Sources of Finance Available to a Startup

For many businesses, the issue about financial sources (where to get funds from for starting up) can be crucial for the success of the business. They are divided into internal and external sources. We have to choose the best financial option in order to open our new retail pharmacy. In fact, the type of finance being chosen will depend on what kind of business and how much money is needed and how the money is spent.

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Personal savings are amounts of money that a business person, partner or shareholder has at their disposal to do with as they wish. For example, if someone uses his or her savings to invest in his or her own or another business, then the source of finance comes under the heading of personal savings. The financial sources of our new retail pharmacy is solely from our personal savings with each of us comes out with RM 100,000. Therefore, the sum of our capital is RM 500,000 from 5 individuals. However, there are other financial options available other than personal savings such as from family and friends (internal sources), from banks, outside investors, grant and community development finance institution (external sources).

When the money is insufficient to start a new business, friends and family may be willing to help. They might lend money for the new business or they might invest in the business, such as by buying shares. A written agreement in place that sets out terms and conditions, including any interest and repayment terms should be made to avoid misunderstandings.

Friends or family may be more willing to lend money than a bank, particularly if security for a loan is not provided. Friends and family may offer easy terms such as an interest-free loan. It should make it easier to get additional finance from the bank if some finance can be raised from own resources or friends and family.

After a credible business plan is made, borrow from a bank is much easier. Many businesses use overdrafts for day-to-day borrowing and loans to finance large purchases such as equipment. Moreover, when business is likely to have peaks and troughs in its cash flow, it’s essential to be able to clearly illustrate these to the bank so an overdraft can be planned.

A larger business with good prospects might attract outside investors. For example, ‘business angels’ typically invest RM 100,000 or more in exchange for a share in the business.

Some of the business is qualified for a grant from government. For example, if a business is setting up in a deprived area.

If your business is setting up in a deprived area, or in a sector that is not normally catered for by mainstream lenders, finance from a community development finance institution will be an option as well.

Introduction

Accounting is a process of: i. Collecting source documents as evidence of transactions and as the source for recording business transactions. ii. Recording relevant details from source documents in the respective books of prime entry. iii. Summarising from the books of prime entry and transferring these summaries to the respective ledgers. iv. Communicating the accounting information to users, by preparing the financial statements. Figure 8: The Accounting Cycle Source Documents are written documents that contain details of the business transactions. They provide evidence that the transactions have taken place.

Management and Financial Accounting

Management Accounting is an area of accounting associated with providing financial and other information to all levels of management in an organisation to enable them to carry out their planning, controlling and decision making responsibilities. It is used in all forms of organisations-profit-seeking and not-for-profit business undertakings; sole traders, partnerships and companies; retailing, manufacturing and service businesses; and government. Management accounting covers: Cost behaviour and cost-volume-profit relationships, Decision making through incremental analysis, Budgeting for financial planning and control, Capital budgeting, Accounting and reporting for business segment operations. Financial Accounting is concerned with reporting information to users external to an entity in order to help them to make sound economic decisons about the entity’s performance and final position. Types of reports used in management accounting and financial accounting are as below:

Differences between management accounting and financial accounting We need accounting information (i.e. financial statements) to aid in decision making, planning, control and coordination of our pharmacy business activities. Apart from this, our finance providers (i.e. banks and financial instituitions who lend money to a business) need to ensure our finance stability and ability to repay the amount borrowed (principal sum) and pay interests.

Basic Financial Statements

Three types of information contained in financial statements serve to inform users about the entity. Firstly, we want information about our business performance. As a business entity, information about its ability to earn profits is an essential part of our financial reports. The second type of information that is necessary for making decisions about our entity is its financial position. The financial position deals with the economic resources controlled by an entity, its financial structure, its capacity to adapt to changes in its environment, and its liquidity and solvency. Lastly, information about the entity’s cash flows is useful for us to assess the entitiy’s operating and financing activities. Operating activities includes: The collection of cash for service provided, The sale of goods to customers, The purchase of goods for sale, The payment for supplier for goods or services purchased, Collection of debts from customers, Payment of wages to employees and The payment of income tax to the government. On the other hand, financing activities engaged by our business would probably includes raising of capital by issuing shares or borrowing money from financial institution, and the repayment of these borrowed funds. The Balance Sheet reports the financial position of an entity at a specific point of time. The financial position is reflected by the assets of the entity, its liabilities or debts owed, and the owner’s equity.

The balance sheet is broken down into three main sections. The top section includes the company name, the title of the company and the time period of the form. The assets section is one of the two sections below the top section.A  This section includes all of the company’s assets.A  The assets are the items the company owns which may include, accounts receivable, inventory, equipment, furniture, automobile, prepared expenses and so on. The liability section is on the other side of the asset section.A  The liabilities may include items like, accounts payable, notes payable, interest payable, payroll accrual, long term liabilities, short term liabilities and so on. The equities can be included on the same side as liabilities.A  The equities are shareholders and the owner’s equities (what the owner has put into it).A  It includes such items as; capital, stock, retained earning and so on. If, the assets are more than the liabilities and equities you will have a net profit.A  But, if the liabilities and equities are more than the assets you will have a net loss.

The Income Statement (also known as profit and loss statement or an operating statement) reports the results of financial performance for a specific time period. Profit for the period is the excess of income over expenses for that time. If expenses for the period exceed income, a loss is incurred. The statement of changes in equity serves as a connecting link between the balance sheet and the income statement, and explains the changes that took place in equity during the period.

Accounting for a Partnership

Most partnerships are not reporting entities and hence do not have to comply with accounting standards and financial reports are thus special-purpose reports. In a partnership, ownership interests generally are not equal because the capital investments and drawings of each partner vary over time. The profit or loss reported each accounting period is distributed to the partners in accordance with the partnership agreement. There are two commonly used methods for accounting equity in a partnership: Method 1: use of Capital accounts for each partner which record capital contributed and withdrawn; and each partners’ periodic share of profits and/or losses. Method 2: use of Capital accounts with fixed balances for each partner reflecting only the capital contributed and capital withdrawn. A partner’s share of profits and/or losses and drawings from profits are recorded in separate Retained Earnings (or Current) account for each partner.

Allocation of partnership profits and losses

We consider 3 elements in establishing an equitable way to allocate profits and losses: A return for the personal services performed by the partner, A return on the capital provided by the partners, A return for the business risks assumed by the partners. Others more common profit and loss sharing agreements includes: A fixed ratio, A ratio based on capital balances, A fixed ratio established by the partners after allowing for interest on capital contributions and salaries to partner for services rendered to the partnership.

Financial Statements for a Partnership

If the partnership is not a reporting entity, it will prepare a special-purpose report. If the partnership is a reporting entity, it must prepare general -purpose financial reports complying with accounting standards. Each individual partner’s equity in business is reported separately on the balance sheet or in a separate statement of changes in partners’ equity; so does the profit or loss allocation for a specific period. Also, salaries authorised for each partner, interest on capital investments and interests on drawings is recognised as an allocation of profit. In our retail pharmacy, the partnership is a reporting entity, therefore, a general -purpose financial reports are prepared which are complying with accounting standards- an income statement, a statement of changes in partners’ equity, a balance sheet and a cash flow statement.

ORGANIZATION STRUCTURE:

The retail pharmacy is owned by us, the 5 registered pharmacists whose name Fum Hoang Jen, Kok Le Fei, Lai Yik Shan, Lim Syok Hua and Phua Li Yung. A marketing manager is employed for managing the sales and marketing of the pharmacy business. He or she is in duty to come out with marketing strategies to increase the profit and build up the reputation of the pharmacy business. In addition, 2 cashiers and 2 sales people are employed to assist the operation of the pharmacy business. Furthermore, among the 5 of us, one of us will be the drug managers or supervisors while being in the possession of presidents of the pharmacy. The other 4 of us are hospital pharmacists who are just the partners of the pharmacy business. Besides that, 2 assistant pharmacists are employed to in our pharmacy. On the other hand, an accounting manager is employed to do the accounting of the pharmacy business. Additionally, an accounting clerk is also employed to assist the accounting manager. Pharmacy merchandising involves the proper placement of goods on pharmacy shelves. The space of a pharmacy available for goods to be displayed is limited by the size and design of the store. Therefore, our retail pharmacy separates the space of our pharmacy into departments or sections that contain major categories of products. In fact, merchandise in a pharmacy tends to flow from one department to the next. This flow is accomplished by placing related departments next to or near each other so can attract the attention of the target customers. For example in our retail pharmacy, beside the cosmetic area is the area arranged with hair care products, oral care products and skin care products.

The target of these products is normally the female customers. So, if they are placed beside the cosmetic area, they are more accessible to the female customers. Pharmacy aisles should be taken into consideration as well as aisles are of various lengths and heights. If an aisle is longer, cross aisles should be provided. Cross aisles are a break in a long run of shelving creating an aisle that allows customers to move easily across the store. In our retail pharmacy, cross aisles are provided for smooth traffic flow and increase visible space for item placement. Moreover, our retail pharmacy uses the space at the beginnings and ends of the aisle runs where these spaces often are referred to as end caps. We use end caps in our retail pharmacy to display promotional and seasonal items, bulk items, impulse items and new products to highlight specific products in order to gain shoppers attention. In addition to this, floor-stand displays will be used in our retail pharmacy to place large quantities of an item on display and making the products easily accessible to consumers as manufacturers often supply these displays and other promotional materials to pharmacy to highlight their products.

Pharmacy shelves are used for storing and displaying drugs and related items. The biggest challenge with these shelving would be that the shelves should be easy to clean. The pharmacy shelving used in our retail pharmacy is shelvesA that are blend functionality with flexibility with high quality shelving display to draw customers into our pharmacy. More storage, less space, easy to install, easy to clean and maintain are the key criteria for our retail pharmacy shelves. Figure 9: Pharmacy shelves for oral care, skin care and hair care products Figure 10: Pharmacy shelves for supplements and OTC products Pharmacists are the more frequently and more accessible to patients or often see on a consistent basis compared to doctors. This is because no appointment is needed to see pharmacist where customers can talk to pharmacists in confidence even about symptoms that are very personal. In order to provide a more comfortable place for our customers, there is a counseling room in our pharmacy to provide privacy for our customers. There are many services available in our retail pharmacy include: Full clinical medication review – our pharmacists will review the prescribed medicines written on the prescription where this service is about having an in depth look at the medicines to confirm the dosage, strength, frequency and drug-drug interactions before dispensing.

Dispensing and counseling of medicines – our pharmacists will dispense the medications after a full clinical medication review and will counsel the patients on the indication, instructions of use, side effects and the expiry date of the medications. One-to-one consultations is provided to ensure patients are getting the most information on the medicines particularly useful for those patients on multiple or long-term medication. Advice on supplements – our pharmacist will provide knowledge on the variety of supplement available and assist customers in purchasing supplement products for certain medical conditions. Minor Ailments Service – our pharmacists are able to provide treatments for a range of minor ailments such as athlete’s foot, headlice, allergic conjunctivitis, dandruff, acne and other minor ailments. Stop smoking service – our pharmacists can help patients give up smoking through advice, support and if appropriate the Nicotine Replacement Therapy. Blood pressure testing – our pharmacists can check your blood pressure and offer lifestyle advice about how to stay healthy. Cholesterol testing – Our pharmacists can offer a simple “finger prick” test that can reveal the cholesterol level and give advice on how to reduce cholesterol level and stay healthy. Blood glucose testing – Our pharmacists can offer a simple finger prick test that can reveal the blood glucose level and give advice on how to keep it low or reduce it as having too much glucose in blood may indicate a greater risk of diabetes. Family planning – Our pharmacists can counsel couples about the information on family planning by providing knowledge on the medications available such as OCP (Oral Contraceptive Pill) or other additional contraception method such as condom.

 

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Sources of finance available to a startup. (2017, Jun 26). Retrieved May 25, 2022 , from
https://studydriver.com/sources-of-finance-available-to-a-startup/

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