Entrepreneurship 4 Marks Question

Formula for break-even point =Fixed expenses
Gross margin Gross Margin = Selling price per unit - variable cost per unit.

Machine	Selling Price	Variable cost	Gross margin	Fixed cost	BEP-calculation	In units
Small	10000	3000	7000	35000	35000/7000	5
Medium	15000	8000	7000	35000	35000/7000	5
Large	20000	13000	7000	70000	70000/7000	10
Industrial	35000	20000	15000	150000	150000/15000	10

Any appropriate example explaining the following points to assess the requirement of working capital:

1. Length of operating cycle.
2. Realisation of cash from debtors.

1.  

1. Manohar:

• Production Budget: An estimate of a number of units which must be manufactured to meet the sales goal.

2. Manav:

• Marketing Budget: An estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.
• Sales Budget: An estimate of future sales used to create company sales growth.
• Capital Budget: Used to determine whether a firm’s long term investments are worth pursuing.
• Cash flow budget: Prediction of future cash receipts and expenditures for a particular time period.
• Project budget: Prediction of the costs associated with a particular company project.

2. Values: Fair dealing with customers; Honesty; Fulfilling social responsibility.

An entrepreneur assess working capital requirement according to the operating cycle:

• In a business concern operating cycle begins with outflow of cash towards the purchase of raw materials, payment of labour, power, fuel and other expenses converting the raw materials into work in progress and converting them into finished goods. Sale of finished good for cash or credit.
• If on credit then conversion of account receivables into cash.
• This operating cycle indicates that funds once tied up in the form of raw materials are later converted into the form of finished goods
• In a manufacturing concern there is a time gap between the first step of purchasing of raw-materials to last step of selling of goods and realizing cash. This time duration is called operating cycle. It is also called the “changing” or circulating capital because money circulates in various forms of assets in a continued manner.

The operating cycle is explained with help of diagram below:

Budgeting is a collective process in which operating units prepare their plans in conformity with corporate goals published by top management.Each unit plan is intended to contribute to the achievement of the corporate goals.Unit managers prepare projections of sales, operating costs, overhead costs, and capital requirements. They calculate operating profits and returns on the investment they intend to use.
The budget itself is the projection of these values for the next calendar or fiscal year.In this process, each unit presents its plans and budget to a reviewing upper management panel and may, thereafter, make whatever changes result from instructions or negotiations with the higher level.
Texts presenting, documenting, and defending the rationales underlying the numbers are usually part of the planning document.Approved budgets then become the road map for operations in the coming year. Ideally monthly or quarterly budget reviews track performance against the budget.As part of such reviews, changes to the budget may be approved. At the end of year managers are judged by their performance against the budget.

Inventory Control is a systematic and detail record of purchase of materials, their storage capacity, quantity in order to supply, quantity order for large discounts, handling delivery of materials etc. It is a process which facilitates an entrepreneur in smooth production operation and to take important decisions in a production line.
The objectives of inventory management are:

1. To ensure that the supply of raw materials and finished goods will remain continuous so that production process is not halted and demands of customers are duly met.
2. To minimise carrying cost of inventory.
3. To keep investment in inventory at optimum level.
4. To reduce the losses of theft, obsolescence and wastage, etc.
5. To make arrangement for sale of slow moving items.
6. To minimise inventory ordering costs.

Working capital refers to that part of total capital which is required for holding current assets.
It may also be defined as the excess of current assets over current liabilities.
A business needs working capital for a number of uses. Some of them are as follows:

1. Ensures solvency of the business: Working capital helps a business to operate smoothly without any financial problem for making the payment of short-term liabilities.
2. Enhances goodwill: Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. Goodwill is enhanced because all current liabilities and operating expenses are paid on time.
3. Ensures easy availability of loans: A firm having adequate working capital can arrange loans from banks and financial institutions in easy and favourable terms.
4. Regular supply of raw material: Prompt payment to creditors of raw materials ensures regular supply of inventory and uninterrupted production.
5. Smooth business operation: Working capital is really a life blood of any business organisation and it helps in its smooth functioning.
6. Ability to face crisis Adequate working capital enables a firm to face crisis in emergencies such as depression.

The value exhibited by the business is:.
Fulfilling responsibility: The business is being responsible by maintaining adequate working capital as it will enable it to meet its current liabilities successfully.

Ramu is engaged in a trading business. Working capital requirement of a trading business is less as compared to a manufacturing business because of a shorter Cash Conversion Cycle. So, his working capital needs will comprise of:

1. Cash for purchasing ice-creams.
2. Cash for payment of various operating expenses as rent, salaries and wages of selling staff, electricity bill, etc.
3. Cash for meeting short-term liabilities, ex-payment to creditors for credit purchase of ice-creams.

When an asset is purchased, it is nothing more than a payment in advance for the use of the asset. Depreciation or amortisation is the cost of using that asset per year and should, therefore, be debited to profit and loss account of the business. If depreciation is not provided, the profits of the concern will be overstated. It is also possible that owners have withdrawn such profits. So, at the end of the working life of the asset, there will be no funds to purchase the assets, as in the given instance. So, depreciation and amortisation should be charged to business as an expense.The values violated by Arjun are:

1. Lack of responsible behaviour.
2. Not working towards sustainable growth.

for a manufacturing company, operating cycle is the length of time needed to complete the following:

1. Conversion of cash into raw materials.
2. Conversion of raw materials into work-in-progress.
3. Conversion of work-in-progress into finished goods.
4. Conversion of finished goods into accounts receivables.
5. Conversion of accounts receivables into cash.

1. Financial management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise.
2. It is an activity which is concerned with acquisition and conservation of capital funds in meeting financial need an overall objectives of business organisation.
3. It means applying general management principles to financial resources of the enterprise.

Objectives of financial management:

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-

Main objectives of financial management is wealth maximization of shareholder’s wealth.

1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.