02.

Starting Business

Following themes are discussed in this chapter

2.1. Registration of businesses and its benefits
2.2. The business plan and its content

The marketing plan

The operational plan

The financial plan

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Let us prepare to start business

Jayantha and Susantha studied at the same class, Jayantha passed the
Advanced Level Examination and continued higher studies and Susantha joined
his fathers business. Sometime later, the two friends met each other.
Pay your attention to their conversation which is given below.
Jayantha :- Why has one part of the boutique been closed? Isnt there the bakery
now? I came to eat a bun.
Susantha :- What to do? Father got sick. We spent a lot. All the business went
down. My brother of course agreed to give me some money. But I
didnt agree to it,as there is a saying too many cooks spoil the soup.
Jayantha :- Thats wrong. There are a lot of successful businesses which are
done by groups of people.You can do this business successfully with
your brother. But do it in a systematic way. Lets start the business
bygiving a good name and registering it. Then everyone will recognize
it.
Susantha :- First I went to a bank to apply a loan. I was asked to submit various
types of documents. So I gave it up.

Jayantha :- Let us start from the beginning. I will also help you. If any work is
done with a plan that will not become a failure.There are institutions
to obtain advice. First let's think about what do we want to do?
and How do we do it? There after, let us start our business with a
proper plan.We can reuse the old builidings and equipment, can't
we? If we submit a plan properly we will be able to get the assistance
from a bank.Then money will not become a problem to carry out the
work.If so, Let us make bread from country rice.
The above dialogue implies that a business should be started systematically and
methodically. Let us examine further, the factors to be considered in starting a
business.
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Introduction
Man has to consume various types of products to maintain his day-to-day life. He
is not able to produce all these products. Therefore, he has to obtain things which
are required to satisfy his wants from the market. At present producers supply
their products to the market accordingly. For that, a person or group of people
gather and establish various types of business organizations like sole traderships,
partnerships, incorporated companies and co-operative societies.
It can be seen that some businesses which were started by various types of business
organizations with high expectations had been bankrupted. But many businesses
have been existing very successfully in the business world for a long period. For
that, much consideration should be paid to business plan when starting and carrying
forward a business.

In this chapter, your attention is drawn to the following basic terms.

_ Legal documents

_ The cost

_ The market

_ The profit

_ The marketing plan

_ Price per unit

_ The financial plan

_ The operational plan

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2.1 Registration of business and its benefits

Now you know that for carrying out business activities in Sri Lanka,
businesses can be organized in various ways. For the start and carrying out
businesses it is necessary to register them according to their nature.
Business registration is done according to the following ways.

Registration of the business name

Registration of the business for legalization

Registration of the business name

Registration of the name of a business is registering the name by which the
business is continued. Registration is compulsory for the sole tradership and
partnership if businesses are carried out under another name, other than the owner's
full name.
Example :- The business name must be registered.
If Ranadewa Gallage uses the name Gallage Stores for his
business.
or
If Chandrasena Disanayaka uses the name Samanala Stores
for his business
or
If Piyal Randewa and Bandula Kantha use the name Piyal
and Bandula Brothers for their business,
The name of a business should be registered under the Business Name Ordinance
No.6 of 1918.
In this way, the business name is registered and if they want to make a change, set
of forms should be refilled and submitted to the respective authorized officer.
The authorized officer for registration of these businesses is the registrar of business
in the respective provincial council. However, the necessary application for
registration can be obtained from the divisional secretariats. Divisional Secretaries
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are given this ability because they have been granted the power of deputy registrar.
Charges for registration are decided according to the assigned power of the
provincial councils.
The application for registration should be submitted within 14 days of starting of
the business.

Registration of a business for legalisation

Registration of a business for legalisation means incorporating it to obtain a legal
status. A business is recognized as a legal person before the law when it is registered
under the authorized officer who is mentioned in the respective act of the type of
organisation. This is called incorporation. Even though the business name of sole
traderships and partnerships are registered, they are not entitled for a legal status.
Accordingly a company obtains a legal entity when it is registered under the registrar
of companies.

Registration of various types of business organisations

There are differences in registration of businesses according to their organising
patterns.
Table 2.1 shows the legal documents which are used for registration of various
types of business organisations.
The type of organization

Respective legal acts

Incorporated companies

The Companies Act No. 7 of 2007

Co-operative Societies

The Co-operative Act No. 5 of 1972

Societies

The Companies Act No. 7 of 2007

(If it acts as a charity organization)

Figure 2.1 Legal documents for business registration

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There is a procedure to be followed in registering businesses according to the

above mentioned acts.The places mentioned below are the places where registration
has to be done and other requirements to be fulfilled for the various types of
businesses.

Incorporated companies
Wherever a company is started, this type of business organization should be
registered at the Registrars Office of companies. The following documents should
be submitted along with the application which is specifically introduced by the
company registrar. This application must be signed by all the intial shareholders.

Name of the proposed company

The articles of association of the company
The written consents to act as directors.
The written consent to act as the secretary.

Co-operative societies
The registration of these societies is done by the commissioner of the co-operative
development in the respective provincial council. The following documents should
be submitted for the registration.

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The application

Two copies of By-statute

The report of economic feasibility of establishing the society

Two copies of the minutes of the meeting where the Proposal for
registration had been approved

The report which shows how the members fees spent

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The map which shows the place where the society is located

A list of names and details of the executive committee

Societal Organisations
There are organizations which exist for the welfare of their members. The registration
of these societies is done according to the nature of their activities. Examples are
given below.

Sports societies
The registration must be done at the divisional secretariat. Properly completed
application which is obtained from the sports officer in that office, must be submitted.

Welfare societies
The registration must be done at the divisional secretariat. Properly completed
application which was obtained from the social services officer in that office must
be submitted.
Registration certificate can be obtained by submitting relevant legal documents
which were introduced according to various types of business organizations, to
the respective authorized officer.
Special permits must be obtained to start some special businesses. These permits
must be obtained to carry out business activities irrespective of the type of business
organization. The officer who issues the permit will vary according to the types of
businesses.

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Figure 2.2 shows some institutions from where these permits must be obtained for
such businesses.
Business
Pharmaceutical shops
Bakeries

Institution
Ministry of Health
Local government institutions

Agency post offices

Postal department of Sri Lanka

Factories

Central Environmental Authority

Foreign Employment Agencies

Foreign Employment Bureau

Training schools for driving

Department of motor vehicles

Press

National Archives Department

Commercial Banks

Central Bank of Sri Lanka

Figure 2.2 - Institutions from where the permits must be obtained.

When considering in this way registration of a business is not merely a simple task.
Various documents must be provided for that. An attempt has to be taken. Although
it is a difficult task, it must be done to comply with the provisions of the law.

Benefits of registering a business

Confirms the ownership of the business

The ownership of the business can be confirmed when there are problems
arising in relation to the business.

Gets an identity for the business

When facing the competition of the business world, it obtains the benefit
of the ability to recognize the business from other businesses as a separate
entity.

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Easy to obtain loans

Loan suppliers are motivated to grant loans because a trust is built up on
the business.

Having recognition when performing as a business

This recognition is very important when entering various types of
agreements.

Qualifies for obtaining incentives from the government

The government provides various facilities for businesses. For obtaining
these facilities, more opportunities are given to the registered businesses.

Provides a legal protection

It helps to overcome challenges which are created by other competitive
businesses.

It is obvious that these benefits encourage the businesses to carry out their activities
successfully. Therefore, they tempt to register their businesses although it is not
compulsory.

Activity 01
Pay your attention to the following matters.
i. Daya Lokuge is going to start a pharmaceutical Shop as Daya Pharmacy
ii. Priyantha Ramanayaka and Sanjeewa Ramanayaka are going to start a
vegetable wholesale business as Ramanayaka Brothers
iii. Indika Muthukumarana with some of his friends is going to start a factory for
packaging spices.
List out the procedure to be followed when starting these businesses according to
the following way.
- Obtaining permits
- Registration
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2.2. The business plan and its content

As a student, you have to site for the Ordinary Level examination next
year. Your expectation is to provide answers successfully, for all the subjects. You
know that various resources are required for your educational activities. You must
know that sufficient time must be allocated for that. But this period must be used
not only to improve the knowledge but also to obtain the ability to work as a
group to become a good citizen. Forecasting your future time which has to be
spent and acting according to that will lead you towards success. It will not be a
difficult task to become a person of good personality. Planning will be useful for
your life.
'Planning' can be identified as an important task in the process of starting
a business. A plan is necessary for a business to start in an organised way. It can
be seen that many businesses have become unsuccessful within a short period of
time after starting. The main reason for this is that, they do not carry them out with
a proper plan. It can be seen that some businesses are carried out successfully
according to business plans. But some businesses do not show any familiarity with
business plans. Even though much attempt is taken for business activities, a
successful business cannot be expected with a poor plan.

Panning is defined as the activity of

deciding what to do how to do and when
to do in advance of starting a business
and have them in written form is known
as a plan

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Therefore, you must understand that any business must be done according to a
business plan. You can clearly understand that the business can be carried out
towards the success in this way.
Before making a business plan, an appropriate business opportunity must be
identified. The attention should be paid to the following matters, when preparing a
business plan with reference to the identified business opportunity.
The market requirements

The future plans for the activities of the selected business

Requirements of financial resources/ Investments to be done

Operational activities

Human resource requirements

01. The market requirements

The market requirements that can be disclosed by a market study are
given below.
The Nature of the market

The existing market for the product. To whom the

product is offered?

The size of the market (Number of units)

The way of offering the product to the existing market.

Opportunities for expanding the market share.

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The demand

Customers who are related to the business opportunity- Local/

foreign .

The way of purchasing goods and services.

Buying patterns and habits.

Factors to be considered in buying. (price / quality/ convenience)

The competition

Who are the competitors of the business?

What is the position of their businesses?

What is their market share?

What are the strengths and weaknesses of competitors?

What are the strategies that must be followed to face the

competition?

02. Future plans for the activities of the selected business

You will be able to find out a more suitable business opportunity after considering
the above mentioned factors. It is very important to consider the future plans for
the activities of the business without implement it immediately. The vision and the
mission of the business should be decided.
Vision : Defines the way an organization or enterprise will look in the future. Vision
is a long-term view. Sometimes describing how the organization would
like the world to be in which it operates.
Example :- A charity working with the poor might have a vision
statement which reads A World without Poverty.
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Mission : Define the fundamental purpose of an organization or an enterprise,

describing why it exists and what it does to achieve its Vision.
It is sometimes used to set out a "picture" of the organization in the
future. A mission statement provides details of what is done and answers
the question: "What do we do?"
Example :- The charity might provide job training for the homeless
and unemployed.
According to that, following factors must be decided well.
What is going to be done?

Is a product going to be produced?

Is a service going to be provided?

How is it going to be done?

Production methods

The technology to be used

The plant layout (Locating the equipment)

Storage

Time period
Attention should be paid to the time period the goods and services are to be
provided to the market
Example :-

Is it throughout the year?

Is it for a period of time? ( In April? / In May?)
Is it day time?
Is it night time?
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03. Financial resource requirement

When starting a business, sufficient money must be invested, for the business. The
below mentioned factors should be considered separately.

How much money is needed?

When is money needed?

How is money supplied?

Example :- Is money supplied by the owner ?
Is money supplied from external sources ?
(bank loans, Institutional loans, Aid.)

04. Operational activities

This means the activities related to the production which are to be carried out in
the business. The attention must be paid to the factors mentioned below for carrying
out the future operational activities in an efficient and effective way.
Locating of the business
Factors that should be considered about locating the business

Cost of land/ Buildings

Condition of the climate

Facilities of disposal of waste

Water supply

Communication facilities

Transport facilities

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The power

Institutional facilities (Eg :- Banks)

Closer to the market

Ability to find employees

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Relevant machinery and equipment

What are the relevant machineries and equipment?

Prices

The way of obtaining them.

(By cash/ by loans/ by leasing)

Ability to obtain locally or internationally

If they are to be imported what are the import taxes and reliefs?

Maintenance of machinery

Required lands and buildings

Extent of land required

Existing land belongs to the owner

Extent of land to be purchased

The money required for that

Alternative methods that can be obtained ( Rent / Leasing)

Suitable technology and production process

Applicable technology and production process may vary according

to the nature of the business idea and the size of the business.

Labour intensive Using more labour relative to the capital

Capital intensive - Using more machines and equipment

relative to the use of labour

Management

Are business activities carried out by the owner ?

Are services obtained from outsiders?

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05. Human resource requirements

Employees who contribute to carry out the tasks of an institution are considered
as the human resource. They can be classified into two groups.

Managerial employees

Non managerial employees

When comparing with other resources which belong to a business, the human
resource is very important. There are some reasons for that.

It is a live resource

It has the ability to react

It can be developed

It has creativity

Factors which must be considered here :

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Required number of total employees

Types of employees

Number of trained / Untrained employees?

Permanent or casual?

How training is given

Future vacancies

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Advantages of preparing plans :

Proper guidance to achieve the objectives of the business

Targets of sales and profits can be fulfilled

Present the future vision

Helpful to obtain financial facilities

The progress of the business can be estimated by comparing the plan

and actual performance

The resources which are required for the business can be identified and
the required cost can be estimated

The expansion and the existence of the business can be confirmed

Making the business idea clear to the outsiders

Help to improve identified strengths and to evade weaknesses

Help to attract employees because it shows the establishment of the

business

Help to recognize the potential problems and to provide solutions to

them

Help to measure the performance of the business

Help to make a positive attitudes among various stakeholders towards

the business

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Activity 02
There are suitable physical resources for the businesses in the area you live. Also
there are human resources with various capabilities. If you have selected a suitable
business opportunity by considering these factors, a financial institute has declared
that they would provide the financial support.
Using the following information, get ready to prepare a business plan with your
friend.

What is the product?

The nature of the market
The demand
The nature of the competitors
Locating the business.
Machines which are going to be used
The period of producing
When presenting information, provision of estimated data would necessary.
Number of required machines
Number of units demanded
The production time period etc.

The content of a business plan

Now you have realized well about the factors which must be considered
when preparing a business plan. In general the content of a business plan can be
presented as follows.

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The marketing plan

The operational plan

The financial plan

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The marketing plan

A marketing plan depicts the process to be followed in the future period of time to
achieve its definite target of the sales of one's goods and services.
In marketing, attempts are taken to achieve the business objectives by selling
goods and services which can be fulfilled customers needs and wants. Therefore,
when preparing a marketing plan, surveys which are done about the market, are
very useful. Market surveys can be done to collect information about consumer
behavour in the market.

The W5 frame can be used in collecting information about the customers behaviour
in a market.
Who

- Customers who demand a product

What - Goods or services, they need.

When - The period / time they buy the product
Where - The place the product is bought.
Why

- The necessity, ability and their habits in buying that product.

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The factors which should be included in a marketing plan

Expected sales/ Income

Expected cost

Expected profit

Expected sales/ Income

Whatever the business activity one involves in some earnings are expected.
Earnings would be different as per the nature of the business.
Example :- A trade business sales
A service business Income from services rendered

Also the expected earnings for a period of time can be presented as follows.

Expected income = Price Per unit X Number of Planned Units

Example :- Sales income planed of Samantha's business for the year 20.......

Business
Trade

Type
mobile phones

Service centres Servicing motor

vehicles

Quantity

Unit price

Value , Rs.

100

8000

800 000

80

800

64 000

Example :- Following is an income plan of a business which sells cement

bricks. This is a monthly plan.

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51

July
Aug
Sep
Oct
Nov
Dec

Mar
Apr
May
June

Cement bricks

Feb

Jan

Type of good

Total

Number of units 25000

Price per unit
Rs.

30

Sales income
Rs.

750000

Complete the monthly plan for the year by using imaginary numbers.
Example :- For the annual plan
A furniture manufacturer is going to make almirah with a new pattern. A specimen
for an annual plan is given below.
product
1st Year
3 rd Year
2 nd Year
Almairah
Number of units

15

Price per unit Rs.

65,000

Sales income Rs.

975,000

Complete the annual plan for next years using imaginary numbers.

Expected expenses
When carrying out a business, various expenses have to be borne. Several expenses
are given below.

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Sales and distribution expenses :

purchasing of trading stocks
Transportation
Sales commissions
Others
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Advertising
Wages for employees
Building rents

Forecast reports can be made annually according to the following mentioned

manner.
Example :- Expenditure plan was made by Chathurika who is going to
sell Mosquito nets"

Expenditure

Jan

Goods purchased
Carriage inwards expenses

Feb

March

60000
15000 75000

Other expenses
Wages of employees
Transport
Sales expenses
Others
Expected Total Expenses

8000
2000
1000
9000

20000
95000

Plan the future expenditure by using imaginary numbers.

Expected profit
Difference between the expected sales/ income and expected expenditure is
considered as expected profit.
Expected profit

expected sales / income - expected expenditure

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Activity 03
1. Select a suitable product and prepare a report of forecast expenditure of
sales for three months.
2. Suppose, your group is going to start a business for selling readymade
garments.Prepare an income statement related to the business for next three
years.

The operational plan

Having forecast sales according to the business idea the businessman should be
ready to sell the expected product or service.
Accordingly, the activities, which are related to produce goods as well as
services, are considered as operational activities. Attention has to be drawn to
make operational plan according to the decided operational activities.
Before producing the item of goods or service an operational plan is prepared by
determining, required equipment, raw materials as well as other potential expenses
of the production process.
When making the operational plan, following factors should be taken into
consideration.
Expected number of units of production
Expected expenditure

Raw materials

Labour

Other expenses

Expected unit cost

Expected profit margin
Expected price per unit

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Production cost
A production firm produces goods by using production resources. To obtain these
resources expenses have to be borne. The value of economic resources which are
used for producing goods or service is called as the cost.
Knowing about the production cost is very important for a production firm. Through
this, it is easy to,
Know the total production cost
Determine the cost per unit
Determine the profit margin
Determine the sales price per unit

Production cost can be divided into two groups as direct cost and indirect cost
according to its nature.Indirect cost is also called as the production overhead
cost.
Figure 2.3 shows the basic components of the cost
Cost

Indirect cost

Direct cost

direct
materials

direct
labour

indirect
materials

other
direct cost

indirect
labour

other
indirect
cost

Figure 2.3

Direct cost
The cost which is directly related to produce goods is called the direct cost. Direct
cost can be classified according to its basic components.
Direct material cost
Direct labour cost
Other direct costs
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Direct material cost

The value of physical resources which are actually included in a product
Example :- The value of wood which is used to make an almirah.
Direct labour cost
Wages which are paid to labourers who are directly involved in producing the
item of goods.
Example :- Wages which is paid to labourers who made the almirah.
Other direct cost
Other costs which are directly related in producing an item of goods except the
direct labour cost and direct material cost, called the other direct cost.
Example :- The money which is paid for making the design, demanded
by the customer.
The total of the direct material cost, direct labour cost and direct expenses, is
considered as the primary cost. It can also be considered as the total direct cost.

Production overhead cost

The cost which cannot be directly recognised with a product is called as the
production overhead cost. The following components are included in the production overhead cost.

Indirect material cost

Indirect labour cost
Other indirect cost

Indirect material cost

Expenses for materials which are related to a unit of production but cannot be
directly recognized
Example :- Sand papers which are used to smoothen when painting an almirah.
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Indirect labour cost

Expenses for labour which are related to a unit of production but cannot be
directly recognized
Example :- Wages for security guards.
Other indirect costs
Other expenses, except the indirect material cost and the indirect labour cost,
which are related to a unit of production but cannot be directly recognized
Example :- insurance, electricity, depreciation of machines, factory rent.
The total cost of indirect material cost, indirect labour cost and other indirect cost
is called the total production overhead cost.

The unit cost

The cost for producing a unit is called the unit cost. It can be calculated as follows:
Unit Cost =

Total Production Cost

Number of units of products

Profit margin
The value, which is added to the cost by considering the existence of the business
and attracting more buyers when supplying products to the market, can be
identified as the profit margin.
If profit margin increases, the price of the product will go up. Then the
number of buyers to the business will reduce.
If profit margin decreases, the price of the product will not go up
considerably. Then the number of buyers to the business will increase.

Selling price per unit

Expected price of the product which is going to be introduced to the market is
called the selling price per unit.
The way of calculation is given below.
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Selling Price Per Unit

Unit Cost + Profit margin

When pricing a product, producer decides the price by adding a specific profit
margin to the basic cost. This is called as determining the price based on the cost.
Even though the unit cost is important, there are more other factors to be
considered when deciding the price of a product.
The demand for the product

(goods / services)
The competition which the firm is facing
Likes/ dislikes related to the product

The production cost plan

Now let us prepare a production cost plan
Example :-

Sujani intends to start a buisness to produce flower vases.

The expected plane to produce 200 flower vases for the
month of January 20XX is as follows.

The production cost plan for the year..............................

Product - flower vases

Direct materials - cement & clay

Direct labour - mason's wages
Direct expenditure - packaging
Primary cost
indirect materials - sand paper
indirect labour - helper's wages
indirect expenditure - electricity
Overhead cost
Total production cost

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The year................
Rs.
Rs.
45000
10000
4000
59000
3000
2000
16000
21000
80000

If it is sold by keeping 10% profit margin on the cost, the selling price per unit can
be calculated as follows.
Expected number of production units
Cost per unit

= 200
= 80,000 = Rs.400
200

10% profit margin on the cost

Selling price per unit

= 400 x 10 = 40
100
= 400 + 40
= Rs.440

Activity 04
Buddhipriya has been producing Vesak lanterns and supplying to the market
during Vesak season for a number of years. Even though he had produced 1000
vesak lanterns in the last year, he was unable to meet the demand at the market.
Therefore, he has decided to produce 500 more vesak lanterns for this year. Pay
your attention on the following factors.

Three types of vesak lanterns are made

octagonal lanterns, lotus flowers and stars
Production is started at the beginning of February and is ended by 30th April.
Supplying to the market is done on the 1st week of May

A part of the brothers house is used and a reasonable rent is paid to him
Iron spikes, Bamboo strips and straws are used as main raw materials
Electrical machines are used
Three friends support to the production activities
A reasonable wage is paid to them

There is a helper to carry lanterns here and there and for the security during
the night

Equal number of Vesak lanterns are produced for each type

Even though Buddhipriya produced Vesak lanterns, he had not earned a sufficient
profit so far. Therefore, he expects your assistance to make a production cost
plan before starting the production this year.
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Activity 05
Products are supplied to the market based on other festivals too. Having selected
an appropriate production which can be supplied to the market, make a production
cost plan and display it in the classroom.

Financial plan
Even though you are a student, you have to spend money for some occasions.
Example :-

To buy a ballpoint pen

To buy food from the school canteen

There are sources of getting money for this. Sometimes you are given money daily,
weekly or monthly by your parents. If you spend the given money economically,
you will be able to save money. By allocating money for the most necessary things,
you will be able to have maximum satisfaction.
These advantages can be obtained by planning about spending and receiving money
based on the past experiences. If so, this is also important for a business. Financial
decisions are the most important factors for the success of a business.
It can be seen that there are successful businesses that earn much benefits with a
less investment. They have reached these successes by taking decisions according
to a plan. There are two main factors which must be considered in a financial plan.

Financing money

Investing money

When starting and carrying out a business, the main challenge faced by a firm is
whether it can finance sufficient money. Therefore, it is necessary to determine the
amount of money that is required to be invested before starting the business.There
after, it must be considered about how to finance this investment.
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By now, forecasting has been done about what is going to be produced

and sold. Funds are necessary for the planned activities. First, it must be considered
about the ways of financing money for purchasing required resources. Actually, it
is not a financial plan, if it is only considered about financing money. It is necessary
to consider about investing money properly for the resources. It must be clearly
identified about how investment should be done for resources. It can be an obstacle
for the business if the money is invested in inappropriate resources.

Investing
It seems that when investing money for resources there are two types of
resources/ Assets.
01. Long term Assets / Fixed Assets / Non-current Assets which are required
for carrying out the business continuously.
Machinery, Buildings, Computers are needed to carry out business activities. Even
though plans are made properly, business activities cannot be performed, without
these resources. So a large amount of money has to be invested to obtain these
resources.
Assets which are existed for more than one year, can be considered as long term
assets.
Example :- Buildings, machinery, motor vehicles.
02.

Short term Assets / Current Assets - which are required for operational
activities.

Even though there are long term assets, more other things are required to
operate them.
Example :- Even there is a machine, raw materials are needed for
production activities.
Even there are sufficient buildings and equipment, stock
is needed for selling.
Sufficient money must be needed to purchase them. In this way, it seems that
various resources are required to maintain day-to-day business activities. These
are called as short term Assets. It is also called as current assets.
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Example :-

Stocks
Debtors
Cash balance
Bank balance

Short term assets, which are required to maintain day-to-day business activities,
are called as working capital.
As mentioned above, the requirement of the resources for the business activities,
must be realized well.
Funds, which are required for the long term assets as well as the day-to-day
activities (working capital) must be considered. Having considered the fund
requirements it is improtant to examine ways of financing these requirements.

Financing
A person can invest his funds as a sole trader. But if the business is a large scale
one, it may be difficult. It must be known that there are optional sources for
financing.

Funds can be supplied to act as owners.

It is called as capital formation.

If there is a proper plan to the business the outsiders will help the
business by financing.
Specially banks and other financing institutions grant loans, when
there is a systamatic business plan.Money, which is obtained from
outsiders in spite of the funds invested by the owner, is called the
external liabilities / external obligations.

These external obligations can be financed by

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Short term financial sources

Long term financial sources

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A guidline for making a financial plan is given below.

Initial capital estimation

Description

Total
Rs.

Investment by
the owner
Rs.

External loans
Rs.

Fixed Assets
Lands
Buildings
Machines
..............
sub total
Working capital requirement
(for a month)
Raw materials
Electricity
Labour
Other expenses
sub total
Total

Preparing financial statements

There are statements which must be prepared and submitted by a business for
financing from external Institutions.Among them financial statements are
important. There are financial statements which must be prepared and submitted
by a business.

Cash flow statement

The statement which shows the inflow and outflow of cash of a business for a
specific period of time is a cash flow statement.

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Income statement
The statement which shows the financial performance of the business for a
specific time period is called an income statement. This statement shows how the
business earned profit / loss.

Balance sheet
The balance sheet is the statement which shows the 'financial position' of a
business as at the closing date of a specific period. It shows the prevailing assets
and liabilities to that date.
At least estimated financial statements for 3 years must be submitted to finance
from an external institute.
You can study more about these matters in the proceeding chapters.

Activity 06
Suppose, you have got the following business opportunities
Producing cake for the Sinhala New Year Festival
Manufacturing desks and chairs for the grade one students in a school.
Supplying string hoppers to a canteen daily.
One of your friends has decided to start one of the above mentioned businesses
and you are asked to prepare an estimation of the initial capital.
Present the dialogue which would be taken place between you and your
friend before making the initial capital estimation.(orally or written)
Prepare the initial capital estimation according to the above dialogue.
This can be done as a group activity.

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Activity 07
Consider the following matters given below.
i. You are given the following production opportunities
Bakery production
Manufacturing furniture
Manufacturing clay flower pots
Production of ties for school children
Production of uniforms for school children
ii.

You like to do a business individually

like to do the business with your elder brother
like to do the business with 10 friends of yours

iii.

like to give an attractive name to the business

like to carry out the business by your own names

iv.

like to use more machines

like to use more labour

v.

like to invest your own money

like to obtain loans from outsiders if necessary

vi.

Expect 15% of a profit to the cost to carry out the business in a

successful way

1. Select an appropriate business opportunity from the opportunities mentioned

above.
2. By considering the other information, arrange the appropriate matters
according to your preference.
3. Make reports that may be important to display in preparation of starting the
selected business opportunity.

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