outline: chapter 1 introduction importance of knowing the numbers measuring success what is...
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Outline: Chapter 1Introduction
Importance of knowing the numbers Measuring successWhat is entrepreneurial financial
management?What Makes Entrepreneurial Finance Similar
to Traditional Finance?What Makes Entrepreneurial Finance
Different from Traditional Finance? Ethics and entrepreneurial finance
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Financial Management:The “Language” of Business
Used to set clear financial goalsUsed to make decisionsUsed to forecastUsed to manage cash flowUsed to seek financingUsed to determine an exit
process for the business
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Measuring “Success”
Income for entrepreneurWealth for entrepreneurGoals derived from personal
values of the entrepreneur
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Differences between Traditional and Entrepreneurial Finance
Lack of historical data to measure risk
Lack of historical data and liquidity complicate the practice of finance in early stage firms
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Perspective of Investors
Prefer less riskDiversified
investors concerned with systematic risk
Non-diversified investors concerned with total risk
Prefer more return
Prefer quick return
Prefer liquidityInvestors face
many different opportunities
No investors are immune from these expectations
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Finance RelationshipsTotal Risk = Diversifiable Risk +
Nondiversifiable RiskRequired Rate of Return = Rf + Beta(Rm - Rf)Rf = Risk-Free Rate of ReturnRm = Return on Market Index like SP500Rm-Rf =Market Risk PremiumBeta is a measure of Nondiversifiable RiskBeta < 1 means asset is less volatile than
market (safe asset)Beta = 1 means asset is just as volatile as
market (average asset)Beta > 1 means asset is more volatile than
market (risky asset) Copyright 2013 Cornwall, Vang & Hartman
Figure 1.1Building a Financial Forecast
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Setting Financial Goals
Revenue Forecasting
Monitoring Performance
ExpenseForecasting
Table 1.1
Example of Stakeholder Analysis
Stakeholder Ethical Principle Application
Family Create balance between work demands and family time.
Establish a more moderate financial growth goal to allow for time with family.
Investors Deal with all investors openly and honestly.
Develop a financial reporting system that provides full and accurate historical information as well as realistic forecasts.
Employees Share financial success with those that helped create it.
Profit sharing, stock option plans, phantom stock, ESOP, etc. while still meeting goals of entrepreneur.
Table 1.1Example of Stakeholder Analysis (continued)
Stakeholder Ethical Principle Application
Customers Fair pricing Establish revenue forecasts that are realistic given this pricing principle.
Suppliers Prompt payment for money owed.
Establish cash forecasts that are based on an assumption of prompt payment of all invoices submitted by suppliers/vendors.
Banker Honest disclosure of information
Assure timely and accurate financial reporting and reasonable financial forecasting.
Community Reliable employment for the community.
Manage cash flow to allow for stable employment even during times of temporary slowdowns
Outline: Chapter 2 Setting Financial Goals
Wealth vs. incomeIntegrating non-financial goalsImportance of self-assessment The self-assessment processThe model and business plan
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Figure 2.1Model for Entrepreneurial Financial Management
Setting Financial Goals
Revenue Forecasting
Monitoring Performance
ExpenseForecasting
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Life Cycle of a Business VentureFigure 2.2
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Pre-Launch Start-up GrowthMaturity
“Quick and Dirty” Valuation
EBITDA+ extra bonuses or compensation to
owners= adjusted EBITDAX earnings multiple= Valuation- Outstanding Loans= Cash proceeds to owner
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Integrating Non-Financial Goals
Ethics and valuesPersonal definition of “success” in
businessFamilyCommunityPersonal interests
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Business Plan Outline
Executive SummaryThe Business ConceptValue Proposition and Industry
AnalysisMarketing PlanOperating PlanFinancial Plan
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Importance of Self-Assessment
Keeps your goals front and center
Financial goals changeNon-financial goals changePart of on-going exit planning
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Outline: Chapter 3 Understanding Financial Statements
Accounting equation Assets = Liabilities + Owners’ Equity
Basic financial statementsLimitations of business financial
statements
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Basic Financial Statements
Income Statement Balance Sheet Statement of Cash Flows
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Income StatementExhibit 3.1
The Company
Month ended April 30, 2012
Sales $35,000100.0%
Cost of Goods Sold 10,000 28.6%
Gross Profit 25,000 71.4%
Operating Expenses
Rent Expense 10,000 28.6%
Utilities Expense 2,000 5.7%
Wages Expense 5,000 14.3%
Depreciation Expense 1,000 2.8%
Total Operating Expenses 18,000 51.4%
Earnings before interest and taxes (EBIT) 7,000 20.0%
Interest Expense 100 .3%
Earnings before taxes $ 6,900 19.7%
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Balance SheetExhibit 3.2The CompanyApril 30, 2012ASSETSCurrent Assets
Cash $ 58,900Accounts Receivable
25,000Inventory 30,000Total Current Assets 113,900
Fixed AssetsEquipment
36,000Less: Accumulated Depreciation
(1,000)Net Fixed Assets 35,000
TOTAL ASSETS $148,900LIABILITIESCurrent Liabilities
Notes Payable $ 15,000Accounts Payable 22,000Wages Payable 5,000Total Current Liabilities
42,000 STOCKHOLDERS’ EQUITY
Common Stock 100,000Retained Earnings 6,900Total Stockholders’ Equity 106,900
TOTAL LIAB. & STOCKHOLDERS’ EQUITY $148,900
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Limitations of Financial Statements Not all assets of a company are
included (e.g. employees or brand names)
Intellectual property not reflected as an asset
Assets are reflected at historical costEstimates must be used for
depreciation, the collectibility of accounts receivable, the salability of inventory, and the amount of warranty liability outstanding
Financial statements affected by the choice of accounting methods (e.g. FIFO, LIFO or average cost)
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Outline: Chapter 4Revenue ForecastingCommon Forecasting Mistakes The Link Between the Marketing
Plan and Revenue ForecastsCreating ScenariosThe Link Between the Revenue
Forecast and the Cash Flow ForecastThe Impact of Business Type on
RevenuesQuantitative Forecasting TechniquesImportance of Revenue Forecasting
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Figure 4.1Model for Entrepreneurial Financial Management
Setting Financial Goals
Revenue Forecasting
Monitoring Performance
ExpenseForecasting
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Common Forecasting Mistakes
The linear forecast mistake The hockey stick forecast
mistake The 20/80 vs. 80/20 mistake
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Marketing Plan and Forecasting
Marketing Plan Revenue ForecastsBackbone
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Marketing Plan and Revenue Forecasting
Identifying industry and market trends
Market research Competitive analysis
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Sample Competitive Grid Figure 4.3
Cleanliness of Facilities
Hours of Operation
Selection Price
Joe’s Inc. Generally clean in public areas, but back rooms usually messy
8:00 – 6:00 Most commonly purchased products available
$5 - $20
Jane’s Inc. Consistently clean and orderly throughout all facilities
8:00 – 8:00 All commonly purchased available and some specialty items in stock
$12 - $30
Sally & Jim’s Shop
Public areas somewhat messy and disorganized and back areas very messy
9:00 – 4:00 Many common items not in stock – usually have to special order
$3 - $15
Dr. C’s Place (New Business)
Plan to be spotless throughout
7:00 – 9:00 All common items plus specialty items not found at competitors’ stores
$5 - $35
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Basic Guidelines for Revenue Forecasts
Market research to assure the quality of the assumptions behind the revenue forecasts
Validate assumptions with more than one source of data
Plan based on more conservative assumptions
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Creating scenarios
Make Three Forecasts1. Best-case2. Worst-case3. Most likely case Track Key Assumptions
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Revenue Forecast and the Cash Flow Forecast
Determine if credit is to be extended to customers
Estimate the percentage of the sales that will be on credit
Determine how long it will take to collect credit sales
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Importance of Revenue Forecasting Bank financingInventory assumptions Staffing decisionsSpace decisionsInvestors
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Outline: Chapter 5Expense Forecasting
Defining costsCost behaviorBreak-even analysisThe impact of business type on
expensesReducing expenses through
bootstrapping
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Figure 5.1Model for Entrepreneurial Financial Management
Setting Financial Goals
Revenue Forecasting
Monitoring Performance
ExpenseForecasting
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Type of Expense Activity BaseSales commissions SalesMaterials cost Units producedHealth insurance Number of employeesWages expense Number of hours workedPayroll tax expense Dollars of wages paid
Table 5.1Variable Costs
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Figure 5.1Variable Cost Behavior
Total Variable Cost Line
Total Units Produced
$
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Figure 5.2Fixed Cost Behavior
Total Fixed Costs
Total Units Produced
$
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Example – Merchandising CompanyExhibit 5.1
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Assumptions used
Sales $100,000
100.0%
COGS 65,000 65.0 65% of sales
Gross profit 35,000 35.0 35% of sales
Sales salaries 15,000 15.0# of salespeople x monthly base
Sales commissions 1,500 1.5 1.5% of sales
Store rent 3,500 3.5 monthly rent
Total selling expenses 20,000 20.0
Office rent 2,500 2.5 monthly rent
Office salaries 12,000 12.0 # people x monthly pay
Depreciation 500 .5 cost of equip./mos. of life
Total gen. & admin. 15,000 15.0
EBIT 500 .5
Breakeven Analysis
Breakeven Quantity
=
Fixed Costs____________________________________
Price per unit-
Variable cost per unit
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Outline: Chapter 6Integrated Financial Model
The entrepreneur’s aspirations reconsidered
Contribution format income statement
Earnings before interest and taxesInventory of assumptionsSocial ventures Determining the funds neededTime out of cashAssessment of risk/sensitivityIntegrating into business
plan/funding document
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Figure 6.1Building a Financial Forecast
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Setting Financial Goals
Revenue Forecasting
Monitoring Performance
ExpenseForecasting