Potential Source of Finance for Start-Up Firms

Running head: FINANCE FOR BUSINESS
Finance for Business
Name of the Student:
Name of the University:
Author’s Note:

1FINANCE FOR BUSINESS
Table of Contents
Part 1: Financial Statements............................................................................................................2
1.1 Financial Position Statement.................................................................................................2
1.2 Profit and Loss Statement......................................................................................................3
1.3 Cash Flow Statement.............................................................................................................3
Part 2: Financing- Risks and Returns..............................................................................................4
2.1 Potential Sources of Finance for a Business..........................................................................4
2.2 Potential Source of Finance for Start-Up Firms....................................................................6
2.3 Potential Sources of Finance for a Growth Firm...................................................................8
Part 3: Cash flow Estimation and Project Evaluation......................................................................9
3.1 Rate of Diminishing Value Depreciation..............................................................................9
3.2 Firms Additional EBIT Calculations.....................................................................................9
3.3 Free Cash Flow Analysis.....................................................................................................10
3.4 Net Present Value................................................................................................................10
3.5 Alternative Project Evaluation Measures............................................................................10
References......................................................................................................................................11

2FINANCE FOR BUSINESS
Part 1: Financial Statements
1.1 Financial Position Statement.
Part 1: Financial Statements
Balance Sheet for ABC Pty Ltd as
on30.6.18
Particulars
Amount
($)
Assets
Non-Current Assets
Plant and Equipment 310
Vehicles 235
Land and Building 1210
Total Non-Current
Assets 1755
Current Assets
Cash 200
Accounts Receivable 235
Inventory 370
Total Current Assets 805
Total Assets 2560
Liabilities and Equity
Current Liabilities
Accounts Payable 270
Tax Liability 90
Bank Overdraft 330
Total Current Liabilities 690
Non-Current Liabilities
Bank Loan 320
Corporate Bonds 430
Total Non-Current
Liabilities 750
Total Liabilities 1440
Shareholder's Equity
Preference Shares 260
Ordinary Shares 690
Retained Earnings 170
Total Shareholder’s 1120

3FINANCE FOR BUSINESS
Equity
Total Liabilities and
Equity 2560
1.2 Profit and Loss Statement
Part 1: Financial Statements
Profit and Loss Statement for ABC Pty Ltd as on 30.6.18
Particulars Amount ($) Particulars Amount ($)
Opening Stock 272 Sales 992
Add: Purchases 554 Closing Inventory 257
Less: Wages -117
Gross Profit 540
Total 1249 Total 1249
Interest -27 Gross Profit 540
Utilities -57 Dividend Received 50
Loss from Sale of Machine -10
Rent -82
Net Profit 766
Total 590 Total 590
1.3 Cash Flow Statement
Cash Flow Statement
Particulars Amt. ($)
Cash flow from Operations
Cash Received from Customers 460
Less: Cash Paid to Suppliers -240
Less: Wages Paid -130
Less: Interest Paid -12
Less: Taxes Paid -8
Total Cash Inflow from Operations 70
Cash flow from Investing Activity Amt. ($)
Purchase of Plant and Machinery -350
Proceeds from Sale of Plant and Machinery 80
Total Cash Outflow from Investing Activities -270
Cash flow from Financing Activity Amt. ($)
Proceeds from Issues of New Share 85
Proceeds from Lon-Term Borrowings 155

4FINANCE FOR BUSINESS
Dividend Received 9
Repayment of Long-Term Borrowings -24
Cost of Buying Back Shares -31
Dividend Paid -26
Payment of Finance Lease Liabilities -48
Total Cash flow from Financing Activities 120
Net Cash Increase/(Decrease) for the year -80
Part 2: Financing- Risks and Returns
2.1 Potential Sources of Finance for a Business
The sources of finance for a business for a business can be particularly in the form of
long-term and short term financing sources such as equity, debentures, debts, retained earnings,
term loans, working capital which is currently in the form of excess of current assets over the
current liabilities of the company (Burns and Dewhurst 2016). On the other hand, letter of credit,
euro issue, and short terms loans and bank over drafts are some of the key short-term financing
loans available for the company. The key features and characteristics that the companies should
consider during the time period of financing are primarily as follows:
 Time Horizon: In order to select the potential source of finance for the company it is
well important for the company to identify the time horizon for which they would be
undertaking the desired level and amount of finance (Lee, Sameen and Cowling 2015).
The time horizon should be well incorporated in association with the purpose of the
finance for which the company is financing the assets or the investing activities of the
company. In specific if the time horizon for the company is long-term then the company
should be going for equity source of finance or debt finance that can easily fulfill the
requirement of the company (Fraser, Bhaumik and Wright 2015). On the other hand, if

5FINANCE FOR BUSINESS
the considered time period of investment for the company is currently short-term than the
company should consider short term loans/borrowings in the form of bank loans,
borrowings and bank overdraft facility that the company can avail.
 Costs: The costs that are directly associated with the financing purpose of the company
should be well taken into analysis for the company so that the company is well able to
analyze the cost benefit analysis associated with each sources of finance. Equity finance
can be costly for the company on the other hand, debt finance could be cost effective for
the company but the same would be creating a charge on the assets of the company
(Kljucnikov et al., 2016). The actions and implementations taken in perspective to
financing can also be limited due to the debt covenants attached. Thus, the company
should select an optimum mix of various financing sources that is indeed cost effective
and well compatible with the operations of the company (Mason, Botelho and Harrison
2016).
 Risks: Risks associated with the company in the form of possible ways where by the
financing sources can create a potential effect on the operations and activities taken by
the company. Borrowings, Debt financing can affect the financial position and the
operations of the company because if the same creates a charge on the assets of the
company where the associated financial risk of the company increases (Mason and
Harrison 2015). The increase in the financial risk can well affect the overall operations of
the company whereby if the company fails to repay interest and principal amount at the
time of due date or maturity the creditors can sue the company and takeover the assets of
the company. On the other hand, there is no such restrictions in equity or preference share
financing.

6FINANCE FOR BUSINESS
 Purpose: The key purpose of the finance that the company intends to use in the defined
period of analysis should be well taken into consideration. If the associated project or
operations for which the company is associating is risky i.e., the business risk is high then
it is accordingly important for the company to undertake sources of finance that is
considerably less risky for the company.
 Impact on Financial Position: The financing sources of the company that the company
is considering should be well considered based on the fact that the same does not impact
the overall financial position of the company. While taxation benefits can be well availed
if the company considers debt financing, but the same might also be not available for the
company if equity and preferences source of finance is considered (Cumming and
Vismara 2017).
The characteristics that were discussed and taken into consideration is important as the
financing sources for the company has been done based on Time Horizon, Liquidity
Requirements, Time horizon, Risks associated, Purpose of Financing and the impact of each
source on the financial position was also taken into consideration. It is very important that the
company considers and takes these factors into account for the purpose of analysis of the
company (Leitch, Welter and Henry 2018).
2.2 Potential Source of Finance for Start-Up Firms
The potential sources of finance for the start-up firms can be primarily done by many
financial institutions and angel investors that ultimately helps the company in financing the
various operational and investment activities undertaken by the company. The list of available
sources of finance that the Start-Up Firm can approach are as follows:

7FINANCE FOR BUSINESS
Venture Capital: The corporate financing activity helps the venture capital receive finance
whereby the financial investor invests in the business/start-up for a fresh set of strategic advice
or cash position. Investors of Venture Capital are always on the verge of looking for companies
that can consistently provide them a high growth rate return. Venture Capitalist look for market
capitalistic opportunities for obtaining long-term capital gains of the company. Venture Capital
are trustworthy and have no obligations for repayments (Gambetti and Musso 2017). Venture
Capital are the most optimal source of finance for the company as they have valuable guidance
experience in the field of business start-up assessment and the financial viability of the business.
Exploration of the better available market opportunities can be well done with the help of
venture capitals who will not only be helping in the investment and financing activities but
would also be looking for various ways whereby it can strategies the operations of the company.
Angel Investors: An Angel Investors are high net worth individual investors that provide
adequate funding and financial support for the company in the form of start-up lie for a stake or
the ownership position in the company so that the same can help the company in the financing
support that they require. Angel Investors can be in the form of Entrepreneurs, Family or
Relatives. In addition to the financial support that a company receives from an angel investors
they also provide the start-up companies with critical knowledge of management expertise
(Cassar, Ittner and Cavalluzzo 2015). Financing from the angel investors is comparatively less
risky than taking loans and this stands out to be the key importance for the loan that the start-up
company can have in their financing sources. The Capital needs are adequately meet by the
angels of the company, they also enable the sustainable growth of the company by reinvesting
the return or the profitability generated from the business back to the company. Business
Acumen, Vertical Expertise and Director Services are some of the key portfolio experiences that

8FINANCE FOR BUSINESS
an angel investors brings during the financing activity carried out by the company. The angel
investors also allows a four-year time period for the purpose of analysis of the fund growth and
fund analysis where they analyze the ability of the company in effective utilization and growth of
funds for the angel investors (Connolly and Jackman 2017). Wealth creation and sustainable
growth of the organization is the key focus of the angel investors rather than monthly or regular
fees which do create as a burden for the start-up business.
Mezzanine Financing: Mezzanine Fund or Mezzanine Loan does not primarily fall into the
category of a pure debt or pure equity. In other words it can be well explained it is a very high
risk and high reward type of financing that is done by the company that almost fulfills the gaps
between the senior debt and equity that the company owns. The key characteristics of this
finance is that this type of finance is generally subordinate to senior debt but still stands out to be
senior than the equity finance. It also earns a higher yield than the senior debt finance that
accompany generally has in the books. The start-up investor can get the desired amount of loan
from the mezzanine investors for a defined period of time where in it has to provide regular
interest amount associated with the equity finance. They charge a very rate of interest rate in the
form of higher risk and higher return for the capital they provide (Khan 2015).
2.3 Potential Sources of Finance for a Growth Firm
The key potential sources of finance for a growing or expanding firm can be in the various
following ways and the same can be as follows:
Loans and Borrowings: Bank Loans and Credits can be the best sources of finance that the
company can utilize in order to finance the operations of the company. The bank loans and
borrowings done can be primarily in the field of line of credit loans, installment credits, balloon
loans and secured loans. The balloon loans is typically most suitable for a growing or expanding

9FINANCE FOR BUSINESS
firm where the company currently has to only to pay the interest payment over the defined period
of finance and the exit stage of the loan it pays back the entire principal amount. The balloon
loan does not create any burden on the operations of the company and can be well considered by
growing companies. On the other hand, secured loans and borrowings can also be well taken by
the company for a defined period of time (Leitch, Welter and Henry 2018).
Venture Capital: The venture capital are typically known for backing up companies that are in
the growth or expansion phase of their business. Investors of Venture Capital are always on the
verge of looking for companies that can consistently provide them a high growth rate return.
Venture Capitalist look for market capitalistic opportunities for obtaining long-term capital gains
of the company (Triantis 2018). Venture Capital are trustworthy and have no obligations for
repayments. Venture Capital are the most optimal source of finance for the company as they
have valuable guidance experience in the field of business start-up assessment and the financial
viability of the business (Sidek et al., 2016).
Initial Public Offering: The initial public offering is a common way of raising equity finance by
the general public in exchange of shares for the company. Small or growing companies typically
raise finance with the help of issue of equity or preferences share in the capital market in the
form of Initial Public Offering for the company whereby the company can grow and expands its
operations (Sidek, Mohamad and Nasir 2016).
Part 3: Cash flow Estimation and Project Evaluation
3.1 Rate of Diminishing Value Depreciation
Diminishing Value of Depreciation
Year 1 2 3 4 5

10FINANCE FOR BUSINESS
Opening Book Value $200,000 $124,000 $74,400 $44,640 $26,784
Depreciation 76000 49600 29760 17856 10713.6
Closing Book Value $124,000 $74,400 $44,640 $26,784 $16,070
3.2 Firms Additional EBIT Calculations
Firm's Additional EBIT
Year 1 2 3 4 5
Revenue 370,000 370,000 370,000 370,000 370,000
Expenses 222,000 222,000 222,000 222,000 222,000
Depreciation 76000 49600 29760 17856 10713.6
EBIT 72,000 98,400 118,240 130,144 137,286
Tax 21,600 29,520 35,472 39,043 41,186
After Tax Earnings 50,400 68,880 82,768 91,101 96,100
3.3 Free Cash Flow Analysis
Firms Additional Free Cash Flow
Year 0 1 2 3 4 5
After Tax Earnings $50,400 $68,880 $82,768 $91,101 $96,100
Depreciation $76,000 $49,600 $29,760 $17,856 $10,714
Feasibility Study ($25,000) $0 $0 $0 $0 $0
Initial Outlay ($200,000) $0 $0 $0 $0 $0
Increase in NWC ($25,000) $0 $0 $0 $0 $25,000
Profit/Loss on Salvage $0 $0 $0 $0 ($6,070)
Salvage Value Tax $1,821
Shutdown Cost ($20,000)
Shutdown Cost Tax $6,000
Free Cash Flow ($250,000) $126,400 $118,480 $112,528 $108,957 $113,565
Discount Factor 1 0.92 0.84 0.77 0.71 0.65
Discounted Cash Flow ($250,000) $116,070 $99,905 $87,132 $77,472 $74,149
Net Present Value $204,728
Internal Rate of Return 38%

11FINANCE FOR BUSINESS
3.4 Net Present Value
The net present value for the project was determined to be around $204,728 and the same
states that the project would be creating an wealth greater than the required rate of return which
is around 8.90% for the company. The project can be well accepted based on the profitability
generated from the business (Andersen et al., 2018).
3.5 Alternative Project Evaluation Measures
The key alternative project evaluation measures that the companies should deploy for the
purpose of project evaluation can be the Internal Rate of Return or the IIR method that states the
return for the project in percentage terms. The IRR of the project was determined to be around
38% for the company reflecting the return that the investors would be getting from the project.

12FINANCE FOR BUSINESS
References
Andersen, S., Campbell, J.Y., Nielsen, K.M. and Ramadorai, T., 2018. Sources of inaction in
household finance: Evidence from the Danish mortgage market. Available at SSRN 2463575.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Cassar, G., Ittner, C.D. and Cavalluzzo, K.S., 2015. Alternative information sources and
information asymmetry reduction: Evidence from small business debt. Journal of Accounting
and Economics, 59(2-3), pp.242-263.
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin,
December, pp.55-66.
Cumming, D.J. and Vismara, S., 2017. De-segmenting research in entrepreneurial
finance. Venture Capital, 19(1-2), pp.17-27.
Fraser, S., Bhaumik, S.K. and Wright, M., 2015. What do we know about entrepreneurial finance
and its relationship with growth?. International Small Business Journal, 33(1), pp.70-88.
Gambetti, L. and Musso, A., 2017. Loan supply shocks and the business cycle. Journal of
Applied Econometrics, 32(4), pp.764-782.
Khan, S., 2015. Impact of sources of finance on the growth of SMEs: evidence from
Pakistan. Decision, 42(1), pp.3-10.
Kljucnikov, A., Belás, J., Kozubíková, L. and Paseková, P., 2016. The entreprenurial perception
of SME business environment quality in the Czech Republic. Journal of Competitiveness, 8(1).

13FINANCE FOR BUSINESS
Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the
financial crisis. Research policy, 44(2), pp.370-380.
Leitch, C., Welter, F. and Henry, C., 2018. Women entrepreneurs’ financing revisited: taking
stock and looking forward: New perspectives on women entrepreneurs and finance.
Mason, C., Botelho, T. and Harrison, R., 2016. The transformation of the business angel market:
empirical evidence and research implications. Venture Capital, 18(4), pp.321-344.
Mason, C.M. and Harrison, R.T., 2015. Business angel investment activity in the financial crisis:
UK evidence and policy implications. Environment and Planning C: Government and
Policy, 33(1), pp.43-60.
Sidek, S., Mohamad, M.R. and Nasir, W.M., 2016. Entrepreneurial Orientation, Access to
Finance and Business Performance: A Preliminary Analysis. International Journal of Academic
Research in Business and Social Sciences, 6(11), pp.692-707.
Triantis, J.E., 2018. Project Finance for Business Development. John Wiley & Sons.