CU-MCOM-SEM-III-Entrepreneurship

d. out-dated ideas Answers 1-a, 2-a, 3-a, 4-a, 5-a 3.9 REFERENCES References book  Entrepreneurship: Hisrich, Robert. Michael Peters and Dean Shepherd, Mathew. Tata McGraw-Hill Education, New Delhi 2017.  Entrepreneurship Development: Sangeeta Sharma, PHI, 2017.  Innovation and Entrepreneurship: Peter Drucker, Harper Collins India, 2015.  Entrepreneurship Development and Small Enterprise: Poornima M, Pearson Education, 2014. Textbook references  Entrepreneurship Development: Gordon E and Natarajan K, Himalaya Publishing House, 5th Edition, 2014.  Entrepreneurship A South Asian Perspective: T V Rao, Donald F. Kuratko, Cengage, 1st Edition, 2012.  The Innovators by Walter Isaacson.  Modern Monopolies by Alex Moazed and Nicholas L. Johnson @109.10 Website  www. Yourarticlelibrabry.com  www. Managementstudyguide.com 51 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT- 4 PREPARING A BUSINESS PLAN STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Meaning and significance of a business plan 4.3 Components of a business plan 4.4 Feasibility study 4.5 Summary 4.6 Keyword 4.7 Learning Activity 4.8 Unit End Activity 4.9 Reference 4.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the meaning of business plan  Discuss the significance of business plan  Describe the components of business plan  State the meaning of feasibility study 4.1 INTRODUCTION A business plan is a composed archive that portrays exhaustively how a business—generally a startup—characterizes its destinations and how it is to approach accomplishing its objectives. A field-tested strategy spreads out a composed guide for the firm from showcasing, monetary, and functional outlooks. 52 CU IDOL SELF LEARNING MATERIAL (SLM)

Business Plans are significant reports used to draw in venture before an organization has set up a demonstrated history. They are likewise a decent way for organizations to keep themselves on track going ahead. Despite the fact that they're particularly valuable for new organizations, each organization ought to have a strategy. Preferably, the arrangement is assessed and refreshed occasionally to check whether objectives have been met or have changed and advanced. At times, another field-tested business plan is made for a set up business that has chosen to move toward another path. 4.2 MEANING AND SIGNIFICANCE OF A BUSINESS PLAN Meaning of Business Plan A business plan is a thorough guide for your private company's development and improvement. It imparts what your identity is, the thing that you intend to do, and how you intend to do it. It additionally assists you with drawing in ability and financial backers. ut, remember, a business thought or business idea isn't an arrangement. Templated marketable business plans give financial backers an outline of what's in store from your organization and educate them concerning you as a entrepreneurs. Most of venture capitalist (VCs) and all financial foundations won't put resources into a startup or independent venture without a strong, composed arrangement. Investors need to realize you have item market fit, a strong group set up, and versatility— which is the capacity to develop deals volume without corresponding development in headcount and fixed expenses. When do you need a business plan? Before you pass on an all-day pay, your Business Plan can advise you in case you're prepared. Over the long haul, it'll keep you zeroed in on what should be cultivated. It's additionally shrewd to compose a marketable strategy when you're: • Seeking subsidizing, ventures, or advances • Searching for another accomplice or fellow benefactor • Attracting, employing, and holding top ability • Experiencing moderate development and need a change Meaning of Business Plan 53 CU IDOL SELF LEARNING MATERIAL (SLM)

Business Plans normally incorporate point by point data that can assist with working on the business' odds of progress, similar to a market investigation, serious examination, client division, promoting, coordination’s and tasks plans, income projection and a general way to long haul development. However it might sound monotonous and tedious, field-tested strategies are basic to progress. To layout the significance of marketable strategies, here are 10-reasons why you need one for your private venture. 1. To assist you with basic choices While business plan have numerous reasons, the essential significance of a marketable business plan is that they help entrepreneurs settle on better choices. Entrepreneurship is regularly an unending activity in dynamic and emergency the board. Plunking down and considering every one of the implications of some random choice is an extravagance that business people can't generally manage. That is the place where a business plan comes in. Building a business plan permits you to decide the response to probably the most basic business choices early. Making a powerful field-tested business plan is a constraining capacity—you need to plunk down and consider significant segments of your business before you begin, similar to your promoting methodology and what items you'll sell. You answer numerous intense inquiries before they emerge. Furthermore, contemplating your center methodologies can likewise assist you with seeing what those choices will mean for your more extensive system. 2. To resolve the crimps Assembling a strategy expects entrepreneur to ask themselves a ton of hard inquiries and set aside the effort to think of well-informed and sagacious answers. Regardless of whether the actual record were to vanish when it's finished, the act of composing it assists with articulating your vision in sensible terms and better decide whether there are any holes in your procedure. 3. To stay away from the serious mix-ups As per the Small Business Administration, just about portion of independent ventures are still around to commend their fifth birthday celebration. While there are numerous reasons why private companies fall flat, a considerable lot of the most well-known are intentionally tended to in business plan. 54 CU IDOL SELF LEARNING MATERIAL (SLM)

As indicated by information from CB Insights, probably the most widely recognized reasons organizations fall flat include: • No market need: No one needs the thing you're selling. • Lack of capital: Cash stream issues or organizations basically run out of cash. • Inadequate group: This highlights the significance of recruiting the opportune individuals to help you maintain your enterprise. • Stiff rivalry: It's difficult to produce a consistent benefit when you have a great deal of rivals in your space. • Pricing: Some entrepreneur value their items or administrations excessively high or excessively low—the two situations can be a catastrophe waiting to happen. Be that as it may, the activity of making a business plan can assist you with keeping away from these significant errors. Regardless of whether it's income estimates or an item market fit investigation, each piece of a business plan can assist with detecting a portion of those conceivably basic slip-ups before they emerge. 4. To demonstrate the reasonability of the business Numerous organizations are made out of energy, and keeping in mind that enthusiasm can be an incredible inspiration, it's anything but an extraordinary verification point. Arranging out precisely how you will transform that vision into an effective business is maybe the main advance among idea and reality. Field-tested business plan can assist you with affirming that your fantastic thought bodes well. A basic segment of your business plan is the statistical surveying area. Statistical surveying can offer profound understanding into your clients, your rivals, and your picked industry. Not exclusively would it be able to edify entrepreneurs who are firing up another enterpreneurship, yet it can likewise better educate existing organizations on exercises like promoting, publicizing, and delivering new items or administrations. 5. To set better goals and benchmarks Without a business plan, destinations regularly become subjective, absent a lot of purpose behind them. Having a business plan can assist with making those benchmarks more purposeful and weighty. They can likewise assist with keeping you responsible to your drawn out vision and system, and gain bits of knowledge into how your methodology is (or alternately isn't) meeting up over the long haul. 6. To convey targets and benchmarks 55 CU IDOL SELF LEARNING MATERIAL (SLM)

Regardless of whether you're dealing with a group of 100 or a group of two, you can't generally be there to settle on each choice yourself. Think about the business plan like a substitute educator, prepared to address questions whenever there's a nonappearance. Tell your staff that if all else fails, they can generally counsel the business plan to comprehend the subsequent stages if they can't find a solution from you straightforwardly. Sharing your field-tested strategy with colleagues likewise guarantees that all part are lined up with what you're doing, why, and offer similar comprehension of long haul destinations. 7. To give a manual for specialist organizations Private companies commonly utilize workers for hire, specialists, and different experts to assist them with singular assignments like bookkeeping, promoting, legitimate help, and as advisors. Having a strategy set up permits you to effortlessly impart important segments to those you depend on to help the association, while guaranteeing everybody is in total agreement. 8. To get financing In case you're anticipating pitching to investors, getting from a bank, or are thinking about selling your organization later on, you're probably going to require a strategy. All things considered, anybody that is keen on placing cash into your organization will need to know it's in acceptable hands and that it's reasonable over the long haul. Business plans are the best methods of demonstrating that and are ordinarily a prerequisite for anybody looking for outside financing. 9. To all the more likely comprehend the more extensive scene No entrepreneurship is an island, and keeping in mind that you may have a solid handle on everything occurring under your own rooftop, comprehend the market landscape too. Composing a business plan can go far in assisting you with bettering your opposition and the market you're working in more comprehensively, enlighten buyer patterns and inclinations, possible disturbances and different bits of knowledge that aren't in every case obviously noticeable. 10. To diminish hazard Entrepreneurship is a dangerous business, yet that hazard turns out to be essentially more reasonable once tried against a very much created strategy. Drawing up income and cost projections, conceiving coordinations and functional plans, and understanding the market and 56 CU IDOL SELF LEARNING MATERIAL (SLM)

serious scene would all be able to assist with decreasing the danger factor from an intrinsically problematic approach to get by. Having a field-tested strategy permits you to surrender less to risk, settle on better choices, and partake in the most clear conceivable perspective on the eventual fate of your organization. 4.3 COMPONENTS OF A BUSINESS PLAN Successful field-tested strategies should contain a few key parts that cover different parts of an organization's objectives. The main pieces of a business plan include: 1. Executive summary 2. Business description 3. Market analysis and strategy 4. Marketing and sales plan 5. Competitive analysis 6. Management and organization description 7. Products and services description 8. Operating plan 9. Financial projection and needs 10. Exhibits and appendices 1. Executive summary The Executive summary is the first and perhaps the most basic pieces of a business plan . This rundown gives an outline of the business plan all in all and features what the business plan will cover. It's normal best to compose the chief outline last so you have a total comprehension of your arrangement and can viably sum up it. Your executive summary ought to incorporate your association's statement of purpose and the items and administrations you intend to offer or at present offer. You may likewise need to incorporate why you are beginning the organization if the strategy is for another association. 2. Business description 57 CU IDOL SELF LEARNING MATERIAL (SLM)

The following piece of a business plan is the business description. This part gives a far reaching depiction of your business and its objectives, items, administrations and target client base. You ought to likewise incorporate insights about the business your organization will serve, and any patterns and significant contenders inside the business. You ought to likewise remember you and your group's insight for the business and what separates your organization from the opposition in your business description. 3. Market analysis and strategy The motivation behind the Market analysis and strategy part of a business plan is to investigate and recognize an organization's essential objective crowd and where to discover this crowd. Elements to cover in this segment include: • Where your objective market is geologically found • The essential trouble spots experienced by your objective clients • The most conspicuous necessities of your objective market and how your items or administrations can address these issues • The socioeconomics of your intended interest group • Where your objective market invests the vast majority of their energy, like specific web-based media stages and actual areas The objective of this part is to obviously characterize your intended interest group so you can make key assessments concerning how your item or administration will perform with this crowd. 4. Marketing and sales plan This piece of your business plan should cover the particulars of how you intend to market and sell your items and administrations. This part ought to include: • Your expected showcasing and advancement methodologies • Pricing plans for your organization's items and administrations • Your systems for making deals • Why your intended interest group should buy from your organization versus your opposition • Your association's remarkable selling proposition 58 CU IDOL SELF LEARNING MATERIAL (SLM)

• How you will get your items and administrations before your intended interest group 5. Competitive analysis Your business plan ought to likewise incorporate a nitty gritty cutthroat investigation that unmistakably traces an examination of your association to your rivals. Blueprint your rivals' shortcomings and qualities and how you expect your organization to contrast with these. This part ought to likewise incorporate any benefits your opposition has in the commercial center and how you intend to separate your organization. You ought to likewise cover what makes your business not the same as different organizations in the business, just as any potential issues you may confront when entering the commercial center if appropriate. 6. Management and organization description This part of your business plan should cover the subtleties of your business' management and organization strategy. Present your organization chiefs and their capabilities and obligations inside your business. You can likewise incorporate HR necessities and the lawful construction of your organization. 7.Products and services description Utilize this part to additionally develop the subtleties of the items and administrations your organization offers that you shrouded in the leader outline. Incorporate all important data about your items and administrations, for example, how you will fabricate them, how long they will last, what needs they will meet and the amount it will cost to make them. 8. Operating plan This piece of your business plan ought to portray how you intend to run your organization. Incorporate data with respect to how and where your organization will work, the number of representatives it will have and any remaining appropriate subtleties identified with your organization's operations. 9. Financial projection and needs The financial section of your business plan should detail how you expect acquiring income and the financing you'll have to begin. You ought to incorporate your fiscal reports, an investigation of these statements and a cash flow projection. 10. Exhibits and appendices The last part of your business plan ought to incorporate any additional data to additional help the subtleties illustrated in your arrangement. You can likewise incorporate shows and informative supplements to help the reasonability of your field-tested strategy and give 59 CU IDOL SELF LEARNING MATERIAL (SLM)

financial backers an unmistakable comprehension of the examination that backs your arrangement. Normal data to place in this part incorporates: • Resumes of organization the board and different partners • Marketing research • Permits • Proposed or current promoting materials • Relevant legitimate documentation • Pictures of your item • Financial reports 4.4 FEASIBILITY STUDY A feasibility study is an investigation that considers the entirety of a task's applicable components—including monetary, specialized, legitimate, and planning contemplations—to determine the probability of finishing the undertaking effectively. Task supervisors use achievability studies to observe the upsides and downsides of undertaking a venture before they contribute a ton of time and cash into it. feasibility study likewise can give an organization's administration significant data that could keep the organization from entering recklessly into dangerous organizations. An feasibility study is basically an appraisal of the reasonableness of a proposed plan or task. As the name suggests, these examinations inquire: Is this task attainable? Do we have individuals, devices, innovation, and assets fundamental for this undertaking to succeed? Will the venture get us the return on investment (ROI) that we require and anticipate? The objectives of feasibility studies are as per the following: • To see altogether all parts of a venture, idea, or plan • To become mindful of any potential issues that could happen while executing the venture • To decide whether, subsequent to thinking about every single critical factor, the task is reasonable—that is, worth endeavour feasibility studies examines are critical to business improvement. They can permit a business to address where and how it will work. They can likewise distinguish potential impediments that may block its activities and perceive the measure of subsidizing it should get the business fully operational. Practicality reads 60 CU IDOL SELF LEARNING MATERIAL (SLM)

target showcasing methodologies that could assist with persuading investors or banks that putting resources into a specific undertaking or business is an astute decision. As the name infers, a possibility examination is utilized to decide the reasonability of a thought, for example, guaranteeing a venture is legitimately and in fact practical just as financially legitimate. It discloses to us whether a venture merits the speculation—at times, an undertaking may not be feasible. There can be numerous purposes behind this, including requiring an excessive number of assets, which not just keeps those assets from performing different errands yet in addition may cost in excess of an association would procure back by taking on a venture that isn't productive. An all around planned examination should offer a recorded foundation of the business or undertaking, like a depiction of the item or administration, bookkeeping explanations, subtleties of tasks and the executives, showcasing exploration and approaches, monetary information, lawful prerequisites, and assessment commitments. For the most part, such investigations go before specialized turn of events and task execution. Sorts of Feasibility Study A feasibility studies assesses the venture's potential for progress; along these lines, seen objectivity is a fundamental factor in the believability of the investigation for expected financial backers and loaning establishments. There are five kinds of possibility study— separate regions that a plausibility study inspects, depicted underneath. 1. Technical Feasibility This appraisal centers around the specialized assets accessible to the association. It assists associations with deciding if the specialized assets meet limit and regardless of whether the specialized group is equipped for changing over the thoughts into working frameworks. Technical Feasibility additionally includes the assessment of the equipment, programming, and other specialized prerequisites of the proposed framework. As a misrepresented model, an association wouldn't have any desire to attempt to put Star Trek's carriers in their structure—at present, this undertaking isn't actually achievable. 2. Economic Feasibility This evaluation ordinarily includes an expense/benefits examination of the venture, assisting associations with deciding the feasibility, cost, and advantages related with an undertaking before monetary assets are dispensed. It additionally fills in as a free venture appraisal and improves project believability—helping leaders decide the positive financial advantages to the association that the proposed undertaking will give. 3. Legal Feasibility This appraisal examines whether any part of the proposed project clashes with legitimate prerequisites like drafting laws, information security acts or web-based media laws. Suppose 61 CU IDOL SELF LEARNING MATERIAL (SLM)

an association needs to develop another place of business in a particular area. A feasibility studies may uncover the association's optimal area isn't drafted for that sort of business. That association has quite recently saved impressive time and exertion by discovering that their venture was not plausible right all along. 4. Operational Feasibility This evaluation includes undertaking an examination to investigate and decide if—and how well—the association's necessities can be met by finishing the venture. Functional possibility concentrates likewise look at how a task plan fulfills the prerequisites distinguished in the necessities examination period of framework advancement. 5. Scheduling Feasibility This appraisal is the most significant for project achievement; all things considered, an undertaking will flop if not finished on schedule. In booking possibility, an association assesses how the undertaking will require to finish. At the point when these regions have all been inspected, the feasibility analysis distinguishes any requirements the proposed venture may confront, including: • Internal Project Constraints: Technical, Technology, Budget, Resource, and so on • Internal Corporate Constraints: Financial, Marketing, Export, and so on • External Constraints: Logistics, Environment, Laws, and Regulations, and so forth Significance of Feasibility Study The significance of an feasibility analysis depends on hierarchical longing to \"take care of business\" prior to submitting assets, time, or financial plan. An achievability study may reveal groundbreaking thoughts that could totally change a task's degree. It's ideal to make these judgments ahead of time, as opposed to hop in and to discover that the undertaking will not work. Directing a possibility study is consistently useful to the task as it gives you and different partners a reasonable image of the proposed project. The following are some vital advantages of leading a feasibility analysis : • Improves project groups' core interest • Identifies new freedoms • Provides significant data for a \"go/off limits\" choice • Narrows the business choices 62 CU IDOL SELF LEARNING MATERIAL (SLM)

• Identifies a legitimate motivation to embrace the venture • Enhances the achievement rate by assessing various boundaries • Aids dynamic on the venture • Identifies motivations not to continue Aside from the ways to deal with feasibility analysis recorded over, a few activities likewise require different imperatives to be investigated - • Internal Project Constraints: Technical, Technology, Budget, Resource, and so forth • Internal Corporate Constraints: Financial, Marketing, Export, and so forth • External Constraints: Logistics, Environment, Laws, and Regulations, and so forth 7 Steps for a Feasibility Study 1. Direct a Preliminary Analysis Start by illustrating your arrangement. You should zero in on an unserved need, a market where the interest is more noteworthy than the inventory, and regardless of whether the item or administration enjoys an unmistakable benefit. Then, at that point you need to decide whether the obstacles are too high to even consider clearing (for example excessively costly, incapable to successfully showcase, and so forth) 2. Set up a Projected Income Statement This progression expects you to work in reverse. Start with what you anticipate that the income from the project should be and afterward what speculation is expected to accomplish that objective. This is the establishment of a pay articulation. Things to consider here incorporate what administrations are required and the amount they'll cost, any changes in accordance with incomes, like repayments, and so forth 3. Direct a Market Survey, or Perform Market Research This progression is critical to the achievement of your feasibility study, so make it as intensive as could be expected. It's imperative to such an extent that assuming your association doesn't have the assets to do an appropriate one, it is worthwhile to recruit an external firm to do as such. The statistical surveying will give you the most clear image of the incomes you can sensibly anticipate from the task. A few interesting points are the geographic impact available, 63 CU IDOL SELF LEARNING MATERIAL (SLM)

socioeconomics, examining contenders, the worth of the market and what your offer will be and if the market is available to development (that is, reaction to your offer). 4. Plan Business Organization and Operations When the foundation of the past advances has been laid, it's an ideal opportunity to set up the association and tasks of the arranged undertaking. This is anything but a shallow, overgeneralized term try. It ought to be exhaustive and incorporate beginning up costs, fixed speculations and working expenses. These costs address things like gear, promoting strategies, land, faculty, supply accessibility, overhead, and so on 5. Set up an Opening Day Balance Sheet This incorporates a gauge of the resources and liabilities, one that ought to be just about as exact as could really be expected. To do this, make a rundown that incorporates things, sources, costs and accessible financing. Liabilities to consider are such things as renting or buying of land, structures and hardware, financing for resources and records receivables. 6. Survey and Analyze All Data This load of steps are significant, however the survey and investigation are particularly essential to ensure that everything is as it ought to be and nothing requires changing or tweaking. In this way, pause for a minute to investigate your work one final time. Reevaluate your past advances, like the pay explanation, and contrast it and your costs and liabilities. Is it still sensible? This is likewise an opportunity to consider hazard, breaking down and overseeing, and think of any alternate courses of action. 7. Make a Go/No-Go Decision You're presently at the highlight settle on a choice about if the task is doable. That sounds basic, yet every one of the past advances we're prompting this dynamic second. A few different interesting points prior to settling on that double decision is whether the responsibility merits the time, exertion and cash and is it lined up with the association's essential objectives and long haul yearnings. 4.5 SUMMARY  A business plan is a key report that any new company needs to have set up before starting activities. Banks and investment firms to be sure frequently make composing 64 CU IDOL SELF LEARNING MATERIAL (SLM)

a suitable marketable strategy an essential prior to considering giving cash-flow to new organizations.  Working without a business plan isn't generally a smart thought. Indeed, not very many organizations can keep going extremely long without one. There are certainly more advantages to making and adhering to a decent strategy—including having the option to thoroughly consider thoughts without putting an excessive amount of cash into them and, at last, losing eventually.  A decent business plan should diagram every one of the projected expenses and potential traps of every choice an organization makes. Business plan, even among rivals in a similar industry, are seldom indistinguishable. In any case, they all will in general have similar fundamental components, including a leader outline of the business and a nitty gritty depiction of the business, its administrations, and its items. It additionally states how the business means to accomplish its objectives.  The arrangement ought to incorporate no less than an outline of the business of which the business will be a section, and how it will separate itself from its possible rivals. 4.6 KEYWORD  Business plan: A written document detailing the purpose, needs, objectives, activities or projected results of a proposed or existing business.  Business model: A plan for the successful operation of a business, including identifying sources of revenue and target markets, detailing products or services, and explaining how profits will be made.  Cash flow: A financial statement that shows a business’s cash balance and movement in and out of bank accounts within a particular timeframe.  Market research: Research relating to the products or services available in your industry, current trends, and consumer habits within your target market.  Target market: The group of people your business intends to sell to, defined by their demographics, activities, habits, needs, or other attributes. 4.7 LEARNING ACTIVITY 1. Analyze the steps for feasibility study ___________________________________________________________________________ ___________________________________________________________________________ 2. Describe the significance of business plan ___________________________________________________________________________ ___________________________________________________________________________ 65 CU IDOL SELF LEARNING MATERIAL (SLM)

4.8 UNIT END ACTIVITY A. Descriptive Questions Short Questions 1. Is a business plan important to the entrepreneur? Comment. 2. You want to start up a business, why do you need to prepare a Business plans? Explain. 3. State the meaning of business plan 4. When do you need a business plan? 5. Describe the importance of feasibility study Long Questions 1. In preparing Business plans, what are the different aspects, you must look into? Explain. 2. Analyze the components of a business plan 3. State the meaning of feasibility study 4. Describe the goals of feasibility study 5. Discuss the types of feasibility study B. Multiple Choice Questions 1. ____________ is primarily concerned with the identification, qualification and evaluation of the project resources. a. Feasibility analysis b. Techno-economic analysis. c. Input analysis. d. Financial analysis 2. Why should an entrepreneur do a feasibility study for starting a new venture: 66 CU IDOL SELF LEARNING MATERIAL (SLM)

a. To identify possible sources of funds b. To see if there are possible barriers to success c. To estimate the expected sales d. To explore potential customers 3. Why should an entrepreneur do a feasibility study for starting a new venture? a. To see if there are possible barriers to success b. To explore potential customers c. To estimate the expected sales d. To identify possible sources of funds 4. The business plan should be prepared by: a. Entrepreneurs b. Consultants c. Engineers d. All of these 5. Why should an entrepreneur do a feasibility study for starting a new venture? a. To see if there are possible barriers to success b. To identify possible sources of funds c. To estimate the expected sales d. To explore potential customers Answer 67 CU IDOL SELF LEARNING MATERIAL (SLM)

1-a, 2-b, 3-c, 4-d, 5-a 4.9 REFERENCE References book  Entrepreneurship: Hisrich, Robert. Michael Peters and Dean Shepherd, Mathew. Tata McGraw-Hill Education, New Delhi 2017.  Entrepreneurship Development: Sangeeta Sharma, PHI, 2017.  Innovation and Entrepreneurship: Peter Drucker, Harper Collins India, 2015.  Entrepreneurship Development and Small Enterprise: Poornima M, Pearson Education, 2014. Textbook references  Entrepreneurship Development: Gordon E and Natarajan K, Himalaya Publishing House, 5th Edition, 2014.  Entrepreneurship A South Asian Perspective: T V Rao, Donald F. Kuratko, Cengage, 1st Edition, 2012.  The Innovators by Walter Isaacson.  Modern Monopolies by Alex Moazed and Nicholas L. Johnson @109.10 Website  www. Yourarticlelibrabry.com  www. Managementstudyguide.com 68 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT -5 CAPITAL STRUCUTRE STRUCTURE 5.0 Leaning objectives 5.1 Introduction of Capital structure 5.2 Creation of capital structure 5.3 Summary 5.4 Key words 5.5 Leaning activity 5.6 Unit end Questions 5.7 References 5.0 LEANING OBJECTIVES After studying this unit, you will be able to:  State the meaning of Capital Structure  Describe the creation of capital structure 5.1 INTRODUCTION OF CAPITAL STRUCTURE The capital structure is the specific blend of obligation and value utilized by an organization to fund its general activities and development. Equity capital emerges from proprietorship partakes in an organization and cases to its future incomes and benefits. Obligation comes as bond issues or credits, while equity may come in the form of common stock, preferred stock, or retained earnings. Short-term debt is also considered to be part of the capital structure. Capital structure is a piece of monetary design and alludes to the extent of different sorts of protections raised by a firm as long haul finance. All in all, it implies the organization of an association's drawn out reserves containing value shares, inclination shares and long haul credits. 69 CU IDOL SELF LEARNING MATERIAL (SLM)

As per Gerstenberg, \"Capital structure or monetary strucutre of a – organization alludes to the sort of protections to be given and the proportionate sum that makes up the capitalisation\". The term 'Capital structure ' alludes to the creation or make up of the measure of long haul financing. As indicated by Gerstenberg, \"The sort of protections to be given and the proportionate sums that make up the capitalisation is known as capital construction or monetary design.\" Capital structure of the firm is the mix of various perpetual long hauls financing like obligation, stock, favored capital and so on It additionally alludes to the drawn out commitments, which are circulated among proprietors and lenders. It tends to be characterized as the wise utilization of various long haul wellsprings of financing with the end goal that the general expense of capital of the firm doesn't increment and stays least and consistent, accordingly amplifying the worth of the firm. At the end of the day, it is the assurance of the proportion of funding to be raised from various sources. Value and obligation are the two chief wellsprings of money. The capital design choice includes the extent of value and obligation. It is as often as possible used to show long haul wellsprings of assets utilized in a business undertaking. 5.2 CREATION OF CAPITAL STRUCTURE What is Capital Structure? The most critical part of beginning a business is capital. It goes about as the establishment of the organization. Obligation and Equity are the two essential sorts of capital hotspots for a business. Capital structure is characterized as the mix of value and obligation that is placed into utilization by an organization to fund the general activities of the organization and for its development. Kinds of Capital Structure The importance of Capital structure can be depicted as the course of action of capital by utilizing various wellsprings of long haul subsidizes which comprises of two wide sorts, value and obligation. The various sorts of assets that are raised by a firm incorporate inclination shares, value shares, held profit, long haul credits and so on These assets are raised for maintaining the business. Equity Capital Equity capital is the cash possessed by the investors or proprietors. It comprises of two distinct sorts 70 CU IDOL SELF LEARNING MATERIAL (SLM)

a) Retained earnings: Retained earnings are essential for the benefit that has been kept independently by the association and which will help in fortifying the business. b) Contributed Capital: Contributed capital is the measure of cash which the organization proprietors have contributed at the hour of opening the organization or got from investors as a cost for responsibility for organization. Debt Capital Debt capital is alluded to as the acquired cash that is used in business. There are various types of obligation capital. 1. Long Term Bonds: These sorts of bonds are considered the most secure of the obligations as they have an all-encompassing reimbursement period, and just interest should be reimbursed while the main should be paid at development. 2. Short Term Commercial Paper: This is a kind of momentary obligation instrument that is utilized by organizations to raise capital for a brief timeframe Optimal Capital Structure Optimal capital structure is alluded to as the ideal blend of obligation and equity financing that aides in boosting the worth of an organization on the lookout while simultaneously limits its expense of capital. Capital strucutre differs across enterprises. For an organization engaged with mining or petrol and oil extraction, a high obligation proportion isn't appropriate, yet a few ventures like protection or banking have a high measure of obligation as a feature of their capital structure. Financial Leverage Financial influence is characterized as the extent of obligation which is essential for the absolute capital of the firm. It is otherwise called capital gearing. A firm having an undeniable degree of obligation is known as an exceptionally turned firm while a firm having a lever proportion of obligation is known as a low levered firm. Significance of Capital Structure Capital structure is fundamental for a firm as it decides the general soundness of a firm. Here are a portion of different elements that feature the significance of capital design 1. A firm having a sound Capital structure has a higher shot at expanding the market cost of the offers and protections that it has. It will prompt a higher valuation on the lookout. 71 CU IDOL SELF LEARNING MATERIAL (SLM)

2. A great Capital structure guarantees that the accessible assets are utilized successfully. It forestalls over or under capitalisation. 3. It aides the organization in expanding its benefits as more significant yields to partners. 4. A legitimate Capital structure helps in augmenting investor's capital while limiting the general expense of the capital. 5. A great Capital structure gives firms the adaptability of expanding or diminishing the obligation capital according to the circumstance. Components Determining Capital Structure Following are the components that assume a significant part in deciding the capital design: 1. Costs of capital: It is the expense that is brought about in raising capital from various asset sources. A firm or a business ought to produce adequate income with the goal that the expense of capital can be met and development can be financed. 2. Degree of Control: The value investors have a greater number of rights in an organization than the inclination investors or the debenture investors. The capital design of a firm will be dictated by the kind of investors and the restriction of their democratic rights. 3. Trading on Equity: For a firm which utilizes greater value as a wellspring of money to get new assets to build returns. Exchanging on value is said to happen when the pace of return on complete capital is more than the pace of revenue paid on debentures or pace of interest on the new obligation acquired. 4. Government Policies: The capital design is additionally affected by the principles and arrangements set by the public authority. Changes in money related and financial approaches bring about achieving changes in capital construction choices. Theories of Capital Structure 1. Net Income Approach: As per this methodology, a firm can limit the weighted normal expense of capital and increment the worth of the firm just as market cost of value shares by utilizing obligation financing to the greatest conceivable degree. The hypothesis propounds that an organization can expand its worth and diminishing the general expense of capital by expanding the extent of obligation in its capital design. This methodology depends on the accompanying presumptions: 72 CU IDOL SELF LEARNING MATERIAL (SLM)

(I) The expense of obligation is not exactly the expense of equity. (ii) There are no taxes. (iii) The risk perception of investors is not changed by the use of debt. Fig 5.1 Theories of Capital Structure The line of contention for net income approach is that as the extent of obligation financing in capital structure increment, the extent of a more affordable wellspring of assets increments. This outcomes in the abatement in generally speaking (weighted normal) cost of capital prompting an expansion in the worth of the firm. The explanations behind expecting cost of debt to be not exactly the expense of equity are that loan fees are normally lower than profit rates because of component of hazard and the advantage of assessment as the premium is a deductible cost. Then again, if the extent of obligation financing in the capital structure is diminished or say when the monetary influence is diminished, the weighted normal expense of capital of the firm will increment and the absolute worth of the firm will diminish. The Net Income (NI) Approach showing the impact of influence on in general expense of capital has been introduced in the accompanying figure. The all out market worth of a firm based on Net Income Approach can be determined as beneath: V= S + D Where, V= Total market worth of a firm S = Market worth of equity shares 73 CU IDOL SELF LEARNING MATERIAL (SLM)

= Earnings Available to Equity Shareholders (NI)/Equity Capitalisation Rate D = Market worth of debt, also, Overall Cost of Capital or Weighted Average Cost of Capital can be determined as: K0 = EBIT/v 2. Net Operating Income Approach: This theory as recommended by Durand is another effect of leverage on the value of the firm. It is entirely inverse to the net income approach. As per this methodology, change in the capital construction of an organization doesn't influence the market worth of the firm and the general expense of capital remaining parts steady independent of the strategy for financing. It infers that the general cost of capital remaining parts as before whether the obligation value blend is 50: 50 or 20:80 or 0:100. In this way, there isn't anything as an ideal capital design and each capital structure is the ideal capital structure. This hypothesis assumes that: (I) The market underwrites the worth of the firm all in all; (ii) The business hazard stays consistent at each degree of debt value blend; (iii) There are no corporate taxed. Fig 5.2 Net Operating Income Approach The reasons propounded for such suppositions are that the expanded utilization of debt increases the financial risk of the equity shareholders and consequently the expense of value 74 CU IDOL SELF LEARNING MATERIAL (SLM)

increments. Then again, the expense of debt stays consistent with the expanding extent of obligation as the monetary risk of the loan specialists isn't influenced. Subsequently, the upside of utilizing the less expensive wellspring of assets, i.e., debt is by and large offset by the expanded expense of equity. As indicated by the Net Operating Income (NOI) Approach, the financing blend is unimportant and it doesn't influence the worth of the firm. The NOI approach showing the impact of influence on the general expense of capital has been introduced in the accompanying figure. The worth of a firm based on Net Operating Income Approach can be resolved as underneath: V = EBIT/K0 Where, V = Value of a firm EBIT = Net working pay or Earnings before premium and assessment k0 = Overall expense of capital The market worth of equity, as per this methodology is the remaining worth which is controlled by deducting the market worth of debentures from the complete market worth of the firm. S=V–D Where, S = Market worth of equity shares V = Total market worth of a firm D = Market worth of debt The expense of value or equity capitalisation rate can be determined as underneath: = EBIT – I/V – D 3. Conventional Approach: The Conventional methodology, otherwise called Intermediate methodology, is a tradeoff between the two limits of net income approach and net operating income approach. As per this theory, the worth of the firm can be expanded at first or the expense of capital can be 75 CU IDOL SELF LEARNING MATERIAL (SLM)

diminished by utilizing more debt as the debt is a less expensive wellspring of assets than equity. Hence, optimum capital structure can be reached by an appropriate debt-equity mix. Past a specific point, the cost of equity increases in light of the fact that increased debt increases the financial risk of the equity shareholders. The upside of less expensive debt now of capital structure is balanced by expanded cost of equity. After this there comes a phase, when the expanded cost of equity can't be counterbalanced by the benefit of low-cost debt. Hence, by and large cost of capital, as per this thoery, diminishes in a limited way, stays pretty much unaltered for moderate expansion under water from there on; and increments or ascends past a specific point. Indeed, even the cost of debt may increment at this stage because of expanded monetary danger. The traditional view point on the relationship between the influence, cost of capital and the worth of firm has been displayed in the figures beneath: 76 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 5.3 Conventional Approach The figures above show that there can be a scope of optimal capital structure or a specific degree of optimal capital structure. 4. Modigliani and Miller Approach: M&M speculation is indistinguishable with the Net Operating Income approach in case burdens are overlooked. However, when corporate taxes are assumed to exist, their hypothesis is similar to the Net Income Approach. (a) In the absence of taxes. (Theory of Irrelevance): The hypothesis demonstrates that the expenses of capital isn't influenced by changes in the capital design or say that the debt-equity blend is unimportant in the assurance of the complete worth of a firm. The explanation contended is that however debt is less expensive to equity, with expanded utilization of obligation as a wellspring of money, the cost of equity increases? This increase in cost of equity balances the benefit of the minimal cost of debt. In this manner, albeit the financial leverage influences the expense of value, the general cost of capital remaining parts steady. The theory emphasises the fact that a firm’s operating income is a determinant of its total value. The hypothesis further propounds that past a specific constraint of debt, the cost of debt increments (because of expanded monetary danger) yet the cost of equity falls along these lines again adjusting the two costs. According to Modigliani& Miller, two indistinguishable firms in all regards aside from their capital structure can't have diverse market esteems or cost of capital due to arbitrage process. In case two identical firms except for their capital structure have different market values or cost of capital, arbitrage will take place and the investors will engage in ‘personal leverage’ (i.e. they will buy equity of the other company in preference to the company having lesser value) as against the ‘corporate leverage’; and this will again render the two firms to have the same total value. The M&M approach depends on the accompanying suspicions: (I) There are no corporate taxes. (ii) There is a perfect market. (iii) Investors act soundly. 77 CU IDOL SELF LEARNING MATERIAL (SLM)

(iv) The normal profit of the multitude of firms have indistinguishable danger qualities. (v) The remove point of interest in a firm is capitalization rate. (vi) Risk to investors relies on the arbitrary changes of expected income and the likelihood that the real worth of the factors may end up being unique in relation to their best gauges. (vii) All earnings are distributed to the shareholders MM approach without corporate taxes, i.e., the hypothesis of insignificance of financing blend has been introduced in the accompanying figure: Fig 5.4 Modigliani and Miller Approach Modigliani and Miller, in their article of 1963 have perceived that the worth of the firm will increment or the cost of capital will diminish with the utilization of debt by virtue of deductibility of interest charges for charge reason. In this way, the ideal capital construction can be accomplished by augmenting the obligation blend in the cost of a firm. As indicated by the M and M methodology, the worth of a firm unlevered can be determined as. where, Vu is worth of unlevered firm furthermore, tD is the limited present worth of the assessment investment funds coming about because of the expense deductibility of the premium charges, t is the pace of duty and D the quantum of obligation utilized in the blend. 78 CU IDOL SELF LEARNING MATERIAL (SLM)

5.3 SUMMARY  Both debt and equity can be found on the balance sheet. Organization assets, additionally recorded on the asset report, are bought with this debt and equity. Capital structure can be a combination of an organization's drawn out obligation, momentary obligation, normal stock, and favoured stock. An organization's extent of transient obligation versus long haul obligation is viewed as while breaking down its capital construction.  At the point when experts allude to capital structure, they are undoubtedly alluding to a company's debt-to-equity (D/E) proportion, which gives understanding into how hazardous an organization's getting rehearses are. Normally, an organization that is vigorously financed by debt has a more forceful capital structure and accordingly represents a more serious danger to investors. This danger, in any case, might be the essential wellspring of the association's development.  Debt is one of the two principle ways an organization can fund-raise in the capital business sectors. Organizations profit with debt due for its assessment potential benefits; interest installments made because of getting assets might be charge deductible. Debt likewise permits an organization or business to hold possession, in contrast to value. Moreover, in the midst of low financing costs, debt is plentiful and simple to get to.  Equity permits outside financial backers to take halfway proprietorship in the organization. Equity is more costly than obligation, particularly when loan fees are low. In any case, in contrast to obligation, value shouldn't be taken care of. This is an advantage to the organization on account of declining income. Then again, Equity addresses a case by the proprietor on the future profit of the organization. 5.4 KEY WORDS  Capital Expenditure: Money spent on buying or improving items that will be owned by a business for a long time, for example, buildings or equipment.  Due Diligence: The inquiry process of obtaining sufficient and accurate disclosure of all material documents and other information which may influence the outcome of the transaction.  Gross Profit: Total income from a business’ sales minus the direct costs of making the sales (this does not include a business' overhead or running costs).  Net Profit: A business' total income minus its total costs  Revenue: The money a business makes from the sales of the products or services of the business. 79 CU IDOL SELF LEARNING MATERIAL (SLM)

5.5 LEANING ACTIVITY 1. State Traditional approach 2. Discuss the Net Operating Income approach 5.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What Are The External Factors Affecting Capital Structure? 2. State the meaning of capital structure 3. State the meaning of equity capital 4. State the meaning of debt capital 5. What are the various ways of classifying entrepreneurs? Long Questions 1. What is Modigliani _ Miller (MM) approach? 2. What Are The Internal Factors Affecting Capital Structure? 3. Describe the types of capital structure 4. Discuss the Net Operating Income approach 5. Discuss the factors determining capital structure B. Multiple choice questions 1. Which of the following ratio will be helpful for assessing the firm’s capital structure? a. Debt to equity ratio b. Profitability ratio 80 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Acid test ratio d. Current ratio 2. Capital structure shows a. Interest coverage ratio b. Debt-equity ratio c. Fixed assets-current assets ratio d. Debtor-creditor ratio. 3. The term capital structure denotes: a. Total of Liability side of Balance Sheet b. Total Shareholders Equity c. Equity Funds, Preference Capital and Long term Debt, d. Types of Capital Issued by a Company. 4. A firm's optimal capital structure: a. is generally a mix of 40 percent debt and 60 percent equity b. is found by locating the mix of debt and equity which causes the earnings per share to equal exactly $1. c. exists when the debt-equity ratio is .50 d. is the debt-equity ratio that results in the lowest possible weighted average cost of capital 5. The term'capital strucutre' refers to the relationship between: 81 a. Debentures, preference shares and equity share capital CU IDOL SELF LEARNING MATERIAL (SLM)

b. Current assets and current liability c. Sum of all non-current assets d. sun of all outsider's liabilities Answers 1-a, 2-b, 3-c, 4-d, 5-a 5.7 REFERENCES References book  Entrepreneurship: Hisrich, Robert. Michael Peters and Dean Shepherd, Mathew. Tata McGraw-Hill Education, New Delhi 2017.  Entrepreneurship Development: Sangeeta Sharma, PHI, 2017.  Innovation and Entrepreneurship: Peter Drucker, Harper Collins India, 2015.  Entrepreneurship Development and Small Enterprise: Poornima M, Pearson Education, 2014. Textbook references  Entrepreneurship Development: Gordon E and Natarajan K, Himalaya Publishing House, 5th Edition, 2014.  Entrepreneurship A South Asian Perspective: T V Rao, Donald F. Kuratko, Cengage, 1st Edition, 2012.  The Innovators by Walter Isaacson.  Modern Monopolies by Alex Moazed and Nicholas L. Johnson @109.10 Website  www. Yourarticlelibrabry.com  www. Managementstudyguide.com 82 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-6 FINANCIAL ANALYSIS AND PLANNING STRUCTURE 6.0 Learning Objectives 6.1 Introduction 6.2 Drawing Financial Plan and Financial Analysis 6.3 Input in Financial Appraisal 6.4 Summary 6.5 Keywords 6.6 Leaning Activity 6.7 Unit end Questions 6.8 References 6.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the meaning of financial planning  State the meaning of financial analysis  Describe the input in financial appraisal 6.1 INTRODUCTION Financial planning and analysis (FP&A) is the planning, anticipating and logical cycles that help an association's monetary wellbeing and business procedure. FP&A experts, chiefs, and chiefs are answerable for furnishing senior administration with the monetary investigation and data they need to make major functional, monetary, and key choices. Financial planning and analysis (FP&A) groups assume an essential part in organizations by performing planning, determining, and investigation that help major corporate choices of the CFO, CEO, and the Board of Directors. Not very many, assuming any, organizations can be reliably beneficial and develop without cautious monetary arranging and income the board. The work of dealing with a partnership's 83 CU IDOL SELF LEARNING MATERIAL (SLM)

income regularly tumbles to its FP&A group and its Chief Financial Officer (CFO). Peruse more about the job of the CFO. 6.2 DRAWING FINANCIAL PLAN AND FINANCIAL ANALYSIS All business plans, whether you’re just starting a business or building an expansion plan for an existing business, should include the following: 1. Profit and loss statement 2. Cash flow statement 3. Balance sheet 4. Sales forecast 5. Personnel plan 6. Business ratios and break-even analysis Even if you’re in the very beginning stages, these financial statements can still work for you. How to write a financial plan for your small business? The good news is that they don’t have to be difficult to create or hard to understand. With just a few educated guesses about how much you might sell and what your expenses will be, you’ll be well on your way to creating a complete financial plan. 1. Profit and loss statement This is a financial statement that goes by a few different names—profit and loss statement, income statement, pro forma income statement, P&L (short for “profit and loss”)— and is essentially an explanation of how your business made a profit (or incur a loss) over a certain period of time. It’s a table that lists all of your revenue streams and all of your expenses—typically over a three-month period—and lists at the very bottom the total amount of net profit or loss. There are different formats for profit and loss statements, depending on the type of business you’re in and the structure of your business (nonprofit, LLC, C-Corp, etc.). What to include in your profit and loss statement  Your revenue (also called sales) 84 CU IDOL SELF LEARNING MATERIAL (SLM)

 Your “cost of sale” or “cost of goods sold” (COGS)—keep in mind, some types of companies, such as a services firm, may not have COGS  Your gross margin, which is your revenue less your COGS These three components (revenue, COGS, and gross margin) are the backbone of your business model — i.e., how you make money. You’ll also list your operating expenses, which are the expenses associated with running your business that isn’t directly associated with making a sale. They’re the fixed expenses that don’t fluctuate depending on the strength or weakness of your revenue in a given month— think rent, utilities, and insurance. How to find operating income To find your operating income with the P&L statement you’ll take the gross margin less your operating expenses: Gross Margin – Operating Expenses = Operating Income Depending on how you classify some of your expenses, your operating income will typically be equivalent to your “earnings before interest, taxes, depreciation, and amortization” (EBITDA). This is basically, how much money you made in profit before you take your accounting and tax obligations into consideration. It may also be called your “profit before interest and taxes,” gross profit, and “contribution to overhead”—many names, but they all refer to the same number. How to find net income Your so-called “bottom line”—officially, your net income, which is found at the very end (or, bottom line) of your profit and loss statement—is your EBITDA less the “ITDA.” Just subtract your expenses for interest, taxes, depreciation, and amortization from your EBITDA, and you have your net income: Operating Income – Interest, Taxes, Depreciation, and Amortization Expenses = Net Income For further reading on profit and loss statements (a.k.a., income statements), including an example of what a profit and loss statement actually looks like, check out “How to Read and Analyze an Income Statement.” And if you want to start building your own, download our free Profit and Loss Statement Template. 2. Cash flow statement 85 CU IDOL SELF LEARNING MATERIAL (SLM)

Your cash flow statement is just as important as your profit and loss statement. Businesses run on cash—there are no two ways around it. A cash flow statement is an explanation of how much cash your business brought in, how much cash it paid out, and what its ending cash balance was, typically per-month. Without a thorough understanding of how much cash you have, where your cash is coming from, where it’s going, and on what schedule, you’re going to have a hard time running a healthy business. And without the cash flow statement, which lays that information out neatly for lenders and investors, you’re not going to be able to raise funds. The cash flow statement helps you understand the difference between what your profit and loss statement reports as income—your profit—and what your actual cash position is. It is possible to be extremely profitable and still not have enough cash to pay your expenses and keep your business afloat. It is also possible to be unprofitable but still have enough cash on hand to keep the doors open for several months and buy yourself time to turn things around—that’s why this financial statement is so important to understand. Cash versus accrual accounting There are two methods of accounting—the cash method and the accrual method. The accrual method means that your account for your sales and expenses at the same time—if you got a big preorder for a new product, for example, you’d wait to account for all of your preorder sales revenue until you’d actually started manufacturing and delivering the product. Matching revenue with the related expenses is what’s referred to as “the matching principle,” and is the basis of accrual accounting. The cash method means that you just account for your sales and expenses as they happen, without worrying about matching up the expenses that are related to a particular sale or vice versa. If you use the cash method, your cash flow statement isn’t going to be very different from what you see in your profit and loss statement. That might seem like it makes things simpler, but I actually advise against it. I think that the accrual method of accounting gives you the best sense of how your business operates and that you should consider switching to it if you aren’t using it already. Why you should use accrual accounting for cash flow For the best sense of how your business operates, you should consider switching to accrual accounting if you aren’t using it already. 86 CU IDOL SELF LEARNING MATERIAL (SLM)

Here’s why: Let’s say you operate a summer camp business. You might receive payment from a camper in March, several months before camp actually starts in July—using the accrual method, you wouldn’t recognize the revenue until you’ve performed the service, so both the revenue and the expenses for the camp would be accounted for in the month of July. With the cash method, you would have recognized the revenue back in March, but all of the expenses in July, which would have made it look like you were profitable in all of the months leading up to the camp, but unprofitable during the month that camp actually took place. Cash accounting can get a little unwieldy when it comes time to evaluate how profitable an event or product was, and can make it harder to really understand the ins and outs of your business operations. For the best look at how your business works, accrual accounting is the way to go. 3. Balance sheet Your balance sheet is a snapshot of your business’s financial position—at a particular moment in time, how are you doing? How much cash do you have in the bank, how much do your customers owe you, and how much do you owe your vendors? What to include in your balance sheet  Assets: Your accounts receivable, money in the bank, inventory, etc.  Liabilities: Your accounts payable, credit card balances, loan repayments, etc.  Equity: For most small businesses, this is just the owner’s equity, but it could include investors’ shares, retained earnings, stock proceeds, etc. It’s called a balance sheet because it’s an equation that needs to balance out: Assets = Liabilities + Equity The total of your liabilities plus your total equity always equals the total of your assets. At the end of the accounting year, your total profit or loss adds to or subtracts from your retained earnings (a component of your equity). That makes your retained earnings your business’s cumulative profit and loss since the business’s inception. However, if you are a sole proprietor or other pass-through tax entity, “retained earnings” doesn’t really apply to you—your retained earnings will always equal zero, as all profits and losses are passed through to the owners and not rolled over or retained like they are in a corporation. 87 CU IDOL SELF LEARNING MATERIAL (SLM)

If you’d like more help creating your balance sheet, check out our free downloadable Balance Sheet Template. 4. Sales forecast The sales forecast is exactly what it sounds like: your projections, or forecast, of what you think you will sell in a given period. Your sales forecast is an incredibly important part of your business plan, especially when lenders or investors are involved, and should be an ongoing part of your business planning process. Your sales forecast should be an ongoing part of your business planning process. You should create a forecast that is consistent with the sales number you use in your profit and loss statement. In fact, in our business planning software, Live Plan, the sales forecast auto-fills the profit and loss statement. There isn’t a one-size-fits-all kind of sales forecast—every business will have different needs. How you segment and organize your forecast depends on what kind of business you have and how thoroughly you want to track your sales. Generally, you’ll want to break down your sales forecast into segments that are helpful to you for planning and marketing purposes. If you own a restaurant, for example, you’ll want to separate your forecasts for dinner and lunch sales. But a gym owner may find it helpful to differentiate between the membership types. If you want to get really specific, you might even break your forecast down by product, with a separate line for every product you sell. Along with each segment of forecasted sales, you’ll want to include that segment’s “cost of goods sold” (COGS). The difference between your forecasted revenue and your forecasted COGS is your forecasted gross margin. 5. Personnel plan Think of the personnel plan as a justification of each team member’s necessity to the business. The overall importance of the personnel plan depends largely on the type of business you have. If you are a sole proprietor with no employees, this might not be that important and could be summarized in a sentence of two. But if you are a larger business with high labor costs, you should spend the time necessary to figure out how your personnel affects your business. 88 CU IDOL SELF LEARNING MATERIAL (SLM)

If you opt to create a full personnel plan, it should include a description of each member of your management team, and what they bring to the table in terms of training, expertise, and product or market knowledge. Think of this as a justification of each team member’s necessity to the business, and a justification of their salary (and/or equity share, if applicable). This would fall in the company overview section of your business plan. You can also choose to use this section to list entire departments if that is a better fit for your business and the intentions you have for your business plan. There’s no rule that says you have to list only individual members of the management team. This is also where you would list team members or departments that you’ve budgeted for but haven’t hired yet. Describe who your ideal candidate(s) is/re, and justify your budgeted salary range(s). 6. Business ratios and break-even analysis Business ratios explained If you have your profit and loss statement, your cash flow statement, and your balance sheet, you have all the numbers you need to calculate the standard business ratios. These ratios aren’t necessary to include in a business plan—especially for an internal plan—but knowing some key ratios is always a good idea. Common profitability ratios include:  Gross margin  Return on sales  Return on assets  Return on investment Common liquidity ratios include:  Debt-to-equity  Current ratio  Working capital Of these, the most common ratios used by business owners and requested by bankers are probably gross margin, return on investment (ROI), and debt-to-equity. Break-even analysis explained 89 CU IDOL SELF LEARNING MATERIAL (SLM)

Your break-even analysis is a calculation of how much you will need to sell in order to “break-even” i.e. cover all of your expenses. In determining your break-even point, you’ll need to figure out the contribution margin of what you’re selling. In the case of a restaurant, the contribution margin will be the price of the meal less any associated costs. For example, the customer pays $50 for the meal. The food costs are $10 and the wages paid to prepare and serve the meal are $15. Your contribution margin is $25 ($50 – $10 – $15 = $25). Using this model you can determine how high your sales revenue needs to be in order for you to break even. If your monthly fixed costs are $5,000 and you average a 50 percent contribution margin (like in our example with the restaurant), you’ll need to have sales of $10,000 in order to break even. 6.3 INPUT IN FINANCIAL APPRAISAL Decisions related to investments are one of the most important and vital decisions for any organization. Making investments is the only way to increase, and maximize return on the shareholder’s wealth. However, taking the right investment decisions is the biggest challenge that management faces. Investment decisions are always characterized by risk and uncertainty. According to Lumby (2004) investment decision defined in simple terms, is one in which organizations make an initial cash outlay, with the aim of receiving, in return, the future cash inflows. Investments can be analyzed from several perspectives, like its suitability according to the company’s objective, social cause, environmental concern etc. Yet, for the purpose of investment appraisal, it is analyzed from the point of view of cash flow only. Thus, the basic aim of investment appraisal is to check whether the initial outlay would result in enough future cash inflows, to be considered worthwhile. In order to achieve this objective, companies require certain inputs. These inputs are put through the process of investment appraisal, to reach the final outcome. Inputs Required For Investment Appraisal Investment appraisal in broad terms requires only two inputs – the estimated cash flows, and discount rate. The estimated cash flows includes all the cash outflows starting from the initial stage till much later, and inflows taking place during the lifetime of the project. This gives the final figure, which is positive or negative cash flows i.e. either inflows are more than outflows which is the acceptable case, or outflows are more than inflows which obviously leads to rejection of that project. Calculation of these cash flow figures, involves the treatment of a number of items. Cash Flows And Time Value Of Money 90 CU IDOL SELF LEARNING MATERIAL (SLM)

For the investment appraisal process as discussed earlier, cash flow estimates are the primary input. Initial outlay is easy to estimate as compared to future cash inflows, and even outflows. This is because current requirements for any project, would be ascertained according to which the required finance, can be obtained. Whereas, in the case of future estimates, all the figures are estimated on the basis of some premise, which is always prone to uncertainty. Once these estimated figures are available, companies calculate these future cash flows, in terms of today’s value. This is known as the time value of money, according to which, a pound today is not equivalent to a pound tomorrow. According to the time value of money, the investor needs to be compensated for certain factors. Firstly, the investment made has delayed the current consumption of the investor. Current consumption is preferred over future consumption for which, the investor needs to be compensated. This compensation is the interest that is expected on the money invested, for that period. The second factor is inflation, the current inflation rate in UK, is 1.8% (for the month of July – Bloomberg.com) Thus, what can be bought for one pound today, will be available for 1.018 GBP, the next year. Thus, future estimates must be converted in terms of present value, so as to find out its present worth. In order to compensate the investor for these two factors, the rate of return offered, is called the risk free rate. This is equivalent to the rate offered by reputed government bonds, or bills. Other Inputs There are some other factors which are required to be considered for the calculation of cash flows. The first is depreciation, which does not form a part of cash flows. For the purpose of calculating true cash flows, the precise time when the cash flow has occurred, is needed. However, depreciation does not involve any cash transaction. So, this is not included while calculating the cash flow. The second is working capital. According to Arnold (2008) besides the large and obvious depreciable assets, investment is also made in working capital. It includes the items like cash, debtors, stock which are part of company’s assets and creditors which is the part of company’s liabilities. Another important factor is interest. Treatment for interest is again, not straight forward. Interest can be viewed from two aspects. Firstly, if the company is employing its own funds. In that case it is losing the interest which it would have earned, by depositing money in the bank. This does not require any treatment here, because this has been considered as the opportunity cost, and treated accordingly. Secondly, if the organization has borrowed funds from the financial market, then the interest is paid on it, which is a cash expense, and must be included in cash flow calculation. Yet, what is seen in most of the cases is that, organizations use combination of both debt and equity. Now, the same item i.e. interest cannot be treated in two separate ways. As a result, it is considered as an opportunity cost. Besides interest on capital, opportunity cost also includes a number of factors, like a building used in any project, would have earned rent otherwise, which is also the opportunity cost of the project. Other similar factors could be machinery, human resources, and other assets. The last factor is the taxation which also reduces the cash flow, 91 CU IDOL SELF LEARNING MATERIAL (SLM)

by the amount of tax paid. In this case the notable factor is that debt capital gets the tax shield. However tax is to be paid on equity capital, making it costlier. Once all the inputs are gathered there are number of techniques available to evaluate the investment, in order to find out whether it would be profitable or not. Discount Rate Once the cash flow figures are derived for the entire period of the project, there are several methods using which we can perform the task of investment appraisal. There are some methods in which there is no allowance for the time value of money, like payback method, and accounting rate of return (ARR). In such methods, the discount rate is not required. However the more sophisticated and widely used methods use the discounted rate of cash flows like net present value (NPV), and internal rate of return (IRR). What is the discount rate and its components is discussed below. Definition The rate of return used for the purpose of finding the present value of future cash flows, is the discount rate. This rate includes the time value of money. Thus, as discussed above it is the risk free rate, plus risk premium. Risk premium depends upon the risk involved, in any particular project. Risk Free Rate Risk free rate includes the expected inflation rate, and the interest on capital which is treated as the opportunity cost of capital. As Arnold (2008) has mentioned “The risk free rate (RFR), forms the bedrock for the time value of money. Calculations such as the pure time value, and the expected inflation rate, affect all investments equally”. Risk Premium The discount rate is not the risk free rate. Rather, it is always more than that. The rate which is above the risk free rate is risk premium. Risk is the probability of not receiving the estimated return, owing to the uncertainty in any business. Higher the risk, higher is the return expected, and vice versa. However calculation of risk in itself is a difficult task. There are numerous methodologies available, for evaluating risk. The most famous among these are, sensitivity analysis, scenario analysis, and probability analysis. After getting the cash flows and discount rate, the next step is to evaluate the project. This is to determine whether the project is worth undertaking, or not. For this purpose, there are various methods. Some of the most popular ones, used across the globe, are discussed here. 92 CU IDOL SELF LEARNING MATERIAL (SLM)

Investment Appraisal Techniques Payback Method This method is used to find out the period in which the future cash inflows would be sufficient, to cover the initial investment. Once this figure is obtained, it is then compared with any arbitrarily chosen time period, set as a threshold by the company. If the payback period is shorter or equal to this chosen time period, then the investment is acceptable else it is rejected. Accounting Rate Of Return It is more popularly known as return on capital employed (ROCE), or return on investment (ROI). The ARR is a ratio of the accounting profit to the investment, in the projects. It is notable that here, accounting profit is used, and not the final cash flow figure. Net Present Value This method uses the discounted cash flows. In this, the present value of outflows is subtracted from the present value of inflows. If the result, known as NPV, comes out to be positive or zero the project is accepted else not. Internal Rate Of Return This method also takes into account, the time value of money. This is used to find out the rate of return, at which net present value of an investment is zero. If this rate is higher or equal than the discount rate, then the project is acceptable else it is rejected. 6.4 SUMMARY  Financial planning and analysis (FP&A) professionals own the financial planning, budgeting and forecasting process at a company to inform major decisions made by the executive team and board of directors. These employees collect, prepare and analyze financial data from across the organization to create reports that provide data- driven answers to business questions. The FP&A function is becoming increasingly forward-looking. It’s using best practices to focus not only on what happened or what’s happening but on why it’s happening and what is likely to happen in the future.  An FP&A director or analyst should be a business partner for the entire organization, working closely with various business units, and a strategic advisor to the CFO or controller. These professionals help leaders of the finance department maintain and 93 CU IDOL SELF LEARNING MATERIAL (SLM)

mitigate additional costs by identifying opportunities for efficiency, savings and investment.  The role of FP&A has evolved in recent years. In the past, FP&A analysts focused on recording and reporting financial results and leveraging historical financial data to extrapolate future sales and earnings. But the flood of data available today and the technology that helps analysts use it has empowered FP&A to move from more reactive work to providing insightful predictions and analytics that directly influence the business’s direction.  FP&A is distinct from accounting in that it focuses on forward-looking data and attempts to anticipate future outcomes, while accounting reviews past and historical information to determine a company’s current financial state. 6.5 KEYWORDS  Annuity: A form of life insurance which operates to provide retirement income. The person who takes out the annuity pays the life office a lump sum and in return receives a series of payments.  Asset allocation: The process of allocating the total investment between the different asset sectors such as shares, bonds (also known as fixed interest investments), property, cash (also known as short dated fixed interest) and overseas investments. Asset allocation can also be referred to as the split between growth and interest bearing investments.  Capital: The value of an investment in a house or business represented by total assets less total liabilities.  Deferred annuity: A type of annuity that pays an income starting from a future age or date. Deferred annuities can only accept eligible termination payment (ETPs) such as lump sums from superannuation funds.  Dividend: The distribution of part of the earnings of a company to its shareholders. 6.6 LEANING ACTIVITY 1. How to write a financial plan for your small business? ___________________________________________________________________________ ___________________________________________________________________________ 2. Why you should use accrual accounting for cash flow ___________________________________________________________________________ ___________________________________________________________________________ 94 CU IDOL SELF LEARNING MATERIAL (SLM)

6.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What Is a Financial Plan? 2. How to determine Cash flow 3. State the meaning of cash flow statement 4. State Payback period 5. Discuss the break even analysis Long Questions 1. Why is a financial plan important for your business? 2. How to write a financial plan for your small business? 3. How to find operating income 4. How to find net income 5. Describe the inputs required for investment appraisal 6. Describes the investment appraisal techniques B. Multiple Choice Questions 1. A business arrangement where one party allows another party to use a business Name and sell its products or services is known as__________. a. A franchise. b. A cooperative. c. An owner-manager business. d. A limited company. 2. ________ refers to planning regarding financial needs of the enterprise various sources of raising funds and their optimum utilization. 95 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Capital structure b. Financial planning c. Financial management d. None of these 3. Which of the following is not a feature of a financial plan? a. Flexibility b. Simplicity c. Cost d. Foresight 4. Which of the following factors affect financial decision? a. Cost b. Risk c. Cash flow position d. All of these 5. The assumptions underlying a company’s financial planning model do not include: a. levels of directors’ remuneration b. levels of sales growth c. levels of working capital d. levels of investment Answers 96 CU IDOL SELF LEARNING MATERIAL (SLM)

1-a, 2-b, 3-c, 4-d, 5-a 6.8 REFERENCES References book  Entrepreneurship: Hisrich, Robert. Michael Peters and Dean Shepherd, Mathew. Tata McGraw-Hill Education, New Delhi 2017.  Entrepreneurship Development: Sangeeta Sharma, PHI, 2017.  Innovation and Entrepreneurship: Peter Drucker, Harper Collins India, 2015.  Entrepreneurship Development and Small Enterprise: Poornima M, Pearson Education, 2014. Textbook references  Entrepreneurship Development: Gordon E and Natarajan K, Himalaya Publishing House, 5th Edition, 2014.  Entrepreneurship A South Asian Perspective: T V Rao, Donald F. Kuratko, Cengage, 1st Edition, 2012.  The Innovators by Walter Isaacson.  Modern Monopolies by Alex Moazed and Nicholas L. Johnson @109.10 Website  www. Yourarticlelibrabry.com  www. Managementstudyguide.com 97 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-7 LAUNCHING THE NEW VENTURE STRUCTURE 7.0 Learning Objectives 7.1 Introduction 7.2 Choosing the legal form of new venture 7.3 Protection of intellectual property 7.4 Marketing the new venture 7.5 Summary 7.6 Keywords 7.7 Leaning Activity 7.8 Unit end Questions 7.9 References 7.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the meaning of intellectual property  Describe the marketing the new venture  Discuss choosing the legal forms of new ventures 7.1 INTRODUCTION The huge day has shown up. Your chance acknowledgment measure noticed that your thought takes care of a huge issue or need, you twofold watched that the objective market is huge enough for expected productivity, you have a strategy to arrive at this objective market, you have an enthusiasm to begin this organization, and you discovered assets to help the beginning up. Realizing that you dissected and tended to these points, you currently need to think about a portion of the more touchy subjects in regards to the arrangements inside your group. Numerous business people neglect the issues examined here or follow up on them in a conventional way as opposed to fitting them to the particular requirements of the endeavor. 98 CU IDOL SELF LEARNING MATERIAL (SLM)

This absence of due persistence can be impeding to the accomplishment of the business. The guidance introduced here can assist you with staying away from those equivalent slip-ups. To ensure the interests of all gatherings required at dispatch, the group ought to foster a few significant reports, like an originators' understanding, nondisclosure and noncompete structures, and a set of principles. Before these are drafted, the group ought to guarantee the endeavor's vision explanation is settled upon. The business group should be in finished concurrence on the vision of the endeavor before they can effectively make the originators' understanding. On the off chance that some colleagues have an interest in making a way of life business (an endeavor that turns out a revenue that replaces different sorts of work), while other colleagues need to reap the endeavor with huge returns, there is a conflict between these assumptions. A private backer will likewise have a solid assessment on the vision for the endeavor. 7.2 CHOOSING THE LEGAL FORM OF NEW VENTURE Every small business must select a legal form of ownership. The most common forms are sole proprietorship, partnership, and corporation. A limited liability company (LLC) is a relatively new business structure that is now allowed by all fifty states. Before a legal form is selected, however, several factors must be considered, not the least of which are legal and tax options. Factors to Consider Each small business should choose an authoritative document of possession. The most widely recognized structures are sole ownership, association, and enterprise. A limited liability company (LLC) is a somewhat new business structure that is presently permitted by every one of the fifty states. Before an authoritative document is chosen, in any case, a few elements should be thought of, not the least of which are lawful and charge alternatives. Components to Consider The authoritative document of the business is one of the main choices that an entrepreneur should make. Since this choice will have long haul suggestions, counsel a lawyer and a bookkeeper to assist with settling on the right decision. The ideal degree of control. Does the proprietor need to possess the business actually or share proprietorship with others? Does the proprietor need to impart obligation regarding working the business to other people? • The level of construction. What is wanted—an extremely organized association or something more casual? • The satisfactory risk openness. Is the proprietor able to hazard individual resources? Is the proprietor able to acknowledge obligation for the activities of others? 99 CU IDOL SELF LEARNING MATERIAL (SLM)

• Tax suggestions. Does the proprietor need to make good on business annual assessments and afterward pay individual personal expenses on the benefits acquired? • Sharing benefits. Does the proprietor need to impart the benefits to other people or by and by keep them? • Financing needs. Could the proprietor give all the financing needs or will outside financial backers be required? On the off chance that external financial backers are required, how simple will it be to get them? • The need for cash. Does the proprietor need to have the option to remove cash from the business? Sole Proprietorship A sole ownership is a business that is claimed and typically worked by one individual. It is the most seasoned, least complex, and least expensive type of business possession in light of the fact that there is no lawful differentiation made between the proprietor and the business (see Table 12.1 \"Sole Proprietorships: A Summary of Characteristics\"). Sole ownerships are extremely mainstream, containing 72% of all organizations and almost $1.3 trillion altogether revenue.US Internal Revenue Service. Sole ownerships are normal in an assortment of ventures, yet the ordinary sole ownership possesses a little help or retail activity, like a laundry, bookkeeping administrations, protection benefits, a side of the road produce stand, a pastry kitchen, an auto shop, a blessing shop, painters, handymen, circuit testers, and arranging administrations. An organization is at least two individuals deliberately working a business as co-proprietors for benefit. Associations make up in excess of 8% of all organizations in the United States and in excess of 11% of the all out revenue.William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 150. Like the sole ownership, the association doesn't recognize the business and its proprietors (see Table 12.2 \"Organizations: A Summary of Characteristics\"). There ought to be a lawful understanding that \"presents how choices will be made, benefits will be shared, questions will be settled, how future accomplices will be conceded to the association, how accomplices can be purchased out, and what steps will be taken to break down the organization when required. There are two sorts of organizations. In the overall association, every one of the accomplices have limitless obligation, and each accomplice can go into contracts in the interest of different accomplices. A restricted association has something like one general accomplice and at least one restricted accomplices whose risk is restricted to the money or property put resources into the organization. Restricted organizations are generally found in proficient firms, like dental specialists, legal counselors, and doctors, just as in oil and gas, movie, and 100 CU IDOL SELF LEARNING MATERIAL (SLM)