Understanding Business Investments
Potential Sources of Funding for Your Business
Potential Sources of Funding for Your Business
With the calculated total business investment cost, entrepreneurs must identify and evaluate the most viable ways to secure funding for their startup. Choosing the right funding source is crucial for establishing a strong financial foundation. Below are some potential sources of funds that entrepreneurs can explore to meet their startup’s needs.
Internal
Sole Proprietorship – owner’s money
Partnership – partners capital contribution
Company – paid-up share capital by shareholders
EXTERNAL
Bank Business Loan
Entrepreneurs Loan Scheme
Suppliers’ Credit
Family and Friends
Angel Investors
Funding a business through personal savings offers the advantage of retaining full control without the need to involve external parties. However, relying solely on personal savings may not provide enough capital to sustain the business over the long term, making it essential to explore additional funding options.
Loans can be a practical solution for businesses requiring significant startup costs. Entrepreneurs must establish a solid repayment plan when borrowing from external sources. Alternatively, securing funds from investors can provide the necessary capital but may require the business owner to relinquish partial ownership or control, potentially affecting decision-making authority.
The 5Cs Criteria for Lending
- Credit History
Evaluates the borrower’s reputation and track record in repaying past debts, providing insight into their financial reliability.
- Capacity
Assesses the borrower’s ability to repay the loan by analyzing income, expenses, and existing financial obligations.
- Capital
Reflects the borrower’s level of commitment through their own financial contribution towards the investment, demonstrating seriousness and financial stability.
- Collateral
Provides the lender with security by identifying assets the borrower can pledge to ensure loan repayment.
- Conditions
Considers external factors like interest rates, loan terms, and economic conditions that may influence the lender’s decision to approve the loan.
Now, using the same Business Investment Cost table formatting, add another column for “Sources of Fund”:
Based on the table, the total business investment cost is RM60,712. Out of this amount, RM13,520 will be contributed by the owner as personal funding, demonstrating their commitment to the business. The remaining balance of RM47,192 will be sourced through third-party lending, ensuring sufficient capital to cover all necessary expenses and facilitate the startup’s operations.
Understanding Gross Profit Margin
Gross Profit Margin is the difference between revenue and the cost of goods sold, which includes raw materials, packaging, and production costs. It is calculated by dividing Gross Profit by Revenue and expressing the result as a percentage. The purpose of the gross profit margin is to determine the value of incremental sales, and to guide decisions regarding pricing and promotions.
Break-Even Revenue Calculation for Malaysian Businesses
Gross Profit Margin
= Gross Profit / Revenue
= RM76,500 / RM165,000
= 0.46364
= 46%
Break Even for Revenue
= (Total Operating Expenses – Depreciation) /
Gross Profit Margin
= (RM85,839 – RM3,645) / 46 %
= RM82,194 / 46 %
= RM178,682
What Is Revenue Break-Even Point?
The break-even point is crucial for business owners to understand because it helps them set realistic sales targets and pricing strategies. It shows the minimum sales needed to avoid a loss, and anything beyond this point contributes directly to profit.
To calculate the break-even point, fixed costs (costs that do not change with production levels) are divided by the contribution margin per unit (selling price per unit minus variable costs per unit). This calculation provides insight into how much needs to be sold to cover all costs and start generating a profit.
Understanding the break-even point helps businesses manage risks, optimize pricing, and plan for growth.
Make an appointment with Company Secretary or Our Lawyer for advice and consultation
WHAT IS?
What is Cost of Product Sold?
It is the Purchase Price of your products sold within an accounting period.
Example: First Stock (+) Purchase (=) Product Cost to be Sold
(-) Final Stock (=) Cost of Product Sold
What is Gross Profit?
It is the difference between Income and Cost of Product Sold
Example : Income – Cost of Product Sold = Gross Profit
Overview of the Statement of Financial Position (Balance Sheet)
A statement of financial position, also referred to as a balance sheet, is a critical financial document that reflects the overall financial health of a business at a specific moment in time. It details the company’s total assets—resources owned that have value—its liabilities, which are obligations to lenders, suppliers, or other creditors, and the owner’s equity, which represents the residual interest in the company after liabilities are deducted.
The statement follows the accounting principle that Total Assets = Total Liabilities + Owner’s Equity, ensuring that the two sides of the balance sheet are always in equilibrium. This balance demonstrates that every resource acquired by the business is funded either through borrowing (liabilities) or through the owner’s investments and retained earnings (equity).
By providing a clear and concise view of a company’s financial structure, the balance sheet enables stakeholders, including investors, creditors, and management, to assess the business’s ability to meet its financial obligations, its funding sources, and its overall financial stability.
Understanding Account Aging
An accounts receivable aging report provides a detailed list of unpaid customer invoices that are past due. It is commonly used by collections teams as a primary tool for managing overdue payments.
Similarly, an accounts payable aging report outlines outstanding invoices owed to suppliers that have exceeded their due dates. These reports are typically categorized by specific time periods, as illustrated in the following example:
Receivable Aging Report
| Customer Name | Total Receivable | 30 Days | 60 Days | 90 Days | 90 Days |
|---|---|---|---|---|---|
| Micronest Enterprise | 8,000 | 5,000 | 3,000 | ||
| Boon Siew Sdn Bhd | 15,000 | 5,000 | 5,000 | 3,000 | |
| Milliter Sdn Bhd | 23,000 | 5,000 | 10,000 | 8,000 | |
| Se Corp | 3,000 | 5,000 | 5,000 | 5,000 | 10,000 |
| TOTAL | 59,000 | 15,000 | 18,000 | 18,000 | 18,000 |
Payable Aging Report
| Suplier Name | Total Payable (RM) | 30 Days | 60 Days | 90 Days | 90 Days + |
|---|---|---|---|---|---|
| Digital Care Tech | 2,450 | 2,450 | |||
| MD Amin Sdn Bhd | 5,000 | 5,000 | |||
| Abu Garci Reno | 6,000 | 6,000 | |||
| Beycut Machine | 10,000 | 5,000 | 5,000 | ||
| TOTAL | 23,450 | 18,450 | 5,000 |
Receivable Aging Report
| Customer Name | Total Receivable | 30 Days | 60 Days | 90 Days | 90 Days |
|---|---|---|---|---|---|
| Micronest Enterprise | 8,000 | 5,000 | 3,000 | ||
| Boon Siew Sdn Bhd | 15,000 | 5,000 | 5,000 | 3,000 | |
| Milliter Sdn Bhd | 23,000 | 5,000 | 10,000 | 8,000 | |
| Se Corp | 3,000 | 5,000 | 5,000 | 5,000 | 10,000 |
| TOTAL | 59,000 | 15,000 | 18,000 | 18,000 | 18,000 |
Payable Aging Report
| Suplier Name | Total Payable (RM) | 30 Days | 60 Days | 90 Days | 90 Days + |
|---|---|---|---|---|---|
| Digital Care Tech | 2,450 | 2,450 | |||
| MD Amin Sdn Bhd | 5,000 | 5,000 | |||
| Abu Garci Reno | 6,000 | 6,000 | |||
| Beycut Machine | 10,000 | 5,000 | 5,000 | ||
| TOTAL | 23,450 | 18,450 | 5,000 |
Make an appointment with Company Secretary or Our Lawyer for advice and consultation