Tag: Financial Literacy

Capital, Product and Marketing are the three key pillars through which a startup can become a sustainable company in the long run. Many startups end up focusing only on one or, at most, two of these pillars, which negatively affects them sooner or later.

Self-funded: This is the money you put into the company through your own savings or money borrowed from your friends/family. You should rely on it only to build a small prototype (or MVP) of your idea. Show off your MVP to a few target customers/investors to get their initial feedback. This will help you understand whether it makes sense to continue pursuing the idea or change it completely.

Investor funds: This can range from initial seed funding from an HNI to VC funding during Series A, B or C rounds. This money usually comes in only when your startup has already started earning its revenues from an existing set of customers. In some cases, however, investors will give you money if you have successfully exited startups earlier.

Customers: This is the profit you generate by selling your products or services to your customers. This is the most important source of capital for your startup, and you should spend a good amount of time building up this source. If you have a B2C product, then remember that it will require larger scale to bring in sufficient money initially. So, either continue looking for an investor or tie up with other businesses for bulk deals. You need to be cognisant of the fact that even in the B2B world, the money will flow in only three to six months after the delivery of your work.

A startup incubator is a collaborative program designed to help new startups succeed. Incubators help entrepreneurs solve some of the problems commonly associated with running a startup by providing workspace, seed funding, mentoring, and training (see list below for a a more extensive list of common incubator services). The sole purpose of a startup incubator is to help entrepreneurs grow their business.

Services provided by business incubators:

• Help with business basics
• Networking opportunities
• Marketing assistance
• High-speed Internet access
• Accounting/financial management assistance
• Access to bank loans, loan funds and guarantee programs
• Help with presentation skills
• Connections to higher education resources
• Connections to strategic partners
• Access to angel investors or venture capital
• Comprehensive business training programs
• Advisory boards and mentors
• Management team identification
• Help with business etiquette
• Technology commercialization assistance
• Help with regulatory compliance
• Intellectual property management and legal counsel

Design thinking is a term used to represent a set of cognitive, strategic and practical processes by which design concepts (proposals for products, buildings, machines, communications, etc.) are developed. Many of the key concepts and aspects of design thinking have been identified through studies, across different design domains, of design cognition and design activity in both laboratory and natural contexts.

Design thinking is also associated with prescriptions for the innovation of products and services within business and social contexts. Some of these prescriptions have been criticized for oversimplifying the design process and trivializing the role of technical knowledge and skills.

Wicked problems

Design thinking is especially useful when addressing problems which are wickedly difficult, in the sense of being ill-defined or tricky, not malicious. Horst Rittel and Melvin Webber contrasted these with “tame” or “well-defined” cases where the problem is clear and the solution available through applying rules or technical knowledge.

Problem framing

Rather than accept the problem as given, designers explore the given problem and its context and may re-interpret or restructure the given problem in order to reach a particular framing of the problem that suggests a route to a solution.

Solution-focused thinking

In empirical studies of three-dimensional problem solving, Bryan Lawson found architects employed solution-focused cognitive strategies, distinct from the problem-focused strategies of scientists. Nigel Cross suggests that ‘Designers tend to use solution conjectures as the means of developing their understanding of the problem’.

Abductive reasoning

In the creation of new design proposals, designers have to infer possible solutions from the available problem information, their experience, and the use of non-deductive modes of thinking such as the use of analogies. This has been interpreted as a form of Peirce’s abductive reasoning, called innovative abduction.

Co-evolution of problem and solution

In the process of designing, the designer’s attention typically oscillates between their understanding of the problematic context and their ideas for a solution in a process of co-evolution of problem and solution. New solution ideas can lead to a deeper or alternative understanding of the problematic context, which in turn triggers more solution ideas.

Representations and modelling

Conventionally, designers communicate mostly in visual or object languages to translate abstract requirements into concrete objects. These ‘languages’ include traditional sketches and drawings but also extend to computer models and physical prototypes. The use of representations and models is closely associated with features of design thinking such as the generation and exploration of tentative solution concepts, the identification of what needs to be known about the developing concept, and the recognition of emergent features and properties within the representations.

The five phases of Design Thinking:

• Empathise with your users
• Define your users’ needs, their problem, and your insights
• Ideate by challenging assumptions and creating ideas for innovative solutions
• Prototype to start creating solutions
• Test solutions

Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. The other way to raise capital in debt markets is to issue shares of stock in a public offering; this is called equity financing.

A company can choose debt financing, which entails selling fixed income products, such as bonds, bills, or notes, to investors to obtain the capital needed to grow and expand its operations. When a company issues a bond, the investors that purchase the bond are lenders who are either retail or institutional investors that provide the company with debt financing. The amount of the investment loan also known as the principal must be paid back at some agreed date in the future. If the company goes bankrupt, lenders have a higher claim on any liquidated assets than shareholders.

Cost of Debt

A firm’s capital structure is made up of equity and debt. The cost of equity is the dividend payments to shareholders, and the cost of debt is the interest payment to bondholders. When a company issues debt, not only does it promise to repay the principal amount, it also promises to compensate its bondholders by making interest payments, known as coupon payments, to them annually. The interest rate paid on these debt instruments represents the cost of borrowing to the issuer.

The sum of the cost of equity financing and debt financing is a company’s cost of capital. The cost of capital represents the minimum return that a company must earn on its capital to satisfy its shareholders, creditors, and other providers of capital. A company’s investment decisions relating to new projects and operations should always generate returns greater than the cost of capital. If a company’s returns on its capital expenditures are below its cost of capital, the firm is not generating positive earnings for its investors. In this case, the company may need to re-evaluate and re-balance its capital structure.

The formula for the cost of debt financing is:

KD = Interest Expense x (1 – Tax Rate)

where:

KD = cost of debt

Since the interest on the debt is tax-deductible in most cases, the interest expense is calculated on an after-tax basis to make it more comparable to the cost of equity as earnings on stocks are taxed.

Debt Financing Options

Bond issues

Another form of debt financing is bond issues. A traditional bond certificate includes a principal value, a term by which repayment must be completed, and an interest rate. Individuals or entities that purchase the bond then become creditors by loaning money to the business.

Bank loan

A common form of debt financing is a bank loan. Banks will often assess the individual financial situation of each company and offer loan sizes and interest rates accordingly.

Family and credit card loans

Other means of debt financing include taking loans from family and friends and borrowing through a credit card. They are common with start-ups and small businesses.

Debt Financing Over the Short-Term

Businesses use short-term debt financing to fund their working capital for day-to-day operations. It can include paying wages, buying inventory, or costs incurred for supplies and maintenance. The scheduled repayment for the loans is usually within a year.

A common type of short-term financing is a line of credit, which is secured with collateral. It is typically used with businesses struggling to keep a positive cash flow (expenses are higher than current revenues), such as start-ups.

Debt Financing Over the Long-Term

Businesses seek long-term debt financing to purchase assets, such as buildings, equipment, and machinery. The assets that will be purchased are usually also used to secure the loan as collateral. The scheduled repayment for the loans is usually up to 10 years, with fixed interest rates and predictable monthly payments.

Advantages of Debt Financing

Tax-deductible interest payments

Another benefit of debt financing is that the interest paid is tax-deductible. It decreases the company’s tax obligations. Furthermore, the principal payment and interest expense are fixed and known, assuming the loan is paid back at a constant rate. It allows for accurate forecasting, which makes budgeting and financial planning easier.

Preserve company ownership

The main reason that companies choose to finance through debt rather than equity is to preserve company ownership. In equity financing, such as selling common and preferred shares, the investor retains an equity position in the business. The investor then gains shareholder voting rights, and business owners dilute their ownership.

Debt capital is provided by a lender, who is only entitled to their repayment of capital plus interest. Hence, business owners are able to retain maximum ownership of their company and end obligations to the lender once the debt is paid off.

Disadvantages of Debt Financing

Adverse impact on credit ratings

If borrowers lack a solid plan to pay back their debt, they face the consequences. Late or skipped payments will negatively affect their credit ratings, making it more difficult to borrow money in the future.

The need for regular income

The repayment of debt can become a struggle for some business owners. They need to ensure the business generates enough income to pay for regular installments of principal and interest.

Many lending institutions also require assets of the business to be posted as collateral for the loan, which can be seized if the business is unable to make certain payments.

Potential bankruptcy

Agreeing to provide collateral to the lender puts their business assets at risk, and sometimes even their personal assets. Above all, they risk potential bankruptcy. If the business should fail, the debt must still be repaid.

Tasks of a Professional Manager

Specialization in every field, technological advancement, globalization of business results into appointment of qualified managers. They can be called as professional managers.

A professional manager is an expert, trained and experienced enough to adeptly manage any type of organization be it a manufacturing house, a service organization, a hospital or a government agency. Professional managers:

• Are objective, focussed and performance oriented.
• Help in meeting competitive challenges of business.
• Are creative and dynamic.
• Follow management practices based on world wide experiences and information.
• Apply theories of management to solve emerging organizational problems.

Providing direction to the firm: The first task, envisioning goals, is one of the tasks that should never be delegated. This is the ability to define overarching goals that serve to unify people and focus energies. It’s about effectively declaring what’s possible for the team to achieve and compelling them to accomplish more than they ever thought possible.

Managing survival and growth: Ensuring survival of the firm is a critical task of a manager. The manager must also seek growth. Two sets of factors impinge upon the firm’s survival and growth. The first is the set of factors which are internal to the firm and are largely controllable. These internal factors are choice of technology, efficiency of labour, competence of managerial staff, company image, financial resources, etc. The second set of factors are external to the firm like government policy, laws and regulations, changing customer tastes, attitudes and values, increasing competition, etc.

Maintaining firm’s efficiency: A manager has not only to perform and produce results, but to do so in the most efficient manner. The more output a manager can produce with the same input, the greater will be the profit.

Meeting the competition challenge: A manager must anticipate and prepare for the increasing competition. Competition is increasing in terms of more producers, products, better quality, etc.

Innovation: Innovation is finding new, different and better ways of doing existing tasks. To plan and manage for innovation is an on-going task of a manager. The manager must maintain close contact and relation with customers. Keeping track of competitor’s activities and moves can also be a source of innovation, as can improvements in technology.

Renewal: Managers are responsible for fostering the process of renewal. Renewing has to do with providing new processes and resources. The practices and strategy that got you where you are today may be inadequate for the challenges and opportunities you face tomorrow.

Building Human Organization: Man is by far the most critical resource of an organization. A good worker is a valuable asset to any company. Every manager must constantly look out for people with potential and attract them to join the company.

Leadership: Organizational success is determined by the quality of leadership that is exhibited. “A leader can be a manager, but a manager is not necessarily a leader,” says Gemmy Allen (1998). Leadership is the power of persuasion of one person over others to inspire actions towards achieving the goals of the company. Those in the leadership role must be able to influence/motivate workers to an elevated goal and direct themselves to the duties or responsibilities assigned during the planning process. Leadership involves the interpersonal characteristic of a manager’s position that includes communication and close contact with team members. The only way a manager can be acknowledged as a leader is by continually demonstrating his abilities.

Change management: A manager has to perform the task of a change agent. It’s the managers task to ensure that the change is introduced and incorporated in a smooth manner with the least disturbance and resistance.

Selection Information technology: Today’s managers are faced with a bewildering array of information technology choices that promise to change the way work gets done. Computers, the Internet, intranets, telecommunications, and a seemingly infinite range of software applications confront the modern manager with the challenge of using the best technology.

Role of a manager

Different managers perform at different levels and require different skills. To meet the demands of performing their functions, managers assume multiple roles. A role is an organized set of behaviors. Henry Mintzberg has identified ten roles common to the work of all managers. The ten roles are divided into three groups: interpersonal, informational, and decisional.

Interpersonal Roles

The three interpersonal roles are primarily concerned with interpersonal relationships. By assuming these roles, the manager also can perform informational roles, which, in turn, lead directly to the performance of decisional roles.

In the figurehead role, the manager represents the organization in all matters of formality. Some examples of the figurehead role include a college dean who hands out diplomas at graduation, a shop supervisor who attends the wedding of a subordinate’s daughter, and the CEO who cuts the ribbon on a new office building.

The leader role defines the relationships between the manger and employees. It involves directing and coordinating the activities of subordinates. It may involve; hiring, training, motivating, and encouraging employees. First-line managers, in particular, feel that effectiveness in this role is essential for successful job performance.

The liaison role involves managers in interpersonal relationships outside of their area of authority. This role may involve contacts both inside and outside the organization. The top-level manager uses the liaison role to gain favors and information, while the supervisor uses it to maintain the routine flow of work.

Informational Roles

Receiving and communicating information are perhaps the most important aspects of a manager’s job. There are three informational roles in which managers gather and disseminate information.

As monitor, the manager constantly looks for information that can be used to advantage. The information gathered might be competitive moves that could influence the entire organization or the knowledge of whom to call if the usual supplier of an important part cannot fill an order.

In the disseminator role, the manager distributes to subordinates important information that would otherwise be inaccessible to them. Example: The president of a firm may learn during a lunch conversation that a large customer of the firm is on the verge of bankruptcy. Upon returning to the office, the president contacts the vice president of marketing, who in turn instructs the sales force not to sell anything on credit to the troubled company.

In the role of spokesperson, the manager disseminates the organization’s information into its environment. Thus, the top-level manager is seen as an industry expert, while the supervisor is seen as a unit or departmental expert.

Decisional Roles

According to Mintzberg, there are four decisional roles the manager adopts. In the role of entrepreneur, the manager tries to improve the unit. For example, when the manager receives a good idea, he or she launches a development project to make that idea a reality.

In the disturbance handler role, the manger deals with threats to the organization. Examples: An emergency room supervisor responds quickly to a local disaster, a plant supervisor reacts to a strike, etc.

The resource allocator role places a manager in the position of deciding who will get what resources. These resources include money, people, time, equipment, and information. This is one of the most critical decisional roles. Example: A college dean must decide which courses to offer next semester, based on available faculty.

Managers spend a great deal of their time as negotiators, because only they have the information and authority that negotiators require. The negotiations may concern work, performance, objectives, resources, or anything else influencing the unit. Examples: A company president works out a deal with a consulting firm; A front line supervisor may negotiate for new typewriters.

Skills of a Manager

A skill is the learnt capacity or talent to carry out pre-determined results often with the minimum outlay of time, energy, or both1. In other words, a skill is an ability or proficiency that a person possesses that permits him or her to perform a particular task.

Analytical Skills

These skills are the abilities to identify key factors and understand how they interrelate, and the roles they play in a situation. Analytical skills involve being able to think about how multiple complex variables interact, and to conceive of ways to make them act in desirable manner.

Technical Skills

Technical skill is the ability to use specific knowledge, techniques, and resources in performing tasks. Examples of technical skills are writing computer programs, completing accounting statements, analyzing marketing statistics, writing legal documents, or drafting a design for a new airfoil on an airplane. Technical skills are usually obtained through training programs that an organization may offer its managers or employees or may be obtained by way of a college degree. Indeed, many business schools throughout the country see their role as providing graduates with the technical skills necessary for them to be successful on the job.

Decision Making skills

These skills are present in the planning process. A manager’s effectiveness lies in making good and timely decisions and is greatly influenced by his or her analytical skills.

Digital Skills

These are important because using digital technology substantially increases a manager’s productivity. Computers can perform in minutes tasks in financial analysis, HRP, and other areas that otherwise take hours, even days to complete.

Human Skills

Human skill involves the ability to interact effectively with people. Managers interact and cooperate with employees. Human skills, therefore, relate to the individual’s expertise in interacting with others in a way that will enhance the successful completion of the task at hand.

Conceptual Skills

Conceptual skill is the ability to see the “big picture,” to recognize significant elements in a situation, and to understand the relationship among the elements. Examples of situations that require conceptual skills include the passage of laws that affect hiring patterns in an organization, a competitor’s change in marketing strategy, or the reorganization of one department which ultimately affects the activities of other departments in the organization.

Communications Skills

Effective communication is vital for effective managerial performance. The skill is critical to success in every field. Communication skills involve the ability to communicate in ways that other people understand, and to seek and use feedback from employees to ensure that one is understood.

Design Skills

It is the ability to solve problems in ways that will benefit the organization. To be effective, particularly at upper levels, mangers must be able to do more than see a problem. They must also be able to design a workable solution to the problem.

Green accounting is a type of accounting that attempts to include factor environmental costs into the financial results of operations. It has been argued that gross domestic product ignores the environment and therefore policymakers need a revised model that incorporates green accounting. The major purpose of green accounting is to help businesses understand and manage the potential quid pro quo between traditional economics goals and environmental goals. It also increases the important information available for analyzing policy issues, especially when those vital pieces of information are often overlooked. Green accounting is said to only ensure weak sustainability, which should be considered as a step toward ultimately a strong sustainability.

It is a controversial practice however, since depletion may be already factored into accounting for the extraction industries and the accounting for externalities may be arbitrary. It is obvious therefore that a standard practice would need to be established in order for it to gain both credibility and use. Depletion is not the whole of environmental accounting however, with pollution being but one factor of business that is almost never accounted for specifically. Julian Lincoln Simon, a professor of business administration at the University of Maryland and a Senior Fellow at the Cato Institute, argued that use of natural resources results in greater wealth, as evidenced by the falling prices over time of virtually all non-renewable resources.

# System of Environmental Economic Accounting (SEEA)

Objectives of Green Accounting:

• Segregation and Elaboration of all Environment related Flows and Stocks of Traditional Accounts:

The segregation of all flows and stocks of assets related to environment permits the estimation of the total expenditure for the protection of the environment. A further objective of this segregation is to identify that part of the gross domestic product that reflects the costs necessary to compensate for the negative impacts of economic growth, that is, the defensive expenditures.

• Linkage of Physical Resource Accounts with Monetary Environmental Accounts:

Physical resource accounts cover the total stock or reserves of natural resources and changes therein, even if those resources are not affected by the economic system. Thus natural resource accounts provide the physical counterpart of the monetary stock and flow accounts of SEEA.

• Assessment of Environmental Costs and Benefits:

The SEEA expands and complements the SNA with regard to costing:

(a) The use (depletion) of natural resources in production and final demand;

(b) The changes in environmental quality, resulting from pollution and other impacts of production, consumption and natural events, on the one hand, and environmental protection, on the other.

• Accounting for the Maintenance of Tangible Wealth:

The SEEA extends the concept of capital to cover not only human-made but also natural capital. Capital formation is correspondingly changed into a broader concept of capital accumulation allowing for the use or consumption and discovery of environmental assets.

• Elaboration and Measurement of Indicators of Environmentally Adjusted Product and Income:

The consideration of the costs of depletion of natural resources and changes in environmental quality permits the calculation of modified macro-economic aggregates, notably an environmentally adjusted net domestic product (EDP).

Problems of Green Accounting:

The SEEA method of calculating Green NDP is beset with a number of problems discussed below:

1. SEEA does not include comprehensive natural resource accounting because regional natural resource accounts are not reflected in the main accounts of the SEEA.
2. It focuses on the use of natural resource for economic activities and ignores the flows and transformations within the natural resources.
3. The types of data needed for SEEA are not available in the necessary format. Thus lack of data has been one of the main problems in the SEEA.
4. Another problem arises when environmental data are directly connected with data of existing national accounts for the preparation of the SEEA. They require assigning of environmental pollution loads to the appropriate economic activities. However, the costs of preventing pollution can only be determined if the causes of pollution are identifiable. But the causes of many types of environmental pollution are not clear. If there are several pollution factors which cause environmental damage, the assignment of this damage will be highly arbitrary.
5. Another problem arises when some of the consequences of environmental pollution become visible after a long time. Estimating only the immediate consequences will lead to wrong policy decisions.
6. Unlike the market prices used by the SNA, there is no simple justifiable valuation system for the SEEA. For different aspects of environmental problems, different valuation problems are used such as prevention and restoration costs and contingent evaluations based on surveys. There are mainly theoretical and arbitrary constructions in SEEA.
7. The pricing of all environmental variables in monetary terms in the SEEA has consequences:

(i) The accounting system is restricted to those variables which are easily monetized thereby reducing the range of the accounting system,

(ii) Monetization of environmental variables and their concentration of only a few aggregates results in a drastic reduction of the SEEA system.