General Business Topics

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General Business Topics

• ELE 41EMT/EIB

George Alexander G.Alexander_at_latrobe.edu.au www.la
trobe.edu.au/eemanage
3 May, 2005
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Topics

• Business as a System
• Business Requirements
• Sources of Funds
• Cost Accounting Objectives
• Elements of Product Cost
• Fixed Variable Costs
• Assets/depreciation

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The Business as a System
Dividend
o
div
tax
m
Initial Capital
Individual Tax
Profit

B f()

y
w
p



Total Revenue
s
x
tax
Cost of business
Material Wages Services
tax
Company Tax
Group Tax
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Types of Capital

• Working Capital - Required to finance the
  day-to-day running of the business.
• Long-term (Fixed) Capital - Required to finance
  the purchase of assets which will, directly or
  indirectly, contribute to profit over a period of
  years.

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Sources of Funds

• Shareholders funds (equity capital)
• Loans from directors
• Bank overdrafts loans
• Trade other creditors
• Government grants
• Venture capital companies
• Other loans

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What is Venture Capital ?
Venture capital (VC) is the process of investing
private equity in companies, typically in early
stages of development, that are believed to offer
significant potential to grow substantially and
reward investors accordingly.
Ref. www.investorhome.com
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Objective of VC
The objective of VC is to generate high rates of
return over long periods of time. VC offers
institutional investors and high-net-worth
individuals high returns (historically better
than stocks) and strong diversification benefits
from very low correlation with other asset
classes.
Ref. www.investorhome.com
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Negatives about VC

• The major negatives of investing in VC are
• Long time frames,
• Lack of liquidity, and
• High management fees.

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History of VC
Before 1946, individuals and families dominated
the VC markets. VC became a defined industry in
the 1950's, primarily financed by wealthy
individuals or syndicates. American Research
and Development was founded in the early 50's and
was considered the grandfather of modern
venture firms. The firm's 25,000 investment in
Digital Equipment multiplied into a stake in
excess of 100 million.
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Venture Capital - Task for students
Conduct a search on the Internet for information
on Venture Capital and examples of Venture
Capital Companies. As an example, look at the
following web sites www.vcjournal.com.au (get a
free journal copy) www.brentwoodvc.com
www.norwestvc.com www.infon.com
www.facvc.com www.avcal.com.au Seek answers
for How do VC companies invest and in what do
they invest?
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Elements of Product Cost

• Direct material
• Direct labour
• Manufacturing overhead
• Indirect material,
• Indirect labour,
• Light and power,
• Repair and maintenance, and
• Depreciation of equipment, etc.

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Fixed Variable Costs

• Fixed Costs
• These are costs which do not vary with changes in
  the volume of production.
• Variable Costs
• These are costs which vary proportionately with
  the volume of production.

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Cost Accounting Objectives

• To measure, for profit determination purposes
• The cost of goods manufactured, or
• The cost of services performed
• To measure the cost and thus the Balance Sheet
  value of inventories, which include
• Raw materials
• Work in process
• Finished goods
• Store and supplies

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Cost Accounting Objectives - Continued

• To assist management in their planning and
  decision making by reporting costs relevant to
  decisions
• Targeted volume,
• Pricing levels,
• Make or buy,
• Purchase or lease, and
• Introducing or phasing out products, etc.

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Cost Accounting Objectives - Continued

• To assist management in monitoring and
  controlling costs in order to ensure that, as far
  as possible, management strategies and plans are
  implemented.
• In summary, cost accounting objectives cater for
• Requirements of financial accounting
• Management planning and control

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Why capitalise/depreciate?

• Capital assets have an estimated useful lifetime.
• Consequently, it would be misleading to account
  for the associated expenditure in just one
  accounting period.
• As a result, the expenditure is accounted for
  over the assets lifetime through depreciation.
• This also provides a basis for valuing the asset.
• ATO requires that the asset expense deduction is
  claimed over the assets lifetime.

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Depreciation - an introduction

• Capital investment in tangible fixed assets -
  equipment, computers, vehicles, buildings, and
  machinery - are commonly recovered through
  depreciation.
• Depreciation also referred to as capital recovery
  (US) and capital allowance (ATO)
• Visit www.ato.gov.au - search for depreciation.
• The depreciation amount itself is not an actual
  cash flow.

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Introduction - cont.

• The process of depreciating an asset accounts for
  the decrease in an assets value because of age,
  wear, and obsolescence.
• Depreciation is a tax-allowed deduction included
  in tax calculations.
• Taxes (income - deductions)(tax rate)

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Depreciation Terminology - cont.

• Salvage Value
• The estimated trade-in or market value at the end
  of the assets useful life.
• Market Value
• The estimated amount realisable if the asset was
  sold on the open market.
• The market value and book value may be
  substantially different.
• Book Value
• The remaining, undepreciated capital investment
  on the books after subtracting all depreciation
  to date.

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Straight Line Depreciation

• The book value decreases linearly with time.
• The depreciation rate, d 1/n, is the same each
  year of recovery period n.
• It is considered the standard against which any
  depreciation model is compared.
• The annual SL depreciation is determined by
• (first cost - salvage value) d

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Example
B 50,000 n 5 years S 10,000 at t
5 Dt for each year is (50,000 - 10,000)/5
8,000/year
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Table of Results
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Important Note
When preparing your Business Plan, you are
expected to use the knowledge you gained in the
Legal Principals and Marketing for
Engineers. Students of ELE 41EIB, please refer
to your last year notes or the web site.
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Useful References

• The Small business handbook how to start and
  successfully operate a small business, ISBN
  1-86350-004-9, Small Business Corporation (Vic.)
• How companies work, ISBN 0-725-10689-1, Nicholas
  Brash, Timothy Lindsey
• The Australian Taxation Office website
• http//www.business.vic.gov.au

Note Please search for newer editions for the
above references
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Preliminary planning

• So far, 24 groups
• Normally, we allow for 2 presentations/session.
• This means we need 12 sessions.
• Using MEL and EIB lectures over 2 weeks, we
  currently have only 6 sessions catered for.

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Preliminary planning actions required

• Use the 8am Tuesday lecture as far as possible.
• Start presentations 1 week earlier on 16 May.
• We need volunteers for the above.
• Please discuss at your next team meetings.

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Presentation Objectives

• Obtaining funds and/or support for the
  implementation of your Business Plan.
• Sell your idea by
• Providing an overview of your business plan,
• Selling yourselves (people behind the idea),
• Establish your credibility, and
• Gain the trust of the audiences

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Presentation Format

• Introduce yourself and the team (Team Leader)
• Outline the idea (product or service)
• Marketing aspects (4Ps)
• Business aspects
• Costs
• Revenue
• Profits, etc.
• Other relevant issues
• (15 minutes 5 minutes questions)

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Presentation Assessment Criteria

• Presentation structure
• Subject matter content
• Own group participation
• Use of audio visual aids
• Handling questions

Marking a mark out of 10 for each of the above
points.
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Thanks for your attention