18MBO409T - Finance For Engineers UNIT 4 & 5 (12 MARKS)

 12M:


Business proposal - idea stage to minimum viable project and various processes

The journey of idea to a minimum viable project (MVP) involves several key stages, each contributing to the successful realization of a business concept.


Idea generation and research:

  • Identify a market need: start by understanding the problem you aim to solve or the need you want to address. Research existing solutions and gaps in the market

  • Market research: dive deeper into your target audience, competitors and industry trends. Gather insights to validate your idea


Conceptualization: 

  • Brainstorm and ideate: collaborate with your team or stakeholders to generate creative ideas. Consider different angles and approaches

  • Solution design: create a high level concept of your product. Define its purpose, features and potential benefits


MVP development:

  • What is MVP?: an MVP is the earliest version of your product that includes only essential features. It aims to deliver core value and validate it with early users

  • Building stages: 

  • Concierge MVP

  • Wizard of Oz MVP

  • Piecemeal MVP

  • Feedback loop


Product roadmap: 

  • Plan ahead: outline the future development phases beyond the MVP. consider scalability, additional features and long term goals

  • Iterative approach: use an agile methodology to iterate and improve your product based on user feedback 


Testing and refinement:

  • User testing: involve early adopters and gather feedback. Understand pain points and areas for improvement

  • Iterate and optimize: refine your MVP based on real world usage. Address bugs, enhance usability and add features incrementally


Launch and market entry: 

  • Go-to-market strategy: plan how you’ll introduce your MVP to the market. Consider pricing, distribution channels and marketing efforts

  • Early adopter acquisition: target users who resonate with your MVPs value proposition

  • Monitor metrics: track user engagement, conversion rates and other relevant KPIs


Cash conversion cycle - also about receivable management

Receivables: 

  • When a firm makes an ordinary sale of goods or services and does not receive payment, the firm grants trade credit and creates accounts receivable which could be collected in the future


Receivables management:

  • It aims at raising the sales volume and profit of the business by managing and providing credit facilities to customers

  • The overall process of receivables management involves properly recording all credit sales invoices, sending notices on due date to collection department, recording all collections and calculation of outstanding interest on late payments


Cash Conversion Cycle (CCC): 

  • It measures the time required for a company to convert money spent on inventory or production back into cas by selling its goods or services

  • A shorter CCC is desirable, as it indicates less time that money is locked up in accounts receivable or inventory


Components of CCC:

Days Inventory Outstanding (DIO):

  • DIO represents the average number of days it takes a company to turn its inventory into sales

Days Sales Outstanding (DSO):

  • DSO measures the average number of days for a company to collect payment after a sale

Days Payable Outstanding (DPO):

  • DPO represents the average number of days for a company to pay its invoices from trade creditors

The overall CCC formula is:


FOR THE FOLLOWING THREE QUESTIONS, YOU CAN ALSO INCLUDE THE DIFFERENce QUESTION (WHICH WAS IN 4M)


Private Equity:

Private equity:

  • Investment capital provided to private companies or public companies that are taken as private

  • PE firms invest in companies with the goal of enhancing their value and achieving substantial returns

Exit strategies:

  • Trade sale: selling the investment to another company for cash or a combination of cash and equity

  • Initial Public Offering: listing the business on a stock exchange and issuing shares to the public

  • Recapitalization: restructuring the company’s capital, often involving debt and equity adjustments


Advantages:

  • Growth potential

  • Expert business management assistance

  • Networking opportunities

  • No obligation to repay

  • Raises the likelihood of increased publicity and exposure


Disadvantages: 

  • Reduces ownership stake for founders

  • Relatively expensive

  • Relatively scarce and difficult to obtain

  • Creates high expectations for business growth


Venture Capital:

Venture capital:

  • Venture capital is a form of private equity funding provided to startups and companies in the early stage

  • VC is often offered to firms that demonstrate significant growth potential and the ability to generate substantial revenue, thus creating the potential for high returns

  • Venture capitalists are individuals who invest in early stage companies with promising futures


Stages of venture capital investment:

Broadly two stages:

  • Early stage financing

  • Late stage financing

Early stage financing:

  • Seed capital stage

  • Start up stage

  • Second round financing

Late stage financing:

  • Expansion finance

  • Replacement finance

  • Turn around

  • Buyout deals


Advantages: 

  • Rapid business growth

  • Expert business management assistance

  • Networking opportunities

  • No obligation to repay

  • Raises the likelihood of increased publicity and exposure


Disadvantages: 

  • Reduces ownership stake for founders

  • Relatively expensive

  • Relatively scarce and difficult to obtain

  • Creates high expectations for business growth


Angel Investment:

Angel investors:

  • Angel investors are individuals or entities that provide capital to small startups or entrepreneurs

  • In exchange for their financial backing, they typically receive equity in the company

  • Angel investors may offer a one time investment or ongoing support during the early stages of a new company


Classification of angel investors:

  • Affiliated: 

  • Professionals 

  • Business associates

  • Non affiliated:

  • Professionals

  • Middle managers

  • Entrepreneurs 


Advantages:

  • Access to capital

  • Access to expertise

  • Minimal restrictions

  • Portfolio diversification

  • Potential for high returns


Disadvantages: 

  • High risk

  • Long term investment

  • Time commitment

  • Limited liquidity

  • Lack of formal process

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