Entrepreneurial Finance

Contents

Introduction.

Part 1: GST Calculation and registration requirements for tax purpose.

Section A: Calculation of GST, Input tax credit and net amount to ATO with respect to transaction tale place for Timberlake and the retailer he sold the goods.

Section B: Registration requirements for tax purpose.

Part 2: Cash Budget

Section A: Preparation of cash budget

Section B: Comment on the cash position of Timberlake for the month of September

Part 3: Venture Valuation for Timberlake.

Section I: Calculation.

Section II: Report on venture valuation.

Conclusion.

References.

Introduction to Venture Capital Valuation

The present report is developed to conduct a case study analysis of the Timber Manufacturing as a sole trader and as a company. The new venture Timber Manufacturing was started by Timberlake and was registered as a sole trader in the year 2018. The company registered for GST in the year 2019 and as the cash flow improved also hired an employee assistant in the year. Timberlake also developed a budget in the year 2019 which depicted that the sales mainly consist of cash and credit sales. In this context, the report is developed for calculating the amounts that are submitted by Timberlake and also states the registration requirement for GST, TFN, ABN, FBT and superannuation. This is followed by developing a cash budget for the venture and also states the venture valuation for Timberlake. This comprises of determining the percentage of acquired ownership, number of shares issues, issue price per share and the post-money valuation. 

Part 1: GST Calculation and Registration Requirements for Tax Purpose

Section A: Calculation of GST, Input Tax Credit and Net Amount to ATO with Respect to Transaction Tale Place for Timberlake and The Retailer He Sold the Goods

TRANSACTION

GST COLLECTED

INPUT TAX CREDIT

AMOUNT TO ATO

Timberlake sold wood to Justine

$2,000.00

$0.00

$2,000.00

       

Justine Sold to customers

$8,000.00

$2,000.00

$6,000.00

       

Amount Paid by Customers

   

$8,000.00

(McCouat, 2012)

Section B: Registration Requirements for Tax Purpose

Particulars

Registration Requirements

GST

Does not have to register for GST in the year 2018 as turnover is b $50000 and $ 700000 which is below $75000 but may prefer to charge GST in the year 2020 as the turnover increases to $100,000 which is greater than $75000. Timberlake can register for GST in the end of the year 2019 and can charge it from 2020 onwards (Marsden, 2010).

Superannuation

Superannuation is regarded as the arrangement by the government of Australia for encouraging the accumulation of funds from their income stream. Timberlake is operating as a sole trader from the year 2018 to year 2019 and does not need to pay the super guarantee rate. However, one employee is hired in the year 2019 and thus has to pay a super guarantee rate of 9.50% to the employee. Also, if more number of employees is hired from the year 2020 then the super guarantee rate of 9.50% is required to be paid to the employees.

TFN

Does not require a separate TFN as Timberlake is operating as a sole trader and thus can use his individual TFN. However, Timberlake has hired an employee assistant in the year 2019 and thus required to pay TFN from this year

ABN

Need an ABN as he is going to register for GST from the year 2019 and thus need to quote an ABN at the time of dealing with other business parties

Fringe Benefits Tax

Timberlake has no employee in the year 2018 and thus there is no requirement of fringe benefit tax. Timberlake is required to pay FBT from the year 2019 to the employee hired (Curtis, 2014).

Part 2: Cash Budget

Section A: Preparation of Cash Budget

TIMBER MANUFACTURING

BUDGET FOR SEPTEMBER 2019

Particulars

Amount

Amount

 

Figures in AUD$

     

Estimated Cash receipts

   

Cash Sales for month September

 $ 20,000.00

 

Credit Sales August (40%*$38000)

 $ 15,200.00

 

Credit sales September (60%*$30000)

 $ 18,000.00

 

Total estimated cash receipts

 

 $ 53,200.00

     

Less: Estimated cash payments

   

Purchases

   

Cash purchases

 $ 40,000.00

 

Credit purchases August (20% of $70000)

 $ 14,000.00

 

Credit purchases September (80%*$58000)

 $ 46,400.00

 

Wages

 $ 5,000.00

 

Rent

 $ 3,500.00

 

Total Estimated Cash payments

 

 $ 108,900.00

     

Increase or decrease in cash flow

 

 $ (55,700.00)

Add: Opening Balance

 

 $ 10,000.00

Closing Balance

 

 $ (45,700.00)

(Carver, 2011)

Section B: Comment on The Cash Position of Timberlake for The Month of September

The cash position of Timberlake as prepared for the month of September 2019 cannot be regarded as good due to higher cash outflows as compared with the cash inflow resulting in a negative amount of the closing balance. There is large amount of credit sales as compared to the cash sales which has a risk of not converting into cash in the subsequent years. Also, the cash purchases made are more as compared to the cash sales resulting in a larger cash outflow. Thus, the total estimated cash payments largely exceed the total estimated cash receipts resulting on obtaining a negative figure of the closing balance of cash.

Part 3: Venture Valuation for Timberlake

Section I: Calculation

A: Percentage of acquired ownership of the venture

 = (Flanc, 2013)

= 75.9375%

Where:

  • I = Investment made by investor = $200,000
  • P = Share sold to public by investor (Total earnings) = $10 Million
  • E: Similar venture earnings = $1 Million

It means going price per dollar of income is $10 ($10 million/$1 Million)

  • E5 = Venture earnings = $200,000
  • r = 50%
  • T = 5 years

B: Shares to be issued to new investor

Number of shared to be issued (n) =

= 31558

(Beaton, 2010)

Where,

  • m = existing shares = 10000 shares
  • n = new shares

C: Issue price per share

= Investment / Number of shares

= $20000/31558

= $6.337537

Total number of shares that will be outstanding after the investment will be = 10000 shares + 31558 shares = 41558 shares

D: Pre-Money Valuation

=10000 shares * $6.337537 = $63375.37

E: Post-Money Valuation

= 41558 shares * $6.337537 = $263375.36

(Haislip, 2010)

Section II: Report on Venture Valuation

Venture is mostly valued using the equity method as valuing the venture using present value investment does not result in actual valuation. Venture valuation is a critical process for the company seeking investment from the investor as valuation help to know the exact gain earned by investor during the investment period. Venture valuation is not an easy process as it is not a game of just making the sum of all the future returns to calculate its value. In valuing the venture investment time factor and waiting cost play an important role in determining the value of venture. The present value of the venture is referred as future cash flows discounted to present value using the required rate of return. In the present case Timberlake is seeking investment of $200000.00 from the potential investor and required rate of return on this investment is 50% per year with expectation to exit from the firm is 5 years. In the venture, entrepreneur seeks to pay for the past investment but investors seek to pay for future return. So, everything needs to be workout on estimates otherwise it cannot be said that there has been proper venture valuation done. In reality the valuation amount of the venture is much lower than what has been expected. It means the actual amount investment within the business by the investor worth very low as compared what has been expected to by business to be worth at future period (Siegel and Shim, 2011).

The part investment by the investor is referred as sunk cost and the thing that really matters in venture is the efforts made by the entrepreneur to raise the business resulted as brand can become profound basis to earn future profits in order to repay the investor at the time of his exist. The future value of investment made by investor and entrepreneur in the business worth more as it contains present value of investment plus return earned on the investment. The expected rate of return is 50%; therefore the business will grow by 50% every year (Hopkins, 2011).

In equity method, following is the procedure to value the venture:

  • The cash investment made today ($200000 investment by investor in Timberlake)
  • The total cash return at predetermined future exist time (It is calculated using the return the similar company provide multiplied by amount invested ie $10 million is value earned by investor at the end of year 5 and similar company provide a return of $1 million every year, it means 10 times the value invested by investor ($200000) has been actually earned by the investor and it needs to be discounted using the rate of return)
  • Discounting the investors return of (10 times * $200000) by 50% (Rate of return) to calculate the present value of total venture
  • After this there is need to calculate the percentage of acquired ownership of the venture by investor through dividing the total investment made by investor with the present value of investor
  • The above percentage reflects the equal value of percent ownership to be sold to investor to get him the target return to the investor (Clowes and Scriven, 2015)

Conclusion on Venture Capital Valuation

It can be concluded that entrepreneur need to know various business valuation techniques such as GST calculation, registration process under taxation, budgeting, factors that impact budgeting, venture valuation and other important criteria that help to run the business properly and get succeeded.

References for Venture Capital Valuation

McCouat, P. 2012. Australian Master GST Guide 2012. Australia: CCH Australia, Limited.

Curtis, V. 2014. Bookkeeping Essentials for Dummies - Australia. Australia: Wiley.

Carver, L. 2011. Venture Capital Valuation: Case Studies and Methodology. Germany: Wiley.

Flanc, J. 2013. Valuation of Internet Start-ups: An Applied Research on How Venture Capitalists Value Internet Start-ups. Germany: Anchor Academic Publishing.

Beaton, N. J. 2010. Valuing Early Stage and Venture-Backed Companies. Germany: Wiley.

Haislip, A. 2010. Essentials of Venture Capital. Germany: Wiley.

Siegel, J. G. and Shim, J. K. 2011. Budgeting Basics and Beyond. Germany: Wiley.

Hopkins, R. 2011. Practical Cash Management, Budgeting, Forecasting and Analysis. United States: Booktango.

Clowes, R. and Scriven, V. 2015. Budgeting: A Practical Approach. Australia: Pearson Australia.

Marsden, S. J. 2010. Australian Master Bookkeepers Guide [2009/10]. Australia: CCH Australia.

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