Tag: OVERVIEW

 

1. WHICH FORMS OF FINANCING EXIST?

 

THERE ARE GENERALLY THREE FORMS OF FINANCING:

• GRANT
• DEBT FINANCING
• EQUITY FINANCING

 

Ad1)  DEFINITION OF GRANT

A grant is a fund given by a person or organization, often a public body, charitable foundation, a specialised grant-making institution, or in some cases a business with a corporate social responsibility mission, to an individual or another entity, usually, a non-profit organisation, sometimes a business or a local government body, for a specific purpose linked to public benefit. (BY COURTESY OF WIKIPEDIA)

 

UNLIKE A LOAN, A GRANT DOES NOT INCLUDE THE OBLIGATION TO PAY IT BACK. SO, IF YOU ARE LUCKY TO GET A GRANT TO LAUNCH YOUR OWN BUSINESS, KEEP TO THE CONDITIONS OF THE GRANT AND BE HAPPY. ALL YOU NEED TO DO IS TO MANAGE YOUR BUSINESS SUCCESSFULLY. BUT THAT IS A SUBJECT FOR A DIFFERENT COURSE…

Ad 2: DEFINITION OF DEBT FINANCING

 

Debt financing occurs when a company raises money by selling debt instruments, most commonly in the form of bank loans or bonds.

WHERE DEBT IS A SUM OF MONEY OWED OR DUE.

WHEN YOU SEE THIS DEFINITION, YOU WILL REALISE THAT FOR YOU AS A SMALL OR MICRO START-UP, THE ONLY PART OF THIS DEFINITION THAT APPLIES TO YOU ARE THE BANK LOANS. DON’T WORRY IF YOU SEE THE WORD “COMPANY” IN THE DEFINITION. WHETHER YOUR BUSINESS IS PART OF A COMPANY YOU HAVE REGISTERED WITH THE REGISTRAR GENERAL (MORE ABOUT THAT IN A DIFFERENT COURSE “BUSINESS MANAGEMENT”), OR YOU OWN THE BUSINESS AS A SINGLE PERSON (SELF-PROPRIETORSHIP) OR TOGETHER WITH OTHERS (PARTNERSHIP), YOU WILL USUALLY FACE THE SAME ISSUE: YOU HAVE TO GO TO THE BANK. MORE ABOUT DEBT FINANCING IN THE NEXT LESSON.

 

AD 3: DEFINITION OF EQUITY FINANCING

Equity financing refers to the sale of company shares in order to raise capital. Investors who purchase the shares are also purchasing ownership rights to the company. Equity financing can refer to the sale of all equity instruments, such as common stock, preferred shares, share warrants, etc.

WHERE EQUITY IS THE VALUE OF THE SHARES ISSUED BY A COMPANY.

HERE WE MUST BE CAREFUL. THIS DEFINITION MAINLY REFERS TO EQUITY OF A COMPANY LISTED ON A STOCK EXCHANGE (E.G., THE GHANA STOCK EXCHANGE – GSE). HOWEVER, IF YOU LAUNCH A BUSINESS AS SINGLE OWNER (SELF-PROPRIETORSHIP), THE BUSINESS IS EQUITY. THE SAME REFERS TO A BUSINESS PARTNERSHIP, IN WHICH EACH OF THE PARTNERS OWNS A PART OF THE EQUITY. THIS IS IMPORTANT WHEN WE DIG INTO EQUITY FINANCING IN ONE OF THE FOLLOWING LESSONS.

 

1. QUESTIONS

 

• IN YOUR OWN WORDS: WHAT IS A GRANT?
• IN YOUR OWN WORDS: WHAT IS DEBT FINANCING?
• IN YOR OWN WORDS: WHAT IS EQUITY?
• IN YOUR OWN WORDS: WHAT IS EQUITY FINANCING?

 

TRY TO ANSWER THE QUESTIONS WITHOUT LOOKING AT THE TEXT.

THE NEXT LESSON WILL FOLLOW IN A FEW DAYS.

 

1. INTRODUCTION

 

IN THE PAST, I HAVE WRITTEN SEVERAL TIMES ABOUT THE NECESSITY OF FINANCIAL LITERACY, AND THOSE OF YOU WHO FOLLOW RECKLING ENTERPRISE AND ITS BLOGS, WILL SURELY REMEMBER THAT..

I CONSIDERED IT IMPORTANT TO RENEW MY THOUGHTS ABOUT THIS MATTER, BECAUSE EVERY DAY I SEE THE STRUGGLE THAT ESPECIALLY PEOPLE IN THE INFORMAL SECTOR HAVE TO KEEP THEIR BUSINESSES ALIVE.

MOST SMALL BUSINESSES COLLAPSE IN THE FIRST YEAR OF THEIR EXISTENCE, AND IN MOST CASES, IT IS BECAUSE OF FINANCIAL REASONS. THE BUSINESSES ARE EITHER UNDER-CAPITALISED, OR THE BUSINESS OWNERS JUST “EAT” THE CAPITAL OF THEIR BUSINESS.

LET;S MAKE IT CLEAR: YOU CAN ONLY RUN YOUR BUSINESS SUCCESSFULLY IF YOU DON’T TOUCH YOUR WORKING CAPITAL. YOU MIGHT TAKE SOME OF YOUR NET PROFIT FOR CONSUMPTION (NET PROFIT EQUALS GROSS PROFIT MINUS ALL EXPENSES), BUT ONLY PART OF IT. THAT IS BECAUSE YOUR BUSINESS SHOULD NOT ONLY MOVE ON THE SPOT. IT SHOULD ALSO MOVE FORWARD, AND IT CAN ONLY MOVE FORWARD, IF THE WORKING CAPITAL INCREASES. YOU MUST SEE TO IT THAT YOU CAN ALWAYS OFFER MORE GOODS OR BETTER SERVICES TO THE PUBLIC.

BECAUSE THERE IS A LOT OF MISUNDERSTANDING ABOUT RUNNING A BUSINESS – ESPECIALLY THE FINANCIAL ASPECT OF IT – RECKLING EBTERPRISE HAS DECIDED TO OFFER THE GENERAL PUBLIC A BASIC COURSE ON FINANCING. THE COURSE IS DESIGNED FOR BEGINNERS IN THE AREA OF FINANCING, WITH STRESS ON ENTREPRENEURS IN THE INFORMAL SECTOR OF THE ECONOMY.

 

ONE THING MUST BE SAID BEFORE WE START: THE PURPOSE OF THIS COURSE IS NOT TO EDUCATE PEOPLE ABOUT THEORIES OR DIFFERENT MODELS OF FINANCING; THE PURPOSE OF THIS COURSE IS TO GUIDE THE LEARNER TO FIND THE BEST WAY TO FINANCE A START-UP BUSINESS AND TO RUN AN EXISTING BUSINESS. THE USER OF THIS COURSE WILL LEARN TO UNDERSTAND THE DIFFERENT ROLES WITHIN A FINANCING AND ECONOMIC FRAMEWORK. NOW LET’S START:

 

THIS COURSE CONTAINS THE FOLLOWING LESSONS:

• INTRODUCTION AND DEFINITION
• FORMS OF FINANCING – OVERVIEW
• DEBT FINANCING
• EQUITY FINANCING
• WHICH FINANCING OPPORTUNITIES ARE THERE IN GHANA?
• WHICH FORM OF FINANCING IS THE RIGHT ONE FOR YOU?
• CONCLUSION

 

EVERY LESSON IS SEPARATED INTO THREE PARTS. THE FIRST IS THE TEXT, OF WHICH YOU SHOULD UNDFRSTAND THE CONTENTS.THE SECOND PART CONSISTS OF UP TO FIVE QUESTIONS ABOUT THE CONTENTS OF THE TEXT; YOU SHOULD DISCUSS AND ANSWER THESE QUESTIONS. IN THE THIRD AND FINAL PART, SEND YOUR ANSWERS TO RECKLING ENTERPRISE. WE WILL CHECK THE ANSWERS AND, IF NECESSARY, CORRECT THEM. WHEN YOU HAVE COMPLETED THE LESSONS SUCCESSFULLY, WE WILL SEND YOU A CERTIFICATE FOR COMPLETION.

NOW LET’S START WITH THE DEFINITION OF FINANCING:

 

 

 

 

 

1. DEFINITION

 

BEFORE WE START DISCUSSING THE SUBJECT, AND HOW YOU DEAL WITH IT IN THEBEST WAY, WE MUST FIRST OF ALL FIND OUT WHAT FINANCING IS. THEREFORE, IT IS BEST TO START WITH THE DEFINITION OF FINANCING:

 

Financing is the process of providing funds for business activities, making purchases, or investing. Financial institutions, such as banks, are in the business of providing capital to businesses, consumers, and investors to help them achieve their goals. The use of financing is vital in any economic system, as it allows companies to purchase products out of their immediate reach. (COURTESY OF INVESTOPEDIA)

WE SEE FROM THE DEFINITION THAT FINANCING IS NOT A ONE-TIME EVENT, BUT A PROCEDURE. AND THIS DOES NOT ONLY APPLY TO THE INVESTMENT OF THE MONEY INTO THE BUSINESS, OR STARTING A NEW BUSINESS WITH IT. IF YOU ARE NOT LUCKY AND RECEIVE THE MONEY FROM FAMILY MEMBERS OR FRIENDS AS A GIFT, WE REALISE THAT THE ACQUIRING OF THE MONEY IS ALSO A PROCEDURE. AND THIS ACCOUNTS WHETHER TOY CHOOSE DEBT FINANCING OR EQUITY FINANCING (MORE ABOUT THE DIFFERENCES BETWEEN DEBT FINANCING AND EQUITY FINANCING IN ONE OF THE NEXT LESSONS).

WE ALSO SEE THAT FINANCING IS THE BASE OF EVERY ECONOMIC ACTIVITY.

Economic Activity is the activity of making, providing, purchasing, or selling goods or services. Any action that involves producing, distributing, or consuming products or services is an economic activity. Economic activities exist at all levels within a society. (DEFINITION FROM BING)

YOU SEE THAT NEARLY EVERYTHING YOU – OR OTHER PEOPLE – DO IS AN ECONOMIC ACTIVITY. IF YOU HAVE YOUR BREAKFAST, YOU ARE INVOLVED IN AN ECONOMIC ACTIVITY. THAT’S BECAUSE YOU CONSUME WHAT OTHER PEOPLE PRODUCE (ALSO AN ECONOMIC ACTIVITY).

AND ALL ECONOMIC ACTIVITIES NEED MONEY. WHETHER PEOPLE PRODUCE, DISTRIBUTE, OR CONSUME ANY GOOD OR SERVICE, THEY NEED MONEY TO DO IT.

IF YOU BUY SOMETHING, YOU FINANCE THE PURCHASE FROM YOUR INCOME, OR, MOSTLY IN CASE OF LARGER PURCHASES, THROUGH A LOAN.

AND, AS THE LAUNCHING OF A BUSINESS – AND THE RUNNING OF THE BUSINESS FOR THAT MATTER – IS CERTAINLY AN ECONOMIC ACTIVITY ACCORDING TO THE DEFINITION MENTIONED ABOVE, IT SURELY NEEDS FINANCING (EVEN IF YOU HAVE THE MONEY FOR IT UNDER YOUR BED OR BETTER, IN THE BANK).

HERE IN THIS COURSE, WE ARE NOT TALKING ABOUT BUSINESSES WHICH ARE FINANCED WITH MONEY THAT YOU ALREADY HAVE, BUT WITH MONEY FROM DIFFERENT SOURCES. THESE SOURCES ALSO GIVE OUT THE MONEY AS A BUSINESS, WHICH IS ALSO AN ECONOMIC ACTIVITY. MORE TO THAT IN THE NEXT LESSON.

THIS ECONOMIC ACTIVITY FINANCING IS, ACCORDING TO THE INVESTOPEDIA DEFINITION “VITAL FOR THE ECONOMIC SYSTEM…”

LET ME GIVE YOU AN EXAMPLE: IF THERE WOULD NOT BE ANY FINANCING, THE AUTOMOBILE INDUSTRY WOULD NOT BE ABLE TO SELL AS MANY CARS AS THEY DO, BECAUSE NOT MANY WOULD-BE OWNERS OF A CAR HAVE THE MONEY TO PURCHASE A CAR RIGHT AWAY. THEREFORE, THEY NEED FINANCING.

I THINK THAT NOW YOU KNOW ENOUGH WHAT FINANCING IS; LET’S GET TO THE QUESTIONS:

 

 

QUESTIONS

 

• WHAT ARE YOUR EXPECTATIONS CONCERNING THIS COURSE?
• THE DEFINITION SAYS THAT FINANCE IS A PROCESS; EXPLAIN WHY.
• WHICH ARE THE TWO CATEGORIES OF FINANCING?
• GIVE AN EXAMPLE OF AN ECONOMIC ACTIVITY EXCEPT FINANCING.
• GIVE ANOTHER EXAMPLE WHEN YOU WILL NEED FINANCING, APART FROM LAUNCHING YOUR BUSINESS OR BUYING A CAR.EXPLAIN IN DETAILS WHY YOU WILL NEED FINANCING.

NOW ANSWER THE QUESTIONS, IF POSSIBLE WITHOUT LOOKING AT THE TEXT.

THE NEXT LESSON WILL FOLLOW WITHIN ONE WEEK.