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MGT602 - Entrepreneurship - Lecture Handout 41

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PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT
DECISIONS (Continued….)

LONG-TERM VS SHORT-TERM DEBT

The entrepreneur may need to borrow funds to finance assets and meet cash needs. Fixed assets are usually financed by long-term debt borrowed from a bank. Alternatives include borrowing from family members, having partners contribute more funds or selling corporate stock. Many of these options require the entrepreneur to give up some equity.

MANAGING COSTS AND PROFITS

An interim income statement helps to compare the actual with the budgeted amount for that period. The most effective use of the interim income statement is to establish cost standards and compare the actual with the budgeted amount for that time period. Costs are budgeted based on percentages of net sales. These percentages can be compared with actual percentages to see where tighter cost controls may be necessary. This lets the entrepreneur manage and control costs before it is too late. In later years, it is also helpful to look back on the first year of operation and make comparisons month-to-month. When expenses or costs are much higher than budgeted, the entrepreneur may need to determine the exact cause. Comparison of actual and budgeted expenses can be misleading for ventures with multiple products or services. For financial reporting purposes, the income statement summarizes expenses across all products and services.
This does not indicate the marketing cost for each product nor should the most profitable product. Allocating expenses over product lines be done as effectively as possible to avoid arbitrary allocation of costs.

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MGT602 - Entrepreneurship - Lecture Handout 28

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THE ORGANIZATIONAL PLAN (Continued ….)

Transferability of Interest

  • Each of the forms of business offers different advantages as to the transferability of interest.
  • In a proprietorship, the entrepreneur has the right to sell any assets.
  • In the limited partnership, the limited partners can sell their interests at any time without consent of the general partners. A general partner cannot sell any interest unless specified in the partnership agreement.
  • In a corporation shareholders may transfer their shares at any time.
  • In the S Corporation, the transfer of interest can occur only as long as the buyer is an individual.

Capital Requirements

The need for capital during the early months can become one of the most critical factors in keeping a new venture alive.

  • For a proprietorship, any new capital can only come from loans or by additional personal contributions. Often an entrepreneur will take a second mortgage as a source of capital. Any borrowing from an outside investor may require giving up some equity. Failure to make payments can result in foreclosure and liquidation of the business.
  • In the partnership, loans may be obtained from banks or additional funds may be contributed by each partner, but both methods require change in the partnership agreement.
  • In the corporation, new capital can be raised by: