Finance is for enterprise Like life giving air's presence Honest financial management, will ensure long existence."
UDYAM SHATRA-Chapter 9,verse 08
Key Objectives:
This module and its associated activities should help the student to:
1.Compare debt and equity financing.
2.Calculate debt-to-equity ratio and debt ratio
3.Evaluate the risks of heavy debt financing .
4.Evaluate the risks of excessive equity financing
Enterprise Concepts:
Financing.Finance is the use and manipulation of money. Raising money for business is one aspect of financing
Debt.The business borrows the money and pays it back over a set period of time at a set rate of interest. Companies sell debt in the form of bonds and debenture. They may also take loans from banks as part of debt.
Equity.The business gives up a Percentage of ownership for money. The investor receives a percentage of future profits from the business based upon the percentage of ownership. Companies sell equity in the form of shares
Grants.Some charity organisation or community groups may give grants to promising youths. A grant is sort of outright donation. The entrepreneur may show this as equity.
Subsidies.Subsidies are financial help given to aspiring entrepreneurs who want to start a new business under some government schemes.
Bonds.Bonds are deposits taken by the company from the public.Company indemnifies the holder of the bond for refund of value of the bond after stipulated period along with interest due. Bonds are not tradable on the stock exchange
Debentures.: If a loan to be raised by a company is divided into uniform parts(each part being serially numbered)and the loan is raised by enabling people to buy as many parts as they wish,then each part will be known as debenture. The debenture therefore is an acknowledgment under seal of a debt or loan. It is as good as loan taken from individual on certain terms and conditions and on payment of a fixed interest rate for a fixed period. A Company assures/guarantees to the holder to refund the value of the debenture on maturity. On liquidity of the company the debenture holder gets the preferential rights to the refund of the value of the debenture. Debentures can be traded on the stock exchange.
Enterprise Skills:
The student 'Activities' in each lesson are designed to clarify the ENTERPRISE CONCEPTS of the lesson and develop some ENTERPRISE SKILLS (E.SKILLS). The E.SKILLS included in a lesson may not be exhaustive, but are indicative.
E.SKILLS stated in a lesson elsewhere may also get addressed through the activities of a particular lesson.
Some useful E.SKILLS are dealt with below:
Numeracy skill.: The skill to calculate, estimate, use calculators and measuring instruments, analyse and respond to quantitative information, recognise and use numerical pattern & relationships is broadly referred to as NUMERACY SKILL.
Data interpretation: The ability to interpret numerical data, figures, charts,graphs and tables is referred to as Data Interpretation.
Activities:
Activity 1 - USING NEW WORDS IN FINANCE
Instruction To Students
The students should fill in the blanks using the terms given.
Terms- Ownership, debt ratio, equity, bonds and debentures, loan agreement, debt-to-equity ratioAfter completing the activity, each group should present and share its main discussion points with the rest of the class.
Work Sheet
1. If you raise money by selling shares, you are giving up _________.
2. Holders of ___________ receive dividends and annual corporate reports.
3. If you borrow money from a bank, you will have to sign a ___________ .
4. The ratio of debt to assets is called a ____________.
5. When a company issues __________________it is raising money through debt.
6. The financial strategy of a company is expressed by its ________________ .
Activity 2 - CASH BANK BOOK (RECORD OF RECEIPTS PAYMENT DAY WISE).
Instruction To Students
Students should fill the worksheet with entries from the information about ‘Lata’s Snacks Business for January’. First four entries are done in students Activity worksheet. Some cells are filled, some are blanks.
After completing the activity, each group should present and share its main discussion points with the rest of the class.
| |
January 1st Own Capital Rs. 1000. |
Method 1:
Cash & Bank Book (Record of Receipts and Payments Day wise)
Date | Details | Payments (Rs.) Cash & Bank | Receipts (Rs.) Cash & Bank | Balance (Rs.) Cash & Bank |
Jan 1st | Own Funds | 1000 | 1000 | |
Jan 5th | Loan from bank | 4000 | 5000 | |
Jan 7th | Cooking Equipments | 2000 | 3000 | |
Jan 8th | Furniture Purchase | |||
Jan 10th | Raw materials | |||
Jan 15th | Sales | |||
Jan 16th | Sales | |||
Jan 17th | Sales | |||
Jan 18th | Party order Sales | |||
Jan 20th | Purchased gas | |||
Jan 22th | Sales | |||
Jan 24th | Sales | |||
Jan 26th | Holiday for Republic Day | |||
Jan 27th | Sales | |||
Jan 28th | Sales | |||
Jan 29th | Electric bill | |||
Jan 30th | Wages | |||
Jan 31st | Repaid to bank | |
Summary of Reciepts & Payments for the period 1Jan to 31 Jan
Reciept | Payments | ||
To Opening Balance To Own Capital To Sales To Recived Loan from Bank | 0 1000 7050 4000 | By Cooking Equipment By Furniture Purchase By Raw Material By Purchased Gas By Electric Bill By Wages By Repaid to Bank Loan By Closing Balance as on 31 Jan | 2000 1000 1500 350 750 2000 1000 3450 |
Total | 12050 | Total | 12050 |
Instruction To Students
Often professional accountants maintain Receipts on left side of Accounts books and Payments on right side in the same account books. The accounts are then periodically balanced off.
Students should complete the Worksheet below using this Method 2
After completing the activity, each group should present and share its main discussion points with the rest of the class.
Instruction To Students
Once more refer to the Record of RECEIPTS & PAYMENTS of Lata’s Snacks Business.
From the R & P Account , ask the students to identify the:
- SALES entries
- COST of Production entries.
Outgoes on ASSETS that have appeared in the ‘Balance sheet’ are not to be taken in the P & L Account.Prepare a Income & Expenditure i.e. Profit and Loss Account using the Worksheet.
After completing the activity, each group should present and share its main discussion points with the rest of the class.
Work Sheet
Determine these ratios to understand the P&L Account.:
Costs-to-sales % = COSTS x 100 =
SALES
Profit-to-sales % = PROFITS x 100 =
SALES
What impression do you get about the profitability of LATA’S SNACKS BUSINESS
from these ratios? Is Lata’s Sales Income adequately covering her costs? Why?
Does Lata make adequate profits? What could happen if more competitors start similar snacks business around Lata’s centre?
Instruction To Students
Students should once again study the Record of RECEIPTS & PAYMENTS (R&P) for Lata’s Business for the month of January.
After completing the activity, each group should present and share its main discussion points with the rest of the class.
Work Sheet
1. What items does Lata own on January 31 and what is its value? These are her assets. Fixed assets are her vessels and furniture. Current assets are her cash.
_______________________________________________________________________________________
2. What loan liability does Lata have on 31 January? This is her long term liablity. (Current liablities are creditors example suppliers to whom payments are due shortly. Does Lata have any current liabilities?)
_______________________________________________________________________________________
3. Prepare Lata’s Balance Sheet on 31st. Jan . And determine her NET WORTH (OWNER’S EQUITY) on that day.
_______________________________________________________________________________________
Total Liabilities = Total Assets
in the Balance Sheet
Determine these ratios to understand the Balance Sheet.:
Current Assets-to - Current Liabilities ratio = Current Assets (CA) =
Current Liabilities (CL)
Total Debt-to - Equity ratio = DEBT (D) =
EQUITY (E)
Total Debt-to -Assets ratio = DEBT (D) =
ASSETS (A)
Students should diagrammatically represent the Current Assets (CA) to Current Liabilities (CL) , Debt (D) to Equity (E) ratio and the Debt (D) to Assets (A) ratio in the following diagrams.
Do the current assets of Lata cover her current liabilities adequately?
Do Lata’s Total Assets cover for her debts (long term + current liabilities) adequately?
What would be the risks if LATA’S business had heavy debt financing, i.e. very large loans had been taken from Bank, in excess of her actual needs?
What was Lata’s Equity Financing when she started on 1 January?
What is her Equity Financing on 31 January? Could there be risks in excessive equity financing in future?
Instruction To Students
Students should list resources they will need for starting up their enterprise. Try to assess whether:
Can you get it as courtesy (free of cost)
Can you get it on loan (borrow)
Can you hire it
Buy new ?Buy second hand ?Buy some in cheap way ?Buy on credit ?
The resource list given here is only suggestive. You may draw up your own.
After completing the activity, each group should present and share its main discussion points with the rest of the class.
The Enterprise (You Choose) : ______________________________
List the resources you will need to starting this enterprise and complete the table given below :
Resource | Is this REALLY needed? | By when?How can we get it? | What cash will we need? |
Somewhere to work | |||
Somewhere to sell | |||
Transport | |||
Tools | |||
Equipment | |||
Materials | |||
Supplies | |||
Special Skills | |||
Cash for anything else? |
Total amount of start-up cash needed Rs.__________