Small Businesses- Big Obstacles

By Anjan Mohapatro

SMALL BUSINESSES
90,000

1993 1996
40,000 Pay their dues and present financial statements. Active

Small fraction really does business and produces income

SMALL BUSINESSES

Small businesses create employment

Blue Chip Companies(Big Dinosaur Firms) create negative employment.

USA/Israel/UK/Ge rmany many SB WORLD CLASS

SMALL BUSINESSES ADMINISTRATION(SBA)

Organize funding for all their needs:infrastructure,capital goods, land and equipment, working capital, license and patent fees etc
Access to Govt funds, local VC, International and multilateral investment sources, local banking community and private investors They act as a capital brokers at a fraction of the costs compared to market charges

Assist in preparation of business plans, feasibility studies

One stop shop- Reduce Bureaucracy

PHASES OF NEW BUSINESSES

Formation of an Idea

Proper legal entity and Accounting

Development of Product and

manufacturing

Marketing & Sales

FORMATION OF AN IDEA
A

Person or group of people join forces centered around an exciting invention, process or service

Fill the needs of a market niche Innovative solution to a problem Create market for a totally new product Provide solution to a problem which is solved in a less efficient manner

At

this stage they require support of

Marketing experts Financials expert Technical expert

TOWARDS NEST STEP

Once the Idea is freezed the next step is formation of legal entity
Raises many possibilities A Partnership firm A Corporation Stock or non stock company A Foreign company or a local entity

The decision is very important .It has tax implications and capabilities of the firm to raise funds. Lawyer must be consulted

TOWARDS NEST STEP

Once the legal entity is formed ,registered with all regulatory authorities and has appointed an accounting firm It should Commence developing new products and services Good entrepreneurs may not be good managers/management techniques are learnt and assimilated Market do not always react the way entrepreneurs expect them to react. Markets are evolving creatures they change, develop, disappear and reappear. Hard to predict. Product mix- well recognized brands which sell well side by side with Innovative Products

HOW GOVT CAN HELP

Entrepreneurs One stop shop Presents his case and business which he wants to develop Receives all necessary permits and license within a reasonable time Receive a list of all sources of capital aviliable both locally and International sources Entrepreneur selects the sources of funds most suitable to his requirements Experts to prepare all necessary documents to raise funds A Mentor is attached who will escort from first phase to the last phase Transform person to a businessman

TRADE OFFS
Conflict

between owners and managers of a company Managers want large salary, owners want to reduce cost. Owner wealth creation, Manager- Profit Maximization Through ESOPS

STOCK OPTIONS
A Stock option is an organized program for the employees of a corporation allowing them to buy its shares. Employers gives subsidized loans Provides a free share against a share purchased Purchase the share of the company at discounted price. Provides an incentive to work only for the company An option to purchase stocks less than the market price for a given period of time Dividends received may be used to purchase the shares A Portion of salary is set off to purchase the shares..

STOCK OPTIONS
A Stock option is an organized program for the employees of a corporation allowing them to buy its shares. Employers gives subsidized loans Provides a free share against a share purchased Purchase the share of the company at discounted price. Provides an incentive to work only for the company An option to purchase stocks less than the market price for a given period of time Dividends received may be used to purchase the shares A Portion of salary is set off to purchase the shares..

INSOLVENCY / BANKRUPTCY
It starts by defaulting of an obligation Money owed to the creditors not paid in time Interests payments due on the bank loans Corporate bonds issued to the Public Temporary or a permanent problem

Creditors gear up and litigate in the court of law or arbitration which leads to Technical or equity Insolvency status Liabilities outweigh its assets it is called Bankruptcy Insolvency. Valuations of assets Market Price /Book value

VOLUNTARY BANKRUPTCY FILING

If

the negotiation with the creditors fails ,the company itself can file for bankruptcy in a voluntary bankruptcy filing Court officials work hand in hand with the creditors representative and management of the defunct company. Should they liquidate the company Value yielded by liquidation exceeds the money the company as a going concern Company goes into a straight bankruptcy ,creditor receives value of the property secured as a co lateral.

VOLUNTARY BANKRUPTCY FILING

Once the assets of a company is sold , the first to be fully paid off is the secured creditors and then the priority creditors are paid wholly or partially Priority creditors- Administrative debts, unpaid wages, uninsured pension claims, taxes, rents etc

CHAPTER 11
11 of Bankruptcy Act 1994 Allows for a reorganization Must be approved by 2/3 rd of the creditors Voluntarily initiated by the company Involuntarily initiated by the creditors
Chapter

GOALS OF BANKRUPTCY LAWS

Provide

fair and equitable treatment to the holders of various classes of security. Eliminate burdensome debt obligations To make sure that the new claims received by the creditors equal to at least what they would have received in liquidation. Long term bonds interest payable from profits. Owners of subordinated debentures becomes shareholders Share holders does not receive any claims. Allows arrange

CHAPTER 11
In favor of maintaining the company as an ongoing concern. A whole is larger than the sum of its parts and a living business is sometimes worth more than the sum of its assets, sold separately. Chapter 7(1978) Liquidation act A district court appoints a trustee with broad powers/at the request of the creditors Liquidate property and distribution Management changes Unsecured financing Operates debtors business to arrest further losses By filing a bond the debtor is able to regain its possession of the business from its trustee

CHAPTER 11
Re organization Unless the court rules otherwise the debtor remains in possession of the business. Creditors are allowed to work flexibly with owners to reach a compromise Age old Absolute Priority Interests of the creditors to be balanced with the interests of the debtors and society at large. Restructuring of old debts Granting of new loans

CHAPTER 10
Hybrid of chapter 7 and 11 Allows reorganization under a court appointed independent trustee for filing of reorganization plans with the court. England: Official receiver is appointed by the law.Takes possession of the business not the deeds. Manage business of the debtors and assess the assets. Goal is maxm value for the liquidation. British law is much more in favour of creditors.

BANKRUPTCY
Bankruptcy is automatically triggered .Debt for equity swaps are not allowed. Provides a very short time for reorganization. Czech Republic
Hungary

Debt for equity swaps Consolidation bank can buy the obligations at 60% par.

Poland Reorganization

and debt consolidation Sale of corporate liabilities in auction Classic bankruptcy

FUNCTIONS OF A CFO
To implement continuous financial audit and control systems to monitor the performance of the firm, its flow of funds, adherence to the budget, the expenditures, income, cost of sales and other items. Budget sets goals of the firm

New products to develop New markets to penetrate New management techniques Possible collaboration Identification of competition Scarce resource for optimum utilization

FUNCTIONS OF A CFO
To

regulate ,supervise and implement a timely ,full and accurate set of accounting books of the firm. Developing countries Books does not reflect the reality as they are tax driven Maintain two books- the real one, other which is presented to Tax Authorities In a position to Blackmail Develops a cognitive dissonance- Honest to superiors- lie to the state

FUNCTIONS OF A CFO
To implement continuous financial audit and control systems to monitor the performance of the firm, its flow of funds, adherence to the budget, the expenditures, income, cost of sales and other items. Budget sets goals of the firm

New products to develop New markets to penetrate New management techniques Possible collaboration Identification of competition Scarce resource for optimum utilization

FUNCTIONS OF A CFO

To timely, regularly and duly prepare and present to the board of directors ,financial statements and reports as required by the pertinent laws and regulations.

Political insecurity Corporate insecurity Personal insecurity

FUNCTIONS OF A CFO
To Comply with all reporting, accounting and audit requirements imposed by the capital markets or regulatory bodies of capital market in which the securities of the company is traded. To prepare and present for the approval of the board of directors an annual budget, financial plans, business plans, feasibility studies and other financial documents To alert the Board of directors and warn regarding irregularity, lack of compliance, lack of adherence, lacuna in the financial systems

FUNCTIONS OF A CFO
To collaborate and co ordinate the activities of outside suppliers of financial services hired or contracted by the firm, including accountants, auditors, financial consultants, underwriters and brokers, the banking system and other financial venues To maintain a working relationship and to develop additional relationships with banks, financial institution and capital markets with the aim of securing funds necessary for the operations of the firm, the attainment of its development plans and investments. IT integrated system

THANK YOU

FUNCTIONS OF A CFO
To implement continuous financial audit and control systems to monitor the performance of the firm, its flow of funds, adherence to the budget, the expenditures, income, cost of sales and other items. Budget sets goals of the firm

New products to develop New markets to penetrate New management techniques Possible collaboration Identification of competition Scarce resource for optimum utilization