Outline: Chapter 1 Introduction Importance of knowing the numbers Measuring success What is entrepreneurial financial management? What Makes Entrepreneurial.

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

Copyright 2013 Cornwall, Vang & Hartman

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


Measuring “Success”

Income for entrepreneurWealth for entrepreneurGoals derived from personal

values of the entrepreneur


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


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


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


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


Figure 2.1Model for Entrepreneurial Financial Management


Revenue Forecasting


ExpenseForecasting


Life Cycle of a Business VentureFigure 2.2


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


Integrating Non-Financial Goals

Ethics and valuesPersonal definition of “success” in

businessFamilyCommunityPersonal interests


Business Plan Outline

Executive SummaryThe Business ConceptValue Proposition and Industry

AnalysisMarketing PlanOperating PlanFinancial Plan


Importance of Self-Assessment

Keeps your goals front and center

Financial goals changeNon-financial goals changePart of on-going exit planning


Outline: Chapter 3 Understanding Financial Statements

Accounting equation Assets = Liabilities + Owners’ Equity

Basic financial statementsLimitations of business financial

statements


Basic Financial Statements

Income Statement Balance Sheet Statement of Cash Flows


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%


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


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)


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




Revenue Forecasting


ExpenseForecasting


Common Forecasting Mistakes

The linear forecast mistake The hockey stick forecast

mistake The 20/80 vs. 80/20 mistake


Marketing Plan and Forecasting

Marketing Plan Revenue ForecastsBackbone


Marketing Plan and Revenue Forecasting

Identifying industry and market trends

Market research Competitive analysis


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


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


Creating scenarios

Make Three Forecasts1. Best-case2. Worst-case3. Most likely case Track Key Assumptions


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


Importance of Revenue Forecasting Bank financingInventory assumptions Staffing decisionsSpace decisionsInvestors


Outline: Chapter 5Expense Forecasting

Defining costsCost behaviorBreak-even analysisThe impact of business type on

expensesReducing expenses through

bootstrapping




Revenue Forecasting


ExpenseForecasting


Cost behavior

Variable Costs Fixed Costs Mixed Costs


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


Figure 5.1Variable Cost Behavior

Total Variable Cost Line

Total Units Produced

$


Fixed Costs

Committed fixed costs Discretionary fixed costs


Figure 5.2Fixed Cost Behavior

Total Fixed Costs

Total Units Produced

$


Example – Merchandising CompanyExhibit 5.1


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


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


Figure 6.1Building a Financial Forecast



Revenue Forecasting


ExpenseForecasting

Time Out of Cash

Time Out of Cash = Cash

Operating Cash Outflow per Month


Outline: Chapter 1 Introduction Importance of knowing the numbers Measuring success What is entrepreneurial financial management? What Makes Entrepreneurial.

Documents

vang hartman slide

financial success

financial forecast copyright

risk diversified investors

entrepreneur copyright

traditional finance

clear financial goals

market risk premium