MGT601 - SME Management - Lecture Handout 18

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PROBLEMS FACED BY NEWLY ESTABLISHED COMPANY

This lecture will continue with the previous lecture problem and then chapter deals with the teething problem that a newly established company faces.

Cash Flow Analysis

If the projected sales associated financial requirements and available financial resources are known, the anticipated cash flow can easily be determined.

Cash Flow (Projected)

Cash Flow and Financial Transactions Period 1 Period 2
1) Cash flow    
Initial expense    
Fixed investment    
Operating expense    
Total cash outflow    
2) Cash inflow    
Cash sales    
Account receivables    
Total operating inflow    
3) Net cash flow (2-1)    
4) Desired minimum cash balance    
5) Total amount of funds required
[3 (if negative + 4)]
   

Source of Funds

Fund Type Amount
Short term
Net trade credit
Commercial loans
 
Intermediate loans  
Long term loans  
Equity  
Total Financing  

Anticipated return on investment

Financial feasibility is adjudged on the basis of satisfactory yield on investment. It can be calculated by relating the average earnings expected over a given period to either the total amount of investment or net worth of organization (Return on equity). Both are compared with potential yield from alternative investment opportunities to ascertain the acceptability or otherwise of a new venture.

Assessment of Personal Requirements and Organizational Capabilities

Human beings provide the motive force to an enterprise. For this purpose, it is necessary to consider the available talent and skills consonants with the organization structure. An inventory must be made of the skills needed for effective implementation of new venture. The steps in undertaking the exercise relating to determination of personal requirements and designing the initial organizational structure are described below:

  1. Ascertaining the anticipated workflow and the various activities (called activity analysis). At this stage, the total range of activities and level of skills are identified.
  2. Grouping the activities into set of tasks that individuals can handle effectively.
  3. Categorization of various tasks to form the basis of structure of organization.
  4. Determination of interrelationship between different positions and designing of organizational hierarchy.

Analysis of Competition

In order to ensure the survival and growth of enterprise, it is essential to make competition analysis. Generally, every organization to face two types of competition:

  1. Direct competition from similar products.
  2. Indirect competition from substitutes.

Competition analysis must seek to identify potential competitors, the strategies adopted by them and their impact on proposed enterprise, specific advantages enjoyed by the purpose venture and formalization of strategy in consonance with these advantages. The entrepreneur must guard against being content with neutralization competitors strategic advantages. The aim should be to have superior strategies at least during the initial stages.

Field Problems of Starting a New Enterprise

Identification of a venture after a thorough analysis of the five major aspects described earlier should not be regarded as the end of all problems. Rather the real problems have been summarized in the following paragraphs.

  1. Pre-Operator Problems
    • Problem of selecting an appropriate form of business organization.
    • Problems related with the acquisition of basic facilities such as sources of raw materials, power, transport etc.
  2. Problems during the construction phase
    These would be connected with:
    • Acquisition of land;
    • Construction of building and other aspect of civil works;
    • Acquisition of machinery and its installation;
    • Preliminary work about the sources of supply of raw materials , labor and managerial inputs;
    • Prospecting about marketing;
    • Preliminary work regarding sources of working capital;
    • Coordination problem connected with the acquisition of different kinds of assets or completion of jobs;

Reference

Corporate Collapse; the causes and symptoms by John Wiley

Book Recommended

Entrepreneurship and small business by C L Banasal

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