business models and financial analysis january 18, 2012 burges hall, rm 411
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BUSINESS MODELS AND FINANCIAL ANALYSIS
JANUARY 18, 2012BURGES HALL, RM 411
2
BUSINESS PLAN DEVELOPMENT
The Business Plan is a key document that articulates what key features will drive your business opportunity. These can include:
• Mission Statement• Key members of the Team• Technology and intellectual positions• Opportunities and market summary• Business model: entry and growth strategy• Competition• Five-year goals and objectives• Five-year financial plan• Risks and rewards
BUSINESS MODELS
Wikipedia: A business model describes the rationale of how an organization creates, delivers and captures economic, social or other forms of value. The process of business model design is part of the business strategy.
BUSINESS MODELS
There are 9 basic business model building blocks (Osterwalder, Alexander &Pigneur, Yves . Business Model Generation: John Wiley & Sons, Inc. 2010)
What are you going to make and sell or service??
1) Value Propositions2) Key Activities3) Key Resources4) Key Partners5) Customer segments6) Channels—sales and disribution7) Customer Relationships8) Cost Structure9) Revenue Streams
BUSINESS MODELS, continued
1) Value Propositions
a) What will you do to solve customer problems
and satisfy customer (unmet) needs?
b) What will you do to differentiate your product
and/or service?
Impact of Differentiated Products
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+12% Market share
+34% Market share
BUSINESS MODELS, continued
2) Key Activities
Examples Microsoft—software development
Dell—supply chain management
McKinsey—problem solving
Newco—outsourcing decisions
HOW WILL YOU CREATE A COMPETITIVE ADVANTAGE?
BUSINESS MODELS, continued
3) Key Resources
a) Physical—manufacturing facilities, buildings,
distribution networks
b) Intellectual—brands, patents and copyrights,
customer databases
c) Human—people are particularly prominent in
certain business models, such as pharma
d) Financial—financial resources or guarantees
such as lines of credit
BUSINESS MODELS, continued
4) Key Partners
a) Strategic alliances between non-competitors
b) Strategic partnerships between competitors
c) Joint Ventures
d) Buyer-supplier relationships
e) Outsourcing manufacturing
BUSINESS MODELS, continued
5) Customer Segments—defines the different groups of people or organizations an enterprise aims to reach and serve
a) Mass Market
b) Niche Market
c) Segmented: big/small; innovative/commodity
d) Diversified
BUSINESS MODELS, continued
6) Channels—how a company communicates with and reaches its customer segments
a) Awareness of our products and services
b) Evaluation of the Value Propositions
c) Purchase (of specific products?) d) Delivery of Value Proposition e) After Sales Support
LIST DIFFERENT SALES CHANNELTYPES
LIST DIFFERENT CHANNELS OF DISTRIBUTION
BUSINESS MODELS, continued
7) Customer Relationships—what type of relationship does each of our customer segments require (desire)?
Some examples a) Personal assistance b) Dedicated personal assistance c) Self-service d) Automated services ( set up to offer
book or movie recommendations)
BUSINESS MODELS, continued
8) Cost Structure—describes all costs incurred to operate a business model
a) Cost-driven b) Value-driven c) Fixed costs d) Variable costs e) Economies of scale
BUSINESS MODELS, continued
9) Revenue Streams
Examples include a) Asset sale b) Usage fee c) Subscription fee d) Lending/renting/leasing e) Licensing
There are a broad range of Pricing Mechanisms including list prices, volume dependent, auctions, product feature dependent, yield management
BUSINESS MODELS
Some Examples:
1) Bait and hook—razor blade strategy; cell phones and air time; computer printers and ink cartridges
2) Southwest airlines—low frills; fast on and off airplane
3) BASF: Verbund—consume everything that goes into plant—”no waste”
SWOT ANALYSIS
Once a business model is developed, it can be tested using a SWOT
analysis on each of the building blocks.
a) Strengths—internal b) Weaknesses--harmful c) Opportunities—external d) Threats—harmful
This analysis can reveal interesting paths to innovation and continuous improvement.
SWOT ANALYSIS, continued
Value Proposition (VP)Assessment Assessing Strengths/Weaknesses1) Our VP are well aligned with customer
needs: scale 5-12) Our VP and customer needs are
misaligned; scale -1 to -5Assessing Opportunities1) What other jobs could we do on behalf of customers?: scale of 1-5
Assessing Threats 1) Are substitute products and services available? Scale of 1-52) Are we in danger of losing any partners? Scale of 1-5
FINANCIAL ANALYSIS DEFINITION
Profit and Loss Statement: A statement showing the revenues, expenses and income of a company. Also known as income statement.
Balance Sheet: A quantitative summary of a company's financial condition including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns and the second part shows all the financing methods.
Cash Flow Statement: A summary of where a company’s money came from and where it went.
Net Present Value (NPV): The difference between the present value of cash inflows and the present value of cash outflows.
PROFIT & LOSS STATEMENT
NEWCO
(000)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenues
Sales $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
Grants $100
Sub-total $40 $600 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
COGS $16 $206 $401 $609 $1,234 $1,800 $2,432 $3,082 $3,594 $4,067
Gross Margin $24 $394 $599 $891 $1,766 $2,700 $3,568 $4,418 $5,406 $6,433
GM,% 60.0% 58.8% 59.9% 59.4% 58.9% 60.0% 59.5% 58.9% 60.1% 61.3%
SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890
% SAR 440% 70% 43% 38% 20% 18% 18% 18% 18% 18%
Operating Income -$152 $42 $169 $323 $1,166 $1,890 $2,488 $3,068 $3,786 $4,543
Other Income
Taxes $0 $0 $40 $113 $408 $662 $871 $1,074 $1,325 $1,590
Net Income -$152 $42 $129 $210 $758 $1,229 $1,617 $1,994 $2,461 $2,953
PROFIT & LOSS STATEMENT
NEWCO
(000)
2010 2011 2012 2013 2014 COMMENTS
Revenues
Sales $40 $500 $1,000 $1,500 $3,000 Net sales of products and services
Grants $100 Federal/state grants
Sub-total $40 $600 $1,000 $1,500 $3,000
COGS $16 $206 $401 $609 $1,234 Cost Of Goods Sold: includes raw materials and manfg costs
Gross Margin $24 $394 $599 $891 $1,766 Operating profit; also called Gross Profit
GM,% 60.0% 58.8% 59.9% 59.4% 58.9% Ratio of gross margin and sales revenues
SARs $176 $352 $430 $568 $600 Sales, Administration, Research expenses
% SAR 440% 70% 43% 38% 20% Ratio of SAR and sales revenues
Operating Income -$152 $42 $169 $323 $1,166
Other Income Can include revenue from interest
Taxes $0 $15 $59 $113 $408
Net Income -$152 $27 $110 $210 $758
BALANCE SHEET: QUESTIONS
1. How much cash do you have?
2. How much do customers owe you?
3. How much equity has been purchased?
Balance Sheet--#1 (3rd year)
ASSETS LIABILITIES
Current Assets Current Liabilities Cash $130,000 Accounts payable $10,000 Accounts receivable $15,000 Short-term notes
(less doubtful accounts) Current portion of long-term notes Inventory $25,000 Interest payable Temporary investment Taxes payable $5,000 Prepaid expenses Accrued payroll
Total Current Assets $170,000 Total Current Liabilities $15,000
Fixed Assets Long-term Liabilities Start-up Costs $100,000 Mortgage Patent Costs $20,000 Other long-term liabilities $100,000 Buildings Total Long-Term Liabilities $100,000
(less accumulated depreciation) Equipment and computers $65,000 Total Liabilities $115,000
(less accumulated depreciation) Furniture and fixtures $10,000 SHAREHOLDERS' EQUITY
(less accumulated depreciation) Capital stock $500,000 Total Net Fixed Assets $195,000 Retained earnings -$250,000
Total Shareholders' Equity $250,000
TOTAL ASSETS $365,000 TOTAL LIABILITIES & EQUITY $365,000
Balance Sheet Check OK
Balance Sheet--#1 (3rd Year)
ASSETS LIABILITIES
Current Assets Current Liabilities Cash $130,000 Accounts payable $10,000 Accounts receivable $15,000 Short-term notes
(less doubtful accounts) Current portion of long-term notes Inventory $25,000 Interest payable Temporary investment Taxes payable $5,000 Prepaid expenses Accrued payroll
Total Current Assets $170,000 Total Current Liabilities $15,000
Fixed Assets Long-term Liabilities Start-up Costs $100,000 Mortgage Patent Costs $20,000 Other long-term liabilities $100,000 Buildings Total Long-Term Liabilities $100,000
(less accumulated depreciation) Equipment and Computers $65,000 Total Liabilities $115,000
(less accumulated depreciation) Furniture and fixtures $10,000 SHAREHOLDERS' EQUITY
(less accumulated depreciation) Capital stock $500,000 Total Net Fixed Assets $195,000 Retained earnings -$250,000
Total Shareholders' Equity $250,000
TOTAL ASSETS $365,000 TOTAL LIABILITIES & EQUITY $365,000
Balance Sheet Check OK
RATIOSCurrent Ratio 11.33 Current Ratio = Current Assets/Current LiabilitiesQuick Ratio 9.67 Quick Ratio = (Current Assets-Inventories)/ Current LiabilitiesCash Ratio 8.67 Cash Ratio = Cash/Current LiabilitiesWorking Capital $155,000 Working Capital = Current Assets - Current Liabilities
CASH FLOW STATEMENT: QUESTIONS
1. In what year are you cash-flow positive?
2. How much cash do you generate in 2016?
3. How much more working capital do you need in 2013?
CASH FLOW STATEMENT
NEWCO
(000)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenues $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
Grants
Sub-total $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
COGS $13 $165 $321 $487 $987 $1,440 $1,946 $2,466 $2,875 $3,254
Gross Margin $27 $335 $679 $1,013 $2,013 $3,060 $4,054 $5,034 $6,125 $7,246
SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890
Operating Income -$149 -$17 $249 $445 $1,413 $2,250 $2,974 $3,684 $4,505 $5,356
Other Income
Taxes $0 $0 $87 $156 $495 $788 $1,041 $1,289 $1,577 $1,875
Net Income -$149 -$17 $162 $289 $918 $1,463 $1,933 $2,395 $2,928 $3,481
Working Cap change -$1 -$13 -$14 -$27 -$56 -$64 -$98 -$108 -$132 -$139
Cash from Operations -$150 -$30 $148 $262 $862 $1,399 $1,835 $2,287 $2,796 $3,342
Capital -$35
Investment $200
Cash Flow $15 -$30 $148 $262 $862 $1,399 $1,835 $2,287 $2,796 $3,342
Year-End Cash $15 -$15 $133 $395 $1,257 $2,656 $4,491 $6,778 $9,574 $12,916
FINANCIAL ANALYSIS
Net Present Value (NPV) To calculate in Excel; “=NPV(Discount rate,%, Year 1,$:Year X,
$)” NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation/risk into account. The larger the NPV, the better.
Discount rate represents the business risk. The higher the rate, the greater the risk.
MODIFIED INCOME STATEMENTNEWCO Base Case
(000)2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenues $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
Sub-total $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
Production, units 1.0 12.7 25.6 39.0 78.9 120.0 162.2 205.5 250.0 295.8
COGS $13 $165 $321 $487 $987 $1,440 $1,946 $2,466 $2,875 $3,254
Gross Margin $27 $335 $679 $1,013 $2,013 $3,060 $4,054 $5,034 $6,125 $7,246GM,% 67.5% 67.1% 67.9% 67.5% 67.1% 68.0% 67.6% 67.1% 68.1% 69.0%
SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890
% SAR 440% 70% 43% 38% 20% 18% 18% 18% 18% 18%
Operating Income -$149 -$17 $249 $445 $1,413 $2,250 $2,974 $3,684 $4,505 $5,356
Taxes @ 35% $0 $0 $87 $156 $495 $788 $1,041 $1,289 $1,577 $1,875Net Income -$149 -$17 $162 $289 $919 $1,463 $1,933 $2,395 $2,928 $3,482
Working Cap change $1 $13 $14 $27 $56 $64 $98 $108 $132 $139
Cash from Operations -$150 -$29 $148 $263 $863 $1,398 $1,835 $2,287 $2,796 $3,343
Capital $35 Cash Flow -$185 -$29 $148 $263 $863 $1,398 $1,835 $2,287 $2,796 $3,343
Cumulative Cash -$185 -$214 -$66 $197 $1,059 $2,458 $4,293 $6,580 $9,376 $12,719
Discount Rate NPV 35% $1,195 '10-'19
MODIFIED INCOME STATEMENTNEWCO Higher Sales
(000)2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenues $40 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500 $12,000
Sub-total $40 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500 $12,000
Production, units 1.0 25.3 38.5 77.9 118.4 160.0 202.7 246.6 291.7 338.0
COGS $13 $329 $481 $974 $1,480 $1,920 $2,432 $2,959 $3,354 $3,718
Gross Margin $27 $671 $1,019 $2,026 $3,020 $4,080 $5,068 $6,041 $7,146 $8,282GM,% 67.5% 67.1% 67.9% 67.5% 67.1% 68.0% 67.6% 67.1% 68.1% 69.0%
SARs $176 $452 $530 $568 $900 $1,080 $1,350 $1,620 $1,890 $2,160
% SAR 440% 45% 35% 19% 20% 18% 18% 18% 18% 18%
Operating Income -$149 $219 $489 $1,458 $2,120 $3,000 $3,718 $4,421 $5,256 $6,122
Taxes @ 35% $0 $0 $171 $510 $742 $1,050 $1,301 $1,547 $1,840 $2,143Net Income -$149 $219 $318 $948 $1,378 $1,950 $2,416 $2,874 $3,416 $3,979
Working Cap change $1 $26 $14 $67 $56 $104 $99 $148 $132 $178
Cash from Operations -$150 $193 $304 $880 $1,322 $1,846 $2,318 $2,726 $3,285 $3,801
Capital $35
Cash Flow -$185 $193 $304 $880 $1,322 $1,846 $2,318 $2,726 $3,285 $3,801Cumulative Cash -$185 $7 $312 $1,192 $2,514 $4,360 $6,678 $9,403 $12,688 $16,489
Discount Rate NPV
35% $1,897 '10-'19
MODIFIED INCOME STATEMENTNEWCO Higher Unit Costs
(000)2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenues $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
Sub-total $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500
Production, units 1.0 12.7 25.6 39.0 78.9 120.0 162.2 205.5 250.0 295.8
COGS $16 $206 $401 $609 $1,234 $1,800 $2,432 $3,082 $3,594 $4,067
Gross Margin $24 $294 $599 $891 $1,766 $2,700 $3,568 $4,418 $5,406 $6,433GM,% 59.4% 58.9% 59.9% 59.4% 58.9% 60.0% 59.5% 58.9% 60.1% 61.3%
SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890
% SAR 440% 70% 43% 38% 20% 18% 18% 18% 18% 18%
Operating Income -$152 -$58 $169 $323 $1,166 $1,890 $2,488 $3,068 $3,786 $4,543
Taxes @ 35% $0 $0 $59 $113 $408 $662 $871 $1,074 $1,325 $1,590Net Income -$152 -$58 $110 $210 $758 $1,229 $1,617 $1,994 $2,461 $2,953
Working Cap change $1 $16 $18 $33 $70 $80 $122 $134 $165 $174
Cash from Operations -$154 -$73 $92 $177 $689 $1,148 $1,495 $1,860 $2,296 $2,779
Capital $35 Cash Flow -$189 -$73 $92 $177 $689 $1,148 $1,495 $1,860 $2,296 $2,779
Cumulative Cash -$189 -$262 -$170 $7 $696 $1,844 $3,339 $5,198 $7,494 $10,273
Discount Rate NPV 35% $898 '10-'19
MODIFIED INCOME STATEMENT/PROCESS IMPROVEMENT
1. Which is the better Case and why?
MODIFIED INCOME STATEMENTProcess Improvement Project
Base Case (000) 2X Capital Investment/30% Reduction in COGS2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
Revenues $40 $500 $1,000 $1,500 $3,000 $40 $500 $1,000 $1,500 $3,000
Sub-total $40 $500 $1,000 $1,500 $3,000 $40 $500 $1,000 $1,500 $3,000
Production, units 1.0 12.5 25.0 37.5 75.0 1.0 12.5 25.0 37.5 75.0
COGS $13 $163 $325 $488 $975 $10 $125 $250 $375 $750
Gross Margin $27 $338 $675 $1,013 $2,025 $30 $375 $750 $1,125 $2,250GM,% 67.5% 67.5% 67.5% 67.5% 67.5% 75.0% 75.0% 75.0% 75.0% 75.0%
SARs $176 $352 $430 $568 $600 $176 $352 $430 $568 $600
% SAR 440% 70% 43% 38% 20% 440% 70% 43% 38% 20%
Operating Income -$149 -$15 $245 $445 $1,425 -$146 $23 $320 $557 $1,650
Taxes @ 35% $0 $0 $86 $156 $499 $0 $0 $112 $195 $578Net Income -$149 -$15 $159 $289 $926 -$146 $23 $208 $362 $1,073
Working Cap change $1 $12 $15 $26 $55 $1 $10 $11 $20 $43
Cash from Operations -$150 -$27 $145 $263 $871 -$147 $13 $197 $342 $1,030
Capital $35 $70 Cash Flow -$185 -$27 $145 $263 $871 -$217 $13 $197 $342 $1,030
Cumulative Cash -$185 -$212 -$67 $196 $1,067 -$217 -$203 -$7 $335 $1,365
Discount Rate NPV Valuation Discount Rate NPV 35% $180 '10-'14 35% $259 '10-'14
FINANCIAL ANALYSISSUMMARY
Analyzing the financial situation of a company is
a complicated process. One needs to use more than one tool to develop an accurate picture of the true financial situation of a business. The use of a P&L Statement, a Balance Sheet and a Cash-Flow Statement are essential.
Net Present Value (NPV) is a powerful financial
tool and should be used to help analyze different business cases.