Alm

1hls reporL serves Lo enllghLen Lhe enLrepreneurlal sofLware englneer on flnanclal maLLers relaLlng Lo
Lhe foundlng and managemenL of a buslness and prudenL flnanclal record keeplng ln Lhe hope LhaL he/
she wlll undersLand Lhe baslc flnanclal maLLers governlng a buslness
10 lnLroducLlon
Powever good a company ls lL won'L lasL lf lLs flnanclal records and resource managemenL procedures
aren'L sound1he flnance of a company ls an lnLegral maLLer ln Lhe general mlcro economlcalfacLors
affecLlng a company llnance ls Lhe llfe source of a company as energy and breaLhlng ls Lo Lhe
experlenced aLhleLe lf managed unskllfully he wlll loose hes compeLlLlve edge ln Lhe case of
companles mlsmanagemenL of ones flnances could very qulckly lead Lo bankrupLcyA loL of new
buslnesses fall due Lo Lhe lack of undersLandlng of how Lo manage Lhelr flnances wlLhouL a good
undersLandlng of how cash flows wlLhln a company ls lnvesLed sLored and used Loo many mlsLakes
noLably ln Lerms of forecasLlng expendlLure and budgeLlng wlll be made Lhe consequences are
unnecessarlly hlgh cosLs lack of sufflclenL resources Lo fund lmporLanL venLures and evenLually
llquldaLlonSo lL ls lnLegral LhaL all sofLware englneers looklng Lo sLarL Lhelr own company ossess a
sound undersLandlng of how a companys flnanclal sLaLemenL lnLegral Lo Lhe accuraLe recordlng and
managemenL of lLs flnances work
20 lssues faclng new sofLware englneers
llrsLly before proceedlng Lo seL a company one musL flrsL conslder lf Lhere ls a markeL for lL LhaL ls lf
Lhere's a subsLanLlal amounL of demand Lo secure enough sales for Lhe companys producL and servlces
Lo keep Lhe buslness runnlng and reallse a proflL 1he company also needs a buslness plan Lhls sLaLes
whaL Lhe companys goal ls whaL Lype of servlces and producLs lL lnLends Lo produce Lhe feaslblllLy of
lLs plans ln Lhe buslness envlronmenL Lhe slze of lLs operaLlons how lL lnLends Lo galn a compeLlLlve
edge over lLs compeLlLors lLs core compeLences experLlse and forecasLs of fuLure sales flgures cosLs Lo
run Lo Lhe buslness and Lhe debLs lL wlll lncur1he buslness plan ls necessary Lo show poLenLlal lnvesLors
as Lhey wlll need Lo conflrm Lhe chances of maklng a proflL and Lhe knowledge LhaL Lhelr lnvesLmenL ls
secure

21 CosLs Lo seLLlng up a buslness
l
roperLy cosLs 1hls refers Lo cosLs such as ueposlLs on properLy ln case of damage or an unableness
Lo pay off Lhe renL renL cosLs LlecLrlclLy waLer and heaLlng
ll
abour cosLs 1hls refers Lo Lhe wages of Lhe sLaff you lnLend Lo hlre conslder conLracLual fullLlme and
parLLlme
lll
LqulpmenLs 1hls refers Lo whaL sofLware's hardware desks chalrs and oLher accessorles wlll you
need
lv
AdverLlslng and MarkeLlng uo you plan on adverLlslng your buslness Lhrough Lhe usual adverLlslng
medlums such as Lhrough adverLlslng agencles lnLerneL banners eLc by word of mouLh by your own
Lhrough prlnLlng ouL fllers and personal webslLes 1he mode of adverLlsemenL should be declded based
on Lhelr amounL you're wllllng Lo spend and Lhe exLenL of coverage you wlsh Lo have 1haL ls how many
people you need Lo know abouL your buslness aL Lhe beglnnlng sLages Lo galn enough cusLomers
8ll13
v
lL ls lmporLanL Lo noLe LhaL lnvolces for conLracLual agreemenLs usually Lake 2 monLhs or so Lo be pald
so ask yourself how wlll you survlve Llll Lhen?
1
1hough Lhese cosLs may perhaps seem daunLlng Lhere are a wlde range of opLlons avallable Lo ralse
caplLal necessary for Lhe buslness lL ls up Lo Lhe sofLware englneer Lo declde whlch sulLs hes slLuaLlon
besL dependlng on Lhe slze of Lhe buslness how much hell need and for how long
22 Sources of caplLalCranLs
1hese are ofLen producLs of governmenL lnlLlaLlves or publlc foundaLlons whlch don'L have Lo be pald
back Lhough you musL keep sLrlcL records of how Lhe funds were spenL Lo prove Lhey were used for Lhe
purposes granLed lL ls lmporLanL Lo undersLand LhaL granLs ofLen would only form a percenLage of Lhe
caplLal cosLs usually less Lhan 30 lf LhaL
2
CverdrafL loans
1hese are usually glven by banks Lhey carry less lnLeresL Lhan acLual loans and allow company Lo spend
a cerLaln degree more Lhan ls ln Lhelr accounL 1he lnLeresL ls only payable on amounL spenL negaLlve
facLors relaLlng Lo overdrafL ls LhaL Lhe bank may choose Lo wlLhdraw overdrafL faclllLy whenever Lhey
wlsh and demand Lhe overdrafL be pald wlLhln 7days
LqulLy CaplLal and Shareholder lnvesLmenLs
1hls ls a common pracLlce ln Loday's caplLallsL markeL a company sells lLs company ln SLocks and
shares Lo Lhe publlc usually 60 of Lhe companys LoLal asseL allowlng Lhe publlc Lo own a parL of Lhe
company 1he company wlll ofLen pay a share of lLs proflL Lo Lhe shareholders as dlvldends 1he
drawbacks of Lhls sysLem ls a prevalllng pressure from shareholders dlssuadlng Lhe company from
Laklng rlsks wlLh Lhe LhreaL of shareholders shylng away aL Lhe slgn of a rlsky venLure1hls resLrlcLs Lhe
power and under values Lhe experLlse of Lhe companys managers

1hls sysLem of lnvesLmenL ls usually for more esLabllshed companles buL for Lhe sLarLer companys lL ls
posslble Lo flnd lnvesLors wllllng Lo buy a parL of Lhe buslness Lhey wlll more usually be referred Lo as
parLners or assoclaLes 1hey can ofLen ralse caplLal needed for sales ln Lhe alm of recelvlng a cerLaln
percenLage of any lncome made
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easlng
?ou can loan necessary equlpmenLs and pay perlodlcally for over Lhe lengLh of usually 2 10 years
reLurnlng lL back afLer Lhe leaslng perlod or llke morLgages pay ln small lnsLalmenLs and own Lhe
equlpmenL afLer a perlod of Llme A good example ls wlLh uell lapLops whlch allow you Lo pay monLhly
lnsLalmenLs over 2 years for compleLe ownershlp of a lapLop whlle you use lL lL spreads your money
around so you can use lL for several operaLlons aL once
ongLerm and shorLLerm oans
1hls ls Lhe more prevalenL form of ralslng caplLal Money ls lenL Lo company wlLh lnLeresL pald on Lop
Lhe raLe may be flxed or varlable 1he money ls Lo be pald back ln lnsLalmenLs over a perlod of
Llme1hese lnclude shorLLerm loans such as credlL cards and oLher loans payable wlLhln a relaLlve shorL
perlod of Llme and longLerm loans an example of Lhls ls properLy morLgages lL musL be undersLood
LhaL lf Lhe company goes lnLo bankrupLcy Lhe lender ls enLlLled Lo lncome generally from Lhe sale of Lhe
company's properLy and longLerm asseLs
Lxample of shorLLerm loans
l
Cash Advance loans Culck cash ls lenL from Lhe lender lnsLlLuLlon wlLh a 7 21 day payback perlod
before flnance charges are lmplemenLed 1heyre usually for slLuaLlons where you're expecLlng money
due ln wlLhln Lhe monLh buL need lL now 1he down slde Lo Lhls loan ls Lhe flnanclal charges lf lL ls noL
repald wlLhln Lhe allocaLed Llme could be very sLeep See
3

ll
CredlLcards wlLh an lnLroducLory raLe of 0 CredlL cards are means of shorLLerm loans Lhey're
generally offered by banks and credlL card companles MosL of Lhem come wlLh annual fees you musL
pay slmply for uslng Lhe card A8Annual ay raLe ls appllcable once Lhe lender does noL pay Lhe credlL
card balance wlLhln Lhe allocaLed Llme 1hey range generally from 9 23 or more dependlng on your
credlL raLlngLxamples
4

lll
SofLoans 1hese are ofLen governmenL lnlLlaLlves usually for sLarLer buslnesses Lhe advanLages of
Lhese are LhaL lnLeresLs' raLes are ofLen lower Lhan Lhe sLandard lndusLry lendlng raLes or one ls glven a
longer Llme Lo pay lL off SecurlLles ofLen arenL needed


30 8udgeLlng
Cnce a caplLal has been secured and flnances are avallable Lo sLarL your buslness lL ls Llme Lo plan
preclsely how Lhe caplLal wlll be spenL and spread Lhrough Lhe dlfferenL buslness funcLlons 8udgeLlng ls
usually carrled ouL annually and revlsed every 4monLhs1here are Lwo levels of budgeLlng one aL Lhe
Lop managemenL levels and LhaL of Lhe dlfferenL deparLmenLal heads 1he Lop managemenL slmply
allocaLes fundlng Lo Lhe dlfferenL deparLmenLs dependlng on lmporLance and proposed needs Who
Lhen spread lL around accordlng Lo where lL's needed1he arL of good 8udgeLlng ls based on analysls of
buslness resources fuLure sLraLeglc plans and markeL analysls and company goals
bll1 2
lacLors ln conslderlng lnvesLmenL paLh

ls lL conslsLenL wlLh Lhe buslness longLerm goals ln LhaL does Lhe operaLlons and goals of Lhe proposed
lnvesLmenL maLch Lhe dlrecLlon sLraLegy and vlslon your company ls almlng for

A rlsk assessmenL of Lhe proposed lnvesLmenL Lo conslder lssues such as chances of Lhe lnvesLmenL
falllng probablllLy of fuLure lack of funds due Lo lnvesLors pulllng ouL posslble damage Lo company
lmage and safeLy of lnvesLmenL operaLlon

1lme value of lnvesLmenL Lo see lf lL wlll generaLe Lhe requlred level of proflL aL a raLe above oLher
alLernaLlve proposed lnvesLmenLs ook aL 1lme value of lnvesLmenL sLrucLure ln Appendlx 1

uo you have sufflclenL resources Lo fund all operaLlons of Lhe lnvesLmenL when wlll you reallse Lhe galns
of Lhe lnvesLmenL and wlll enough have enough money Lo hold on Llll Lhen? Agaln conslderlng lssues as
Lhe amounL of Llme lL wlll Lake large buslnesses Lo compleLe lnvolce paymenLs

WhaL are oLher posslble galns from lnvesLmenL ln Lerms of Lmployee morale boosLlng an appralsal of
Lhe company's Soclal lmage good press and oLher nondlrecL flnanclal lmpllcaLlons?


32 MeLhods for calculaLlng Lhe fuLure value of lnvesLmenL proposals

neL resenL value MeLhod (nv)
1hls ls calculaLed by subLracLlng Lhe cosL of Lhe proposal from lLs beneflL over Lhe llfeLlme perlod
forecasLed for Lhe proposal Appendlx 1
ulscounLed Cash llow (uCl)
1hls lnvolves Lhe precedence LhaL money ln hand now ls worLh more Lhan Lhe same amounL ln a couple
years Llme lL measures Lhe neL lncome of Lhe proposal aL Lhe end of Lhe pro[ecL perlod agalnsL a
percenLage requlred raLe of reLurn Lhls flgure can elLher be Lhe companys welghLed average cosL of
caplLal (WACC) or Lhe raLe of lnLeresL whlch wlll be lncurred from anoLher proposalWACC slmply refers
Lo amounL of money a company musL make on revenues Lo remaln proflLable ln Lhe case of publlc
companles saLlsfy lLs shareholders see Appendlx 1 for calculaLlon Appendlx 1

lnLernal 8aLe of 8eLurn (l88)
1hls ls Lhe percenLage raLe of lnLeresL an lnvesLmenL lncurs afLer a cerLaln perlod See Appendlx 1 for
calculaLlon Appendlx 1


40 Companys flnanclal sLaLemenLs
When looklng aL companles lL ls lmporLanL Lo remember LhaL sales value alone do noL dlvulge Lhe
proflLablllLy of Lhe company ?ou musL also conslder Lhe cosLs of Lhe companys operaLlons Lo reallse
LhaL sale1hls secLlon deals wlLh Lhe records a company musL keep accuraLely recordlng and managlng
flnances golng ln and ouL of Lhe company
41 1he balance sheeL
1he balance sheeL ls a scope of Lhe companys asseL and debLs lL an accuraLe deplcLlon of how much
Lhe company ls worLh
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