RESPOND TO EACH QUESTION WITH AT LEAST 100 WORDS and 1 Reference
Question 1 (Christopher Cren)
Entrepreneurship starts as an idea in one’s head but will never leave the realms of the dreamworld and be manifested in real life if there is no seed capital otherwise known as start-up investment (Glackin & Mariotti, 2020, section 7.1). The are several common methods used to gain this investment, some of them are listed here: debt or equity financing, family and friends, peer-peer lending, community development financial institutions, angel investors, vendor financing, self-funding: bootstrap financing, and more.
Analyzing independent funding, debt funding, and equity funding there are advantages and disadvantages associated with each one. Independent funding is “where a business funds itself out of cash flow. This is another route for the self-reliant. While this is a lower-risk financing option, and allows an entrepreneur to retain full ownership, the success of this strategy is highly dependent on the type of business you’re in” (bnz, 2022, p.1). This method is appealing because you don’t have to repay anyone such as financial institutions.
The next method is debt funding, such as applying for loans. Depending on the amount of existing loans or debt that you carry, you might not get enough money to cover your startup. Further if your business goes under you are still liable to make the debt repayments.
Lastly, equity financing is like the television show Shark Tank. “An investor will receive a percentage of ownership in a company” (Glackin & Mariotti, 2020, section 10.5) in return for funding the company. This method leaves little ownership and room for creativity. If your investors don’t like how the business is operating, they can pull out.
From exhibit 10-3 my first colleague preferred funding from friends and family and the second colleague preferred from banking institutions. I personally do not like funding from friends and families because it can be difficult to do business with friends and family. Things such as family deaths, divorces, and other obstacles can impede this funding type. Next, the cost of getting funding from banks can alter from things such as interest rates, the economy, and personal credit scores.
QUESTION 2 (Joseph Naro)
Seeking capital for a new business can be extremely daunting and requires a depth of personal and business factors. Despite personal preferences, the business owners must logically determine a financing method that puts the company in the best position for success. From the text, there are a multitude of financing sources that can be utilized for planning financials, and each of them have various strength and weaknesses associated with them. The three categories, dept financing, equity financing, and grant (independent) financing are primary methods for sourcing funds for a startup.
Depending on the business and my data-driven faith in it, I would choose a debt financing platform that would allow for variable usage of the funds with minimal impact to future production if possible. Bootstrapping is a popular method for those building companies with little resources and want to refrain from perusing potentially hazardous loans. This is probably the least risky of all the methods, but it can hinder business if major capital is necessary for success. The other method I would utilize is venture capitalism, otherwise found on Shark Tank. This process allows for private investors to start up a business at a negotiated cost. For this to be successful, however, you have to have great negotiation skills and convince the investor that this is well worth the money while bargaining for an optimal payback deal or allowing them royalties. Depending on the source, this method has potential to cause headaches that would have been easier dealt with traditional loan means.
QUESTION 3 (Heather)
Debt-to-Equity Ratio
To calculate, we need to divide the total liabilities by the shareholder equity.
1.14 = $2,448,803 / $2,140,600
This explains how much debt a company has per every dollar of equity, or how the company is financing the business. It provides transparency for investors in terms of liquidity, understanding profitability related to dividends and determines the business’s ability to get a loan. A good ratio is generally below 2.0. This company’s D/E ratio is below the average meaning it holds a comfortable amount of equity.
Long-Term Debt
Add current portion of long-term debt with long term debt net of current portion.
$120,104 + $1,143,796 = $1,263,900
The company has relatively high long-term debt. There are other ratios that will help us see a more holistic picture of the company financials. Working Capital is total current assets divided by total current liabilities, which in this case is 2.34 which means it owns high operating liquidity in the case of a business downturn. Solvency ratios like debt-to-assets ratio tells us to what degree the company’s assets are financed by debt. This company has 2.62% debt-to-asset ratio which means less of its assets are financed by debt. I would also want to see their revenue to determine the AR turnover and see how many days it takes to collect receivables.
In summary, this company seems solvent and a low-risk opportunity for an investor.
QUESTION 4 (Geovanni)
The balance sheet is one of the most important financial statements of a business. The balance sheet shows a snapshot of a business’s assets, liabilities, and equity at a point in time (Glackin & Mariotti, 2020). When I was young, every time I went into a Costo, I would always imagine how extremely well off the business owner must be. My imagination primarily stems from seeing so many assets in the form of inventory (goods) throughout the store. I always thought that assets were the complete story of the firm’s wealth. However, as I grew up and learned more about business, I realized that asset is such a broad term. A firm’s assets can be further analyzed by examining its liabilities and equity. Liabilities represent what the firm owes other lending institutions (usually to acquire those assets). And equity represents what Costco truly owns outright at a specific point in time. Furthermore, there could be many equity owners (i.e., when a firm sells stocks). For the longest time, I thought only one person owned everything I saw in Costco outright! I am glad to understand these concepts more now.
Conclusion on the composition of the organization’s capital:
Based on the balance sheet provided in this week’s discussion, I conclude that although the firm has $4,589,403 in assets, they still owe and have to repay $2,448,803. In other words, we can visualize that the firm is currently worth more than 4.5 million dollars, but they truly owned only $2,140,600 at the time the balance sheet was completed.
Risks:
I think that it is somewhat risky, seeing that the “total current liabilities” are $949,007 while the “cash and cash equivalents” are only $189,861. The total current liabilities are what the firm must pay within the next 12 months. Although the firm is still expecting to receive $1,317,566 within the next 12 months (through the accounts receivable), the question I have in mind is when exactly will they receive that money (if they really will receive the total expected amount). I just feel it is safer to have higher cash available provided the high current liabilities (my opinion only).
Conclusion on the business’s financing:
I think the firm’s financing decisions are ideal. My premise is based on a specific financial ratio called the debt to equity ratio (aka D/E). The debt to equity ratio is a financial ratio that indicates the relative proportion of shareholders’ equity and debt used to finance a firm’s assets. It is retrieved by getting the total debt ($2,448,803) and dividing it by the total shareholders’ equity ($2,140,600). In this case, the ratio is 1.14. A score higher than 1 indicates that the firm has more debt than it has equity. Conversely, a score below 1 means that the firm has more equity than it has debt (and is considered outstanding). Different industries have different “ideal” benchmarks. Generally speaking, a debt to equity ratio of 1.0 and 1.5 is typically regarded as good. A firm with a debt to equity ratio of 2.0 or higher may be considered risky due to high leverage (“The Investopedia Team,” 2022).
