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Financing As One Of The Key Success Factors Of Small And Medium-Sized Enterprises

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Abstract

All entrepreneurs try to be timely unlimited, constant and successful in their business. In doing so, their company founding, running operations and development all depend on adequate and quality financing. The goal is to ensure a stable financing and growth and the question is how, when and from which sources should the financing be ensured. When talking of financing, it is primarily meant ensuring the money or the capital, a synonym of the entrepreneurship and its main moving strength. In order to be successful, it is of high importance to meet optimal business decisions and specially investing decisions. Even though the focus of the financing process is not solely limited to money, money plays a central role and is also the basis and the requirement for business activity and the very existence and the end goal of a business as well. One important focus of entrepreneurs is the question of an optimal financial structure for their own enterprise. The specifics of every individual company together with the industry they are in and macroeconomic environment they operate in do not allow for a uniform and generally applicable solution to this problem. The focus of this problem lies in the ratio between the size and structure of assets on one side and the size and structure of equity and debt on the other side. Every entrepreneur should also know which amount and structure of long-term assets, fixed assets is necessary for his enterprise. The function of investment planning defines these requirements before the actual investment takes place. An entrepreneur who is already longer in business will at this point analyze his actual financial structure with a focus on capital accumulation and conditions of raising debt.
DOI: 10.1515/cks-2016-0010 1
FINANCING AS ONE OF THE KEY SUCCESS FACTORS OF SMALL AND
MEDIUM-SIZED ENTERPRISES
Stjepan Pticar
Abstract
All entrepreneurs try to be timely unlimited, constant and successful in their business. In
doing so, their company founding, running operations and development all depend on
adequate and quality financing. The goal is to ensure a stable financing and growth and the
question is how, when and from which sources should the financing be ensured. When talking
of financing, it is primarily meant ensuring the money or the capital, a synonym of the
entrepreneurship and its main moving strength. In order to be successful, it is of high
importance to meet optimal business decisions and specially investing decisions. Even though
the focus of the financing process is not solely limited to money, money plays a central role
and is also the basis and the requirement for business activity and the very existence and the
end goal of a business as well. One important focus of entrepreneurs is the question of an optimal
financial structure for their own enterprise. The specifics of every individual company together with
the industry they are in and macroeconomic environment they operate in do not allow for a uniform
and generally applicable solution to this problem. The focus of this problem lies in the ratio between
the size and structure of assets on one side and the size and structure of equity and debt on the other
side. Every entrepreneur should also know which amount and structure of long-term assets, fixed
assets is necessary for his enterprise. The function of investment planning defines these requirements
before the actual investment takes place. An entrepreneur who is already longer in business will at this
point analyze his actual financial structure with a focus on capital accumulation and conditions of
raising debt.
Keywords: Financing, Assets, Equity, Debt, Sources
JEL Classification: L26
Main financing problems
The business process of every company includes purchasing process, production process and
sales process which finishes the circulation of assets and as a goal has value creation, profit
maximization, existence and growth of a company. The particular position of small entrepreneurs is
that the role of ownership and the role of management very often centers around one person, an
entrepreneur, and among other goals, the entrepreneur aims to achieve maximum profit within the
shortest possible period with minimum nominal capital and to increase that capital. Still, inadequate
investing is a potential danger and a possible cause of illiquidity, insolvency, excessive indebtedness
and inability of fulfilment of planned goals.
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Liquidity is the ability of an enterprise to cover the due short-term liabilities with current
assets and solvency is the general ability to cover the liabilities. In this respect, the financing problem
of a company lies in the inability to cover the due short-term liabilities on time as an effect of
insufficient cash. The business financing of a company has a function to recognize this situation on
time and to ensure enough money to prevent illiquidity from happening. In other case, illiquidity can
step by step turn into insolvency and excessive indebtedness and as a chain reaction spread itself on
the whole economy. “The causes of this problem in their various forms can be very different from
each other and can therefore be classified by different criteria. According to their origin the causes are
classified as external and internal.” (Vukicevic 2000)
External causes are influenced by the macroeconomic policy of the state which has a goal of
achieving the development on a global level of the country through the measures and means of
achieving it.
As an example, the role of the national bank is to ensure the liquidity and solvency of the
commercial banks through its monetary and credit policy and the reserve policy. The commercial
banks then can substantially influence the liquidity and solvency of the microeconomic entities,
especially small and medium-sized enterprises. If the policy of the commercial banks limits, hardens
or disables the access to credit for small and medium-sizes enterprises, their financing will be
endangered and as a result their illiquidity will come with a high probability. The fiscal policy of the
state can also have a substantial impact on the liquidity and solvency of small and medium-sized
entrepreneurs because the dynamic of the tax system has a contrary logic from the interest of
entrepreneurs and it decreases their liquidity. A worsening of general credit requirements or decline in
liquidity of big corporations has a further negative impact on small and medium-sized enterprises who
work with them. The speed of payments and the circulation of money also influence liquidity and
solvency. Finally, rules and regulations and the entrepreneurial infrastructure as well influence
liquidity and solvency of entrepreneurships. The quality of regulations, their applicability in practice
and the overall quality of entrepreneurial infrastructure can leave a positive or a negative impact on
liquidity and solvency. (Abrams 2004)
Internal causes correspond to all company-related causes of illiquidity and insolvency because
of which the entrepreneur can not pay his due liabilities with his available current assets (cash) since
the quantity of it is lower than the due liabilities to be paid at that moment. The main reason for that is
the inconsistency between revenues and expenses. An inconsistence can also appear in times of short-
term and long-term financial balance. The reasons for it are often more complex inconsistencies in the
financial structure of a company. In a balance sheet of an insolvent company, insolvency can be
recognized as an imbalance between the structure of assets and the structure of sources of those assets.
This happens when a part of fixed assets is financed by short-term (current) financial sources, and the
higher the ratio of this kind of financing is, the stronger the negative impact on liquidity and solvency
is. This is the case in financial investments when the rule is disrespected that fixed assets should be
financed from long-term sources and current assets should be financed from short-term sources.
Namely financing of investments from short-term sources, blocks permanently current assets. Same
thing happens when investing in securities, especially in the long-term ones. Illiquidity is often the
effect of an inability to collect receivables and insolvency of a poor financial result, a situation when
revenues are lower than expenses, so the company is making losses. There are also other reasons for
illiquidity and insolvency, such as poor organization of accounting and finance function.
Financing as a term
Founding a company requires capital. The amount of the nominal capital depends on the legal
form of the company: corporation, partnership or own business. The money is necessary during the
business activity to purchase everything needed for the production process. Using financing, company
ensures materials, salaries, external services from other companies, taxes and other duties payable to
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the state. In short, the whole running operations are financed until collecting payables for goods and
services sold. That is the moment when the new cycle begins. Money is also required for financing the
development. “In an economy in which goods are traded for money, money plays a central role in a
cyclical movement. The money is the requirement for the continuity of a company because the cyclical
movement generally begins and ends with money(Orsag 1997)
In this respect, the role of finance function/department of a company is to ensure the money for
financing of the business activity. Financing of a company contains the following functions:
Planning, sourcing and deploying all financial resources of a business unit
Coordination between receivables and payables due
Regulation and monitoring of financial ratios and cash flows
Financial control and analysis of a rational deployment of money (Lazaric 1990)
The conclusion may be that financing is the money side of an entrepreneurship, including its various
forms: initial financing, current financing and development financing of an enterprise. However, the
financing function does not only include ensuring the sources of money, but also its investing and
reimbursement. One can discuss financing in its narrow sense, as sourcing of money for business
needs from particular sources. In this way a company creates liabilities to these sources. In a broader
sense, financing can be understood as investment of money in fixed assets and current assets necessary
for the business activities or for the development and reimbursement of money which will pay off the
liabilities created in the process of money sourcing. In doing so, the money travels through a cyclical
movement and changes its original form depending on in what it was invested and then in the return
process its gets back to its original form (cash) increased by the amount of profit. According to this,
financing is understood as a continuous process of sourcing, investing and reimbursing the money in
an appropriate measure, structure and dynamics. (Horvat, Tintor 2006) Business finances of an
enterprise has a duty of meeting the optimal financial decisions in terms of ensuring the optimal
amount and structure of necessary assets and the most cost-effective combination of the size, structure
and dynamics of its sources.
Forms of financing
We differentiate between three main forms of financing: initial financing, current financing
and development financing.
Initial financing should ensure enough initial capital for founding the enterprise and setting up
the operations. Under this we understand ensuring the long-term sources for financing of initial
investments in fixed assets.
Current financing should ensure the sufficient quantity of short-term sources of financing of
current short-term requirements of the enterprise. This means the financing of required current assets
for supporting of well functioning business activities and maintaining of liquidity and solvency of the
company. However, every entrepreneur wants to be as successful as possible in his venture and he
aims to achieve development and growth which will in turn enable the increase in assets, scope of
business, create profit and his own enrichment. To develop his enterprise and to grow, he will be
motivated through a fight for survival on the market. (Skrtic 2002)
Development financing should ensure the sufficient quantity of additional long-term sources of
financing of new investments, in other words of development and growth.
Every form of financing requires sufficient quantity and quality of sources of financing. They
are the requirement for a successful business, development and growth of any enterprise. Sources of
financing can be own and foreign. This will be covered in more depth in the further section, but one
can point out here that the choice of own vs. foreign financing depends on a number of factors. These
are the legal form of the company, its state of development and economic performance, availability of
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the sources of financing, financing terms and further factors. This is why in the practice, the sources of
initial financing are primarily own sources of an entrepreneur, sources of current financing come from
his business activity, are trade credits and short-term loans from financial institutions, while sources of
development financing come mostly from the additional capital increase or additional long-term loans
from financial institutions.
Financial structure
A sound analysis of financial structure requires a good basic understanding and knowledge in
accounting. Norm Brodsky, an experienced entrepreneur and author claims „if you learn the
fundamentals of accounting, you will see that numbers are not as complicated as you thought they
would be and that you develop knowledge you need to gain control over your company. (Brodsky
2009) Financial structure of an enterprise is depicted in its balance sheet. It is characterized as a
balance between assets and liabilities and shareholder’s equity, which represent the sources of
financing of those assets. The financing process is formalized in the accounting of the economic
entity. This process can be seen as a duality of the accounting principles, as a structure of assets on
one side and structure of liabilities and shareholder’s equity on the other side as well as through the
logical connections between these structures. (www.accounting-world.com)
The easiest way to do it is by analyzing the financial statements, particularly the balance sheet.
So the balance sheet is the main source of information for analyzing the financial situation of an
enterprise. This is why the analysis of the balance sheet is so important. The starting point and the
basis of this analysis is the balance between the value of assets and of liabilities and shareholder’s
equity. All other important relations are based on this one. According to this, we differentiate between:
Vertical financial structure it contains separately financial structure of assets and of
liabilities and shareholder’s equity
Horizontal financial structure it shows the connection between parts of assets and of
liabilities and shareholder’s equity
Vertical financial structure
Structure of assets
Vertical financial structure contains the structure of assets and sources of financing of these
assets of an enterprise. Entrepreneurs have a constant need of having assets, means which they deploy
in their business activities. This need for assets changes depending on the dynamics and the growth of
a business. The asset part of the balance sheet shows all the assets an entrepreneur has at his disposal
to be used in his activity. This is the reason why the vertical analysis of the balance sheet begins with
analysis of asset structure. The asset part of the balance sheet contains various forms of value in terms
of assets: cash, objects, rights, accounts receivable and other assets which can be classified in terms of
accounting either as fixed assets (long-term assets) or current assets (short-term assets).
Fixed assets are composed of fix, long-term means of production which are in circulation for
longer than one year and they return back to cash through depreciation and amortisation.
Current assets are means of production which are shorter in circulation and it is expected that
they will be sold, used or spent during the financial year or a business cycle. In this respect, from the
financial point of view, it will be differentiated between long-term and short-term bound assets. Long-
term bound assets are means of production which are continuously in circulation or deployment and
should be financed from the long-term sources of financing. The rest are current assets and they
should be financed from the short-term sources of financing. The vertical structure of assets is
generally seen as a ratio between fixed assets and current assets but also as a structure of each one of
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them in terms of possibility and speed of their translation into cash. One of the main goals of the
analysis of the vertical financial structure is determining the optimal amount of assets in terms of
requirements for continuous business activities, growth and development. Another goal is optimizing
the investment in current assets.
Structure of liabilities and shareholder’s equity
Structure of liabilities and shareholder’s equity shows from which sources are the assets of a
company financed as well as the ratio of financing these assets from own equity vs. borrowed money.
This structure also gives a hint as to when are these liabilities due to be paid back. This side of the
balance sheet formalizes the relationship between company owners and sources of financing and
therefore plays a central role in the analysis of the structure of sources of financing. Shareholder’s
equity consists of the nominal capital and other capital positions and liabilities of a company consist of
items from different sources and with different maturity. The main objective is to find the optimal
structure of financial sources and to decide whether it is cheaper to use own sources of financing or to
take a loan. The structure of liabilities and shareholder’s equity represents the ratio between the own
sources of financing and foreign sources of financing, or in economic language, equity and liabilities
(debt). This ratio is known as debt to equity ratio or leverage and is measured and shown as
liabilities/owner’s equity. An acceptable ratio is generally meant to be the ratio between liabilities and
shareholder’s equity of less than 1 or 1, and an unfavourable financial structure is the one with a ratio
higher than 1. That would mean that the entrepreneur has more debt than his own capital. Since this
ratio has implications on solvency of the entrepreneur, in this case, the entrepreneur would often be
insolvent. This criteria is a hint concerning the necessity of having a higher ratio of own capital in the
total capital of the enterprise which will then result in higher security and lower business risks.
Horizontal financial structure
Horizontal financial structure is a time-connection between assets and their sources of
financing. Assets show all means of production and their structure. In which scope and with which
costs assets are supported, depends on the structure of debt and equity. From this point of view there
are also some key rules of financing of an enterprise.
Long-term investments, the investments in fixed assets should be financed from long-term
sources of high quality. This rule is based on the principle of security, liquidity and solvency. Since it
is about assets which have a long-term depreciation and amortisation, meaning their transformation
back into cash, their financing from the sources with a short-term maturity would lead to illiquidity
and insolvency.
Analogous to this financing rule of long-term financing, there is a rule that assets that bind the
short-term capital, current assets should be financed from the short-term sources. The principle of
profitability is applied here. In the case of financing of current assets from the long-term sources, since
the amount of assets to be financed is constantly changing, those sources would not be fully utilized
and additionally, the interest of financing with longer maturity is also higher. When engaging in a
business activity or an investment, an entrepreneur can prioritize security over profitability and in this
case, he can also finance current assets from the long-term sources. By doing this, he would increase
the security of his investment, but decrease its profitability. The analysis of the horizontal financial
structure gives entrepreneurs a good insight in the financial situation of their enterprises. Not only
entrepreneurs have interest in their financial indicators. These are also their business partners, money
lenders and other stakeholders. The information about the financial situation enables the entrepreneur
to actively and timely manage his own finances and especially to implement necessary measures if it
comes to an unfavourable financial situation. There are numerous indicators and financial ratios which
give insight into financial situation in terms of liquidity, solvency and financial security.
Besides liquidity, the analysis of the horizontal financial structure of a company also includes
viewing of its solvency. Solvency is the ability of an enterprise to pay all of its due liabilities at any
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given time. To measure solvency, it is important to know the total value of all assets and to compare it
to the amount of total liabilities. The lower the ratio of liabilities in total financing is, the higher the
solvency is.
Optimal financial structure
All entrepreneurs focus on the question of an optimal financial structure for their own
enterprise. The specifics of every individual company together with the industry they are in and
macroeconomic environment they operate in do not allow for a uniform and generally applicable
solution to this problem. The focus of this problem lies in the ratio between the size and structure of
assets on one side and the size and structure of equity and debt on the other side. One of the most
important things is to have a reasonable ratio between debt and equity. The optimal ratio depends on
factors such as competitive position of a company, capital requirements of the business and industry it
is in. The general rule is that the ratio between liabilities and shareholder’s equity, debt to equity ratio,
should be lower than 1 or 1. If this ratio is higher than 1, it means the liabilities are higher than the
shareholder’s equity and this may indicate an unfavourable financial situation of a company. (Strauss
2005)
Optimal investment in fixes assets
Many empirical studies verify a positive correlation between the degree of planning of
entrepreneurial activity (inclusive financial planning) and the success of the enterprise. (Gaunsel
2005) One finance expert claims about enterprises: „those who do not implement a well funded
control at the beginning, plan to fail. (Davis 1988) Every entrepreneur should know which amount and
structure of long-term assets, fixed assets is necessary for his enterprise. The function of investment
planning defines these requirements before the actual investment takes place. An entrepreneur who is
already longer in business will at this point analyze his actual financial structure with a focus on
capital accumulation and conditions of raising debt. Well known and often used methods of evaluating
the economic feasibility and efficiency are payback period rule, net present value method and internal
rate of return method.
Payback period rule is a calculation of duration of a period in which an investment will pay
back. This is the period in which investment cost will be refinanced through annual profits and
amortisations.
Net present value method determines the value the future payments have today. The net
present value is calculated by discounting the future payments and summing them up. The higher the
difference between present value of future payments and initial investment is, the more financially
attractive the project is.
Internal rate of return method is a method of calculating the average annual return of an
investment. Internal rate of return is the discounting factor of discounting the future payments to have
a present value of the initial investment. If internal rate of return (IRR) is higher than costs of capital
plus the risk premium, the investment will be profitable within its whole duration.
The same methods described above also serve as a tool for choosing the best investment project. The
investors who need to decide between more possible investment options which one to take, also use
these methods of profitability. These are often banks and other financial institutions.
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Determining the appropriate size of current assets
Finding of an optimal size of current assets is hindered by the fact that this value is constantly
changing, depending on a number of internal and external factors. According to the principle of
cyclical movement of all means of production, current assets have a central role in connecting all
functions of the reproductive business process.
One of the roles of the entrepreneur is to ensure the sufficient amount of current assets as well as their
optimal deployment. This means that the goal is to reach the highest profits possible with the
minimum current assets. This is why the structure and the share of current assets in total assets of an
enterprise is an important indicator. Since current assets are a part of a cyclical movement that
happens at least once per year, in order to calculate the optimal amount of current assets, one should
determine the current assets turnover ratio. This value can be 1 or higher than 1. The coefficient of the
yearly current assets turnover ratio is the ratio between total revenues and average employed current
assets in a year. A higher coefficient implies more efficient use of current assets in the whole
entrepreneurial process. Through permanent analysis of all revenues and expenses, the entrepreneur
should pay attention not to become illiquid but also not to have unused cash somewhere on a bank
account. This is why he should run a permanent financial policy of increasing the speed of revenues in
the business process and at the same time to invest money wisely and on time. Again, it is a question
of a principle which entrepreneur favours in exercising his business activity. Does he give advantage
to security of an investment with a lower return or does he aim to achieve a higher profitability
engaging in higher risks.
Optimal structure of sources of means of production
Optimizing the structure of sources of means of production means to ensure sufficient amount
of sources with an appropriate ownership structure and maturity. An optimization of the size and
structure of required assets of a company also influences the optimal amount and maturity structure of
the sources of these assets. This is the reason for the goal of the entrepreneur to optimize sources in
terms of their origin. The basis for this is the analysis and decision whether it is more economical to
take a loan or to use own capital when investing in a project. The often used method when making this
decision is a financial leverage. (Traverso 2003)
Entrepreneurs are primarily interested in profit maximization of own investments, so the
optimal ratio between foreign sources of financing and own capital is the one with the highest return
on equity (ROE) and the method of financial leverage assumes the profitability of using the debt
financing. Furthermore, in order to define the limit of indebtedness, entrepreneurs use the rule of cost
effectiveness, structured as a ratio between capital accumulation and financing costs. The coefficient
can be higher than 1, 1, or lower than 1. A coefficient of lower than 1 points out at a situation where
financing costs are higher than capital accumulation so from the entrepreneurial point of view, every
raising of further debt should be critically examined.
Sources of financing
The business cycle and especially the financing cycle of every enterprise begins with sources
of financing. The origin, the type and conditions of financing are key success factors for every
company and the growth and development potential of an enterprise depend on them. This is the
reason why these factors deserve a special focus of attention when analyzing the financing process of a
company. The types of sources of financing and their size are depicted in the balance sheet in the area
of liabilities and shareholder’s equity. Sources of financing can be viewed from many different angles,
among others, depending on a type of business ownership. Legal form of a company and the risks
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depending on it influence the decision on type and sources of initial financing, current financing and
development financing and growth. (Drucker 1992) There are three main legal forms of a company:
Trading company in ownership of one person
The owner is mostly also the manager. He bares the business risk solely. Nominal capital is generally
the owner’s investment, current financing comes from business activity and additional capital for
development financing usually comes from the savings of the owner or from the annual profit.
Trading company in ownership of more people
It is an organizational form where partners manage the enterprise together, spread the business risk
and share the profit. Partners ensure the nominal capital by their continuous share in the company,
current financing comes from business operations and development financing is organized from a
combination of sources.
Corporation (incorporated company)
A corporation generally has a higher number of owners, these are its shareholders. Shareholders
ensure the nominal capital by organizing money, assets or rights, current operations (business activity)
is financed from a combination of sources and development financing mostly by raising debt or capital
increase. Shareholders organize a joint management, spread the business risk, share profits and decide
on dividend payout.
Sources of financing according to their formation
Business processes can be financed from various sources which can be classified according to
their formation to following groups:
1) Sources of financing from operations
They come from current business activity of a company and have a significant importance in terms of
size and their share in total financing of an enterprise. Mostly, these are revenues from goods and
services sold but they can also come from the sale of a part of fixed assets.
2) Sources of financing from investments
These sources are various loans for investments of an enterprise, which should in terms of their
maturity be divided in medium-term and long-term loans. These are mostly loans from financial
institutions but they can also be loans from business partners with specific conditions. The access to
bank loans by small and medium-sized enterprises is often limited. The biggest obstacles for
getting loans from banks come from the amount of money foreseen for crediting the company, from
general terms and conditions of money investing and from insuring guarantee. Entrepreneurs seek for
financing of their businesses loans with longer payback periods, lower credit costs, lower
administrative barriers and minimal collaterals and banks aim at achieving exactly the opposite.
Besides, more and more often there are debates about a situation of an absence of high-quality
development programs for small and medium-sized entrepreneurs. Therefore, there are also alternative
forms of sources of financing from investments other than from banks. These come from money
brokers, business partners and other business partners.
3) Financing from the money sources
Money sources are based on financial activities of an enterprise. These are earnings from interest for
loans, deposit money and dividends as well as earnings from transactions with stocks and securities.
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Forms of financing
There are different criteria for classification of types of financing of an enterprise. The criteria are:
a) According to the availability of the source
b) According to the origin of the source
c) According to the ownership of the source
According to the availability of the source
Here we differentiate between the short-term and long-term financing of an enterprise. The
characteristics of a short-term financing are availability of the source up to one year, like for example
short-term trade credits or money loans. Analogous to this, all sources of financing that are available
for longer than a year are called long-term financing. These can be long-term loans or stock financing.
In practice, sources of financing with availability between one year and five years are often called
medium-term financing.
According to the origin of the source
According to the origin of financing, we differentiate between internal and external sources of
financing. Internal sources of financing of a company are all these sources that come from business
operations. Examples of this are profit, amortisation, securities, and savings. According to this, all
other sources of financing that do not raise money for the company from its own activities, are called
external sources of financing, like money loans or receipts from issuing securities.
According to the ownership of the source
We differentiate here between equity financing and debt financing. Equity financing consists of all
sources that are personally assured by the owner or owners and do not have to be paid back.
(www.extension.iastate.edu) These are nominal capital, increase in capital and retained earnings.
Sources of debt financing are all those that do not come from the owner or from the own business.
They create liabilities for the company, have a maturity and company has to pay interest for using
them.
Equity financing
In every phase of a financing process, at initial financing, current financing and development
financing, it is important to use appropriate sources of financing. An entrepreneur tries to finance his
business as much as possible from his own sources, meaning from his equity. Initial capital is the first
and the most important source of equity financing. It represents the starting point of a business
activity. Then follow various types of revenues from operations but also from financing, insurances,
issues of stocks, amortization, net profit and other.
The first and the most important source of financing is the nominal capital (initial capital).
After registering the business and existing articles of association, the known figure is the amount of
the nominal capital and initial structure of sources of financing. The nominal capital can be in the form
of money, assets or rights of managing the enterprise and it defines the size and structure of assets of a
company.
During the business activity, the structure of sources of financing changes constantly. Money
transforms itself into other non-financial asset forms (fixed assets and current assets) and then returns
back into money form increased by profit. At the end of a business cycle (business year), the balance
sheet and profit and loss statement are created and the annual profit or loss (from the profit and loss
statement) will be reflected as a capital gain or capital reduction in a balance sheet. After being
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reduced by taxes, the profit carried forward will be used by the company as a source of equity
financing in a coming business year.
Equity financing is a constant process which enables business development. The financing by
customers is understood as a period between charging and shipment of goods, and revenues from a
client can be seen on the particular client account which then reflects the balance on current account.
The balance of a current account shows the total available cash which can be used for financing
purposes.
Accounting as a function captures all business activities which cause a change in assets,
capital, liabilities, financial profit or annual profit. An adequate financial planning, monitoring of all
income and expenditure for supporting the planned business, enables the entrepreneur the insight in
surplus of a current account. Entrepreneur can use this money as a financial investment which will
give him earnings from interest, which can be again used as a source of equity financing.
Amortization is also a source of financing. The entrepreneur calculates the amortization with
one of the legally foreseen methods, which suits him best for financing of business activity and for
renewing and increasing the substance of assets. The amortization as an expense decreases the profit
as a calculation basis for taxes, so the entrepreneur has to pay lower taxes. At the same time,
amortization is an expense which does not cause an outflow of cash, so it has multiple positive effects
as a source of equity financing of a company.
The entrepreneur can additionally increase the sources of equity financing by selling a part of
his assets he is not currently using and earning interest for it. Current assets are very appropriate for
doing so because they can be quickly sold and charged for. (www.efinancemanagement.com)
Possession of securities and stocks is another important form of equity financing since a
cheque can be quickly and easily reimbursed. It is similar with other forms of securities. Receipts from
stocks are these from the emission of own shares (sale at a given market price). Owning stocks of
other companies in an own portfolio will also yield dividends which can also serve as a source of
financing. Also the possession of bonds and other forms of current financial means earn interest and
entrepreneur can convert them into cash when he needs.
The net profit is another source of equity financing of a company. Profit (or loss) is calculated
for a particular time span, mostly a business year, but it can also be a shorter period. Before
calculating net profit, one calculates gross profit, shown as a difference between revenues and
expenses in the analyzed period. When revenues are higher than expenses, the enterprise makes a
gross profit and after its taxation, the amount that stays is net profit. By making profits, a company
increases the sources of equity financing. The available cash on a current account increases the
liquidity of a company and retained earnings increase the shareholder’s equity and in turn the security
of a business.
Debt financing
Debt financing is reached by lending money from financial institutions or from business
partners. The entrepreneur himself can also be creditor of his own company if he invests in his
company rather by giving it a loan than increasing its capital. So the debt financing of a company
means ensuring its assets by creating liabilities to creditors (money lenders). Again, like equity
financing, debt financing can be also divided in short-term and long-term financing. As short-term
debt financing we understand taking short-term loans from banks or business partners or financing
through short-term business means and examples of long-term financing are long-term loans from
banks or business partners. (www.forbes.com)
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DOI: 10.1515/cks-2016-0010 11
To conclude, we can not stress enough that the primary goal all entrepreneurs have is to be
successful in their business. This means to operate unlimited, constantly and as a result make profit
and increase capital. In doing so, their company founding, running operations and development all
depend on appropriate and high-quality financing. The goal is to ensure a stable financing and achieve
growth. Important question is how, when and from which sources should financing be organized.
Appropriate financing will ensure sufficient amount of money or capital, a synonym of the
entrepreneurship and its main moving strength. To achieve sustainable success, entrepreneurs not only
have to meet optimal financing but also other business decisions including investments.
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DOI: 10.1515/cks-2016-0010 12
Author´s contacts
Stjepan Pticar, MBA, Franz-Loidl-Straße 36/28, 1220 Vienna, Austria, stef_ironman@yahoo.com
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Six-Week Start-Up, Planning Shop
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Abrams, R. (2004) Six-Week Start-Up, Planning Shop, Palo Alto, 33
On line: http://www.accountingworld.com
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Our Irrational Fear of Numbers
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Brodsky, N. (2009) Our Irrational Fear of Numbers, Inc., 33
Dodging the Bullet, Venture
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Davis, E. (1988) Dodging the Bullet, Venture, 78
Inovacije i poduzetnistvo
  • P F Drucker
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Drucker, P. F. (1992) Inovacije i poduzetnistvo. [Innovation and entrepreneurship] Globus. Zagreb, 122
Toward a Framework of Financial Planing in New Venture Creation, presented at United States Association for Small Business and
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Gaunsel, B.B. (2005) Toward a Framework of Financial Planing in New Venture Creation, presented at United States Association for Small Business and Entrepreneurship Annual Meeting, January 2005, Palm Springs, California
Poduzetnicka ekonomija-Kako uciniti prvi korak [Entrepreneurial economics-How to do a first step] Trgovacka akademija
  • D Horvat
  • Z Tintor
Horvat, D., Tintor, Z. (2006) Poduzetnicka ekonomija – Kako uciniti prvi korak [Entrepreneurial economics – How to do a first step] Trgovacka akademija, Zagreb, 52
Metode poslovnih financija [Methods of business finance] Privredni vjesnik
  • K Lazaric
Lazaric, K., (1990) Metode poslovnih financija [Methods of business finance] Privredni vjesnik, Zagreb, 11
Financiranje emisijom vrijednosnih papira [Financing by emission of securities
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Orsag, S. (1997) Financiranje emisijom vrijednosnih papira [Financing by emission of securities] Rifin, Zagreb, 34
Osnove poduzetnistva
  • M Skrtic
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  • Zagreb
Skrtic, M. (2002) Osnove poduzetnistva. [Essentials of entrepreneurship] Mikrograd. Zagreb, 12