Basics of Business & Finance

Ashok always wanted to be different from his schoolmates. When he was in standard XI, he hit upon the idea of selling nimboo-pani at the park near his home in the evenings during his summer recess. He brought ice from his home and made sure that the lemons were fresh. Kids and youngsters who would be thirsty at the end of their games would buy his drinks. At the end of each day he counted the cash, set aside the money for the mornings purchases and saved the rest. He made a tidy sum before his school reopened. Ashok dreamt of being an entrepreneur and after his graduation decided to pursue an MBA program. He felt that the degree would provide him with professional knowledge necessary to supplement his enterprising nature. He did his summer project in a company manufacturing transformers where he came to know a lot about it. He learnt that the basic raw-material was CRGO (Cold Rolled Grain Oriented) silicon steel which was in the form of thin sheets & cut to size as per design. He also noticed that there was huge requirement of CRGO and scented a business opportunity. He kept constant touch with the MD of the company even after completion of his project learning the tricks of the trade, the sources of supply of silicon steel, and enquiring about machinery and equipment to cut and process the different shapes of core laminations required. When he was nearing completion of his MBA, he put all his calculations and projections together in the form of a detailed business plan and discussed possibilities with his father. Ashoks business would require Rs. 5 lacs to begin with and his father agreed to provide him with Rs. 1.5 lacs. Ashok had savings of Rs. 1 lac which would come handy but he was still Rs. 2.5 lacs short. He was thinking of bank loan but it so happened that he got in touch with one of his childhood friend, an electrical engineer, who agreed to give the required amount and technical advice against a 50% share in the profits. Ashok started his business immediately after completion of his MBA.

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Ashok worked very hard to make his business successful. He negotiated hard with his suppliers and never compromised on quality. His goodwill started to build up and he was sure to make sizeable profits at the end of the 1st year. However, when the accounts were compiled Ashok was at his wits end. His income statement was showing profits but he was unable to see the cash. His Balance Sheet was showing very high current ratio. The market was growing and there were overseas opportunities coming up. He also needed more funds for working capital. Ashok started to think about arranging finance for expansion of his business. Terms to know: i. ii. iii. iv. v. vi. vii. Business plan Partnership Goodwill Income statement Balance Sheet Current Ratio Working Capital

Questions: 1. 2. 3. 4. 5. 6. What are the key factors that should be considered when starting a business? What should be the key elements of a good business plan? What other main forms of business were available before Ashok? What are the principal financial statements and what information do they convey? Explain Ashoks position at the end of 1st Year - Profits but no cash. How can Ashok arrange for finance for business expansion?

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