·To understand why positive profits can still result in a
negative cash flow.
·To understand the role of budgets in preparing pro forma
statements.
·To learn how to prepare monthly pro forma cash flow,
income, balance sheet, and sources and uses of funds statements for the first
year of operation.
·To explain the application and calculation of the break-even
point for the new venture.
·To illustrate the alternative software packages that can
be used for preparing financial statements.
The Financial Plan
I.The financial plan provides a complete picture of:
1.How much and when the funds are coming into the
organization.
2.Where the funds are going.
3.How much cash is available?
4.The projected financial position of the firm.
II.The financial plan provides the short-term basis for
budgeting and helps prevent a common problem-lack of cash.
III.The financial plan must explain how the entrepreneur will
meet all financial obligations and maintain its liquidity.
IV.In general, the financial plan will need three years of
projected financial data for outside investors.
Operating and Capital Budget
A.Before developing the pro forma income statement, the
entrepreneur should prepare Operating and capital budgets.
·If the entrepreneur is a sole proprietor, he or she will
be responsible for the
·Budgeting decisions.
·In a partnership, or where employees exist, the initial
budgeting process may
·Begin with one of these individuals.
·Final determination of budgets will ultimately rest with
the owners or entrepreneurs.
B.In the preparation of the pro forma income statement, the
entrepreneur must first develop a sales budget, an estimate of the expected
volume of sales by month.
·From sales forecasts, the entrepreneur will determine the
cost of these sales.
·Estimated ending inventory will also be included.
C. Coproduction or Manufacturing Budget.
·This budget provides a basis for projecting cash flows
for the cost of goods produced.
·The important information in this budget is the actual
production required each month and the needed inventory to allow for changes in
demand.
·This budget reflects seasonal demand or marketing
programs, which can increase demand and inventory.
·The operating budget is an important document, as the pro
forma income statement will only reflect the actual costs of goods.
D.Operating Budget.
·Next the entrepreneur can focus on operating costs.
·Fixed expenses (incurred regardless of sales volume)
include rent, utilities, salaries, interest, depreciation, and insurance.
·The entrepreneur will need to calculate variable
expenses, which may change from month to month depending on sales volume, such
as advertising and selling expenses.
E. Capital
budgets are intended to provide a basis for evaluating expenditures that will impact
the business for more than one year.
·A capital budget may project
expenditures for new equipment, vehicles, or new facilities.
·These decisions can include
the computation of the cost of capital and the anticipated return on investment
using present value methods.
·The entrepreneur should
enlist the assistance of an accountant.
Managerial fictions denote a type of functions associated
with managerial activities. As he acts as an organizer, he performs a number of
managerial functions like planning organizing, staffing, directing,
communicating, co-coordinating and controlling.
1. Planning:
Planning is a basic managerial function of entrepreneur.
Planning helps in determining the course of action to be followed for achieving
various entrepreneurial objectives. It is decision in advance, what to do, when
to do, how to do and who will do a particular task. Planning is process which
involves ‘thinking before doing’.
Planning is concerned with the metal state of
entrepreneur. He thinks before undertaking a work. Other managerial functions
of entrepreneurs such as organizing, staffing, directing, co-ordination and
controlling are also undertaken after planning.
Hart defines planning as ‘the determination in advance of
a line of action by which certain results are to be achieved’. According to
Terry, “Planning is the selecting and relating of facts and the making and
using of assumptions regarding the future in the visualization and formulations
of proposed activities believed necessary to achieve desired results”.
Planning is a process of looking ahead. The primary
object of planning is to achieve better results. It involves the selection of
entrepreneur objectives and developing policies, procedures, programmers,
budgets, and strategies. Planning is a continuous process.
A detailed planning is done in the beginning but the
actual performance is reviewed and suitable changes are made in plans when
actual execution is done.
Plans may be of many kinds, such as short range plans,
medium range plan, long range plans, standing plans, single use plans,
strategic plan, administrative plans and operational plans.
The process of Planning involves a number of steps:
i) Gathering information,
ii) Laying down objectives,
iii) Developing planning premises,
iv) Examining alternative courses of action,
v) Evaluation of action patterns,
vi) Reviewing limitations,
vii) Implementation of plans.
2. Organizing:
Every business enterprise needs the service of a number
of persons to look after its different aspects. The entrepreneur sets up the
objectives or goals to be achieved by its personnel.
The energy of every individual is channelized to achieve
the enterprise objectives. The function of organizing is to arrange, guide,
co-ordinate, direct and control the activities of other factors of production,
viz., men, material, money and machines so as to accomplish the objectives for
the enterprise.
In the words of Kountze and O’Donnell, ‘Organizing is
that part for managing that involves establishing and intentional structure for
roles for people in an enterprise to fill.” Organization provides the necessary
framework within which people association for the attainment of business
objectives.
Louis A. Allen describes organization as, “the process
identifying and grouping work to be performed, defining and delegating
responsibility and authority and establishing relationships for the purpose of
enabling people to work most effectively together in accomplishing objectives.”
The process organization involves the following steps:
(i) To identifying the work to be performed;
(ii) To classify or group the work;
(iii) To assign these groups of activities or work to
individuals;
(iv) To delegate authority and fix responsibility and
(v) To co-ordinate these authority-responsibility
relationship of various activities.
The character and type of organization depends upon the
size and nature of the enterprise. Though there are many types of organization
but generally three types of organizations are in vogue:
(i) Line organization
(ii) Functional organization and
(iii) Line and staff organization
In line organization authority flows vertically from the
top of the hierarchy to the bottom. Under functional organization, the work is
divided into different departments.
Each department deals in one type of work and it specializes
in one work only. A workman has a work under many superiors who specialize in
different functions.
Line and staff organization provides for specialists with
line executives. It is a combination of line and functional form of
organization.
A sound organization contributes greatly to the
continuity and success of the enterprise. However, an organization is not an
end in itself. The organization structure should be flexible.
3. Staffing.
The function involves manning the positions created by
organization process. It is concerned with human resources of an enterprise.
Staffing is filling, and keeping filled, positions in the
organization structure through defining work force requirements, appraising,
selecting, compensating and training”. Thus, staffing consists of the
following:
(i) Manpower planning, i.e., assessing manpower
requirements in terms of quantity and quality;
(ii) Recruitment, selection and training;
(iii) Placement of man power;
(iv) Development, promotion, transfer and appraisal;
(v) Determination of employees’ remuneration.
Every entrepreneur has to perform the staffing function
in one form or the other, in order to get things done through others.
But, it is decidedly a difficult managerial function of
entrepreneur as it concerns human beings whose behavior and actions cannot be
predicted, and that is why it has become a distinct and specialized branch of
management.
4. Directing:
Directing is concerned with carrying out the desired
plans. It initiates organized and planned action and ensures effective
performance by subordinate towards the accomplishment of group activities. In
the words of George R. Terry, “Direction is moving to action and supplying
simulative power to the group”.
After planning, organizing and staffing, the entrepreneurship
has to guide and supervise his subordinates. It is the final action of an
entrepreneur in getting others to act after all preparations have been
completed.
5. Leadership.
An entrepreneur has to issue orders and instructions and
guide and counsel his subordinates in their work with a view to improve their
performance and achieve enterprise objectives.
Leadership is ‘the process by which an entrepreneur
imaginatively directs/ guides and influences the work of others in choosing and
attaining specified goals by mediating between the individual and organization
in such a manner that both will get maximum satisfaction’.
Leadership is the ability to build up confidence and zeal
among people and to create an urge in them, to be led. To be a successful leader,
an entrepreneur must possess the qualities of foresight, drive, initiative,
self-confidence and personal integrity.
Different situations may demand different types of
leadership, i.e. autocratic leadership, democratic leadership and free rein
leadership.
6. Communication.
Communication constitutes a very important function of
entrepreneur. It is said to be the number one problem of entrepreneur today. It
is established fact that entrepreneur spend 75 to 90 percent of their working
time in communicating with others.
Communication is the means by which the behavior of the
subordinate is modified and change is effected in their actions.
The word ‘communication’ has been derived from the Latin
word ‘communes’ which means ‘common’. The essence of communication is getting
the receiver and the sender tanned together for a particular message.
It refers to the exchange of ideas, feelings, emotions
and knowledge and information’s between two or more persons. Nothing happens in
management till communication takes place.
Communication is a two-way process as it involves both
information and understanding. It may be written, oral and gestural.
Communication is said to be formal when it follows the formal channels provided
in the organization structure.
It is informal communication when it does not follow the
formal channels. Communication flows downward from a superior to subordinates
and upward from subordinates to a superior.
It also flows between two or more persons operating at
the same level of authority.
Communication is essential for decision making and
planning. It increase managerial capacity and facilitates control. It has been
rightly said that good entrepreneur are good communicators and poor
entrepreneur are poor communicators.
7. Motivations.
The term motivation is derived from the word ‘motive’
which means a need or an emotion that prompts an individual into action.
Motivation is the psychological process of creating urge among the subordinates
to do certain things or behave in the desired manner.
It is a very important function of entrepreneur. The
importance of motivation can be realized from the fact that performance of a
worker depends upon his ability and the motivation.
There are many strategies adopted by entrepreneur for
increasing the motivation of subordinates. According to Michel Julius.
“Motivation means the act of stimulating someone or
oneself to get a desired course of action to push the right button to get a
desired reaction, a compliment, dollar raise, a smile, a promise of a rise, a
new typewriter, a preferred location or a new desk”.
Thus, entrepreneur has to provide some personal incentive
to the subordinates to motivate, perused and inspire them for contributing
their best towards the achievement of enterprise objectives.
The incentives to be provided may be financial, such as
increase in wages, or non-financial, like better working conditions, job
security, recognition, etc a sound motivational system must be productive,
competitive, comprehensive and flexible, and it must consider the
psychological, social, safety, ego and economic needs of the worker.
8. Supervision.
Supervision is another important managerial function of
entrepreneur. After issuing instructions, the entrepreneur has to see that the
given instructions are carried out. This is the aim of supervision.
Supervision refers to the job of overseeing subordinates
at work to ensure maximum utilization of resources, to get the required and
directed work done and to correct the subordinates whenever they go wrong.
Sound organizational set up, effective delegation, human
approach, effective communication and management by exception make supervision
effective.
9. Co-ordination.
Co-ordination is one of the most important functions of
entrepreneur. It is essential to channelize the activities of various
individuals in the organization for the achievement of common goals.
Every department or section is given a target to be
achieved and they should concert rate only their work and should not bother
about the work of other organs.
It is left to the entrepreneur to see that the work of
different segments is going according to pre-determined targets and corrective
measures have to be taken if there is any deviation.
Co-ordination creates a team spirit and helps in
achieving goals through collective efforts. It is the orderly arrangement of
group effort to provide unity of action in the pursuit of common objectives.
Dalton McFarland defines co-ordinates as the “process
whereby an executive develops an orderly pattern of group effort among his
subordinates and secures unity of action in the pursuit of common purposes”.
Co-ordination can be classified under two categories: (i)
vertical and horizontal co-ordination, and (ii) internal and external
co-ordination.
Whereas vertical co-ordination is the co-ordination
between different levels of management, the term horizontal co-ordination is
used when co-ordination has to be achieved between departments of the same
level of authority.
Co-ordination is internal when it is between different sections
of the same concern and external when it is required with persons outside the
organization.
Co-ordination is regarded as the very essence of
entrepreneurship as in order to co-ordinate the activities of his subordinates,
entrepreneur has to perform all the other functions of entrepreneur via,
planning organizing, staffing, directing and controlling. It must also be noted
by the readers the co-ordination and co-operation do not mean the same thing.
10. Controlling.
Controlling can be defined as “determining what is being
accomplished, that is evaluating the performances, if necessary, applying
corrective measures so that the performance take place according to plans”.
Control is essential for achieving objectives of an
entrepreneur. The planning of various activities does not ensure automatic
implementation of policies.
Control is the process which enables entrepreneur to get
its policies implemented and take corrective actions if performance is not
according to the pre-determined standards.
If planning is the beginning of the entrepreneur process,
controlling may be said to be the final stage, if planning is looking ahead,
controlling is looking back. Control is not possible without planning is
meaningless without control.
Control is a line function and entrepreneur assesses the
per5formance of their subordinates. The main purpose of control is to see that
the activity is achieving the desired results.
A control system, to be effective, must conform to the
nature of activity, report deviations promptly, reflect organization
structu5re, assure corrective action and be economical.
The process of controlling involves the following steps:
(i) Establishing standards of performance;
(ii) Measuring actual performance;
(iii) Comparing the actual performance with the standard;
