget
 Schedule of payments for manufacturing costs
Pro Forma
Cash
Capital expenditures budget
Flow
Schedule of collections from sales

Pro Forma Pro Forma balance sheet estimates the financial

condition at the end of a budget period
Balance
Sheet
Starts with an estimate of the ending balance
for Retained Earnings
 Financial Institutions for Small Business Support

Difficult aspect to assess among potential borrower

Character especially in cases where the borrower is first time
borrowers.

Important that the prospects are at the age capable to

Capacity enter a contract and that he is free from any legal
immunities.

A lender require an asset as an added security to

Collateral protect itself in the event when the loan cannot be
collected.

Personal commitment to the business includes lifestyle

Commitments choices.

Circumstances generally include markets, consumer

Circumstances trends, economic predictions and also environmental
considerations.
 BUSINESS INSTITUTIONS AND
AGENCIES FOR BUSINESS FUNDING