Professional Documents
Culture Documents
As part of your plan you will need to provide a set of financial projections which translate what you have said
about your business into numbers.
how much capital you need if you are seeking external funding
the security you can offer lenders
how you plan to repay any borrowings
sources of revenue and income
You may also want to include your personal finances as part of the plan at this stage.
A financial forecast is an estimate of future financial outcomes for a company or country (for
futures and currency markets). Using historical internal accounting and sales data, in addition to
external market and economic indicators, a financial forecast is an economist's best guess of what
will happen to a company in financial terms over a given time periodwhich is usually one year.
Credit risk is also referred to as default risk. This type of risk is associated with people who borrowed
money and who are unable to pay for the money they borrowed. As such, these people go into
default. Investors affected by credit risk suffer from decreased income and lost principal and interest,
or they deal with a rise in costs for collection.
Liquidity risk involves securities and assets that cannot be purchased or sold fast enough to cut
losses in a volatile market. Asset-backed risk is the risk that asset-backed securities may become
volatile if the underlying securities also change in value. The risks under asset-backed risk include
prepayment risk and interest rate risk.
Changes in prices because of market differences, political changes, natural calamities, diplomatic
changes or economic conflicts may cause volatile foreign investment conditions that may expose
businesses and individuals to foreign investment risk. Equity risk covers the risk involved in the
volatile price changes of shares of stock.
Investors holding foreign currencies are exposed to currency risk because different factors, such as
interest rate changes and monetary policy changes, can alter the value of the asset that investors
are holding.
The term capital structure refers to the percentage of capital (money) at work in a
business by type. Broadly speaking, there are two forms of capital: equity capital and
debt capital. Each type of capital has its own benefits and drawbacks and a substantial
part of wise corporate stewardship and management is attempting to find the perfect
capital structure in terms of risk/reward payoff for shareholders. This is true for Fortune
500 companies and for small business owners trying to determine how much of their
start-up money should come from a bank loan without endangering the business.
Capital structure describes the sources of funds a company uses for acquiring income-
producing assets. The focus on these funds contrasts with the financial structure
concept (previous section) which includes all of the company's debt and equities.
Capital and financial structures set the firm's level of leverage. Leverage, in turn,
determines how creditors and owners share business risks and rewards.
Business people use the term structure in quite a few different ways.
The terms "governance," "business," and "legal," are all associated with their own
"structures" for instance. These refer to aspects of company set up and operation.