8. Financial: Fundamentals Created by: Dr. Janet Ratliff & Mr. Hunter Branham

8. Financial: Fundamentals 9. Financial: Funding Product/Service Describe Product or Service. What is it solving? Why will customers buy it? How is it different from products similar? How will you manufacture this product? 2. Customers Creating Value? Customer/Target Market? Where are they located? How large is your market? Marketing Competitors’ strengths and weaknesses? Competitive advantage? Promote or advertise? Brand/Logo?   5. Team Members Team members? Member responsibilities? 7. Summary Short description Target market? Value Proposition? Provide a vison/mission statement. Start selling? 3. Channels/ Distribution Distribution? Quality assurance? Customer service? Operations Legal Structure? Location? Capital resources? Rented? Used? Purchased? 8. Financial: Fundamentals Cost Structure Cost to start up? Fixed/variable costs? Breakeven point? Revenue Structure Sales projections? Revenues? 9. Financial: Funding External funding? Borrowing? Equity financing?

Business Model Canvas Cost Structure Revenue Structure 9. Financial: Fundamentals Cost Structure What will it cost to start up your business? What costs will be fixed/variable? What is your breakeven point? What costs are associated with forms of payment. Revenue Structure What are your sales projections? (For one year) What are your revenues? (For one year) What are customers willing to pay? How do they pay?

Cost An amount that has to be paid or given up in order to get something. Examples of costs (expenses) to a business are: Cost of goods sold Rent Utilities Salaries Advertising Supplies Insurance, licenses, fees, and loans Payment methods (per transaction)

Start-Up Costs Costs associated with starting a business Start-up costs may include: Building (buying, leasing, renting) Inventory Legal costs (licenses, fees, taxes) Logo Employee costs Office equipment, furniture, office supplies

Fixed and Variable Costs Fixed Costs Fixed costs are costs that must be paid regardless of how much of a good or service is produced. Examples of fixed costs are rent, insurance fees, interest on loans, salaries, advertising, and software. Variable Costs Variable costs are costs that go up and down depending on the quantity of the good or service produced. Examples of variable costs are direct materials to the product.

Break-Even Analysis A useful tool for determining how increases in sales will affect your profits. The break-even point is the volume of sales that must be made to cover all of the expenses of a business. Below the break-even point, your expenses will exceed your revenues and you will be losing money. Once you reach the break-even point, your sales will equal all your expenses.

This means that at this level of sales, you will neither make nor lose money. Once you exceed the breakeven point, you will begin to earn profits. https://youtu.be/tXI3Qdu_Qt8

Revenue The dollar value of the goods or services a business sells to customers. An example of revenue is Sales Number of units sold multiplied by selling price

Monthly Cash Flow Statement A cash flow statement is an accounting report that describes the way cash flows into and out of a business over a period of time. Cash flow deals with actual cash coming into and going out of a business. It shows how much money is available to pay bills and continue operations. To create a pro forma (projected) cash flow statement, you will need to estimate your monthly cash receipts (revenues) and monthly cash disbursements (costs).

How to Estimate Monthly Cash Flow It can be challenging when determining future estimated monthly cash receipts. The best way to determine future estimated monthly cash receipts is to take first month sales and project what will be sold each month thereafter. As a business owner, it is important to monitor seasonal affects because some products might not sell during certain seasons. When this occurs, some months might produce smaller revenue.

Example of Monthly Cash Receipts Walters Electric sells bulbs and light fixtures. Their first month of sales include: 20 CFL bulbs at $15 per unit 10 indoor light fixtures at $155 per unit 6 outdoor lights at $175 per unit When you total each product for the first month, Walters Electric has a total of $300, $1550, and $1050, for a grand total of $2900.

Continued To predict how much Walters Electric would sell in the second month, we would look at time of year and season. For example, Walters Electric’s first month was April. To project sales in May, we would project more units sold in CFL bulbs, indoor light fixtures, and outdoor lights since May is a summer month.

Continued CFL bulbs will always be bought since homes need light bulbs every month; indoor light fixtures will always be bought because home owners are always buying new light fixtures; outdoor lights will be bought more often because people will be outside for family or friend gatherings. This thought process and calculation would be done monthly, where considerations of time and season must be taken into account for projections. After a year, historical data can assist significantly with this process.

Determine a Price for a Product Demand-based pricing Determined by how much customers are willing to pay for a product or service Potential customers are surveyed to find out what they would be willing to pay for the product.

Determine a Price for a Product Cost-based pricing Determined by using the wholesale cost of an item as the basis for the price charged Markup = Wholesale cost x Percentage markup Markdown = Retail price x Percentage markdown

Determine a Price for a Product Competition-based pricing Determined by considering what competitors charge for the same product or service Once you find out what your competition charges for an item, you must decide whether to charge the same price, slightly more, or slightly less. Consideration needs to be given to special deals competitors have with specific vendors among other cost saving initiatives.

Pricing a Service or an Idea Time-based pricing Bundling Pricing an Idea Licensing Up-front payment Royalties Annual minimum

9. Financial: Funding

8. Financial: Fundamentals 9. Financial: Funding Product/Service Describe Product or Service. What is it solving? Why will customers buy it? How is it different from products similar? How will you manufacture this product? 2. Customers Creating Value? Customer/Target Market? Where are they located? How large is your market? Marketing Competitors’ strengths and weaknesses? Competitive advantage? Promote or advertise? Brand/Logo?   5. Team Members Team members? Member responsibilities? 7. Summary Short description Target market? Value Proposition? Provide a vison/mission statement. Start selling? 3. Channels/ Distribution Distribution? Quality assurance? Customer service? Operations Legal Structure? Location? Capital resources? Rented? Used? Purchased? 8. Financial: Fundamentals Cost Structure Cost to start up? Fixed/variable costs? Breakeven point? Revenue Structure Sales projections? Revenues? 9. Financial: Funding External funding? Borrowing? Equity financing?

Business Model Canvas 9. Financial: Funding Will you need external funding? If so, will you consider borrowing? For how long do you plan to borrow the money? How much will the monthly payment be? How much interest will you pay back over time? Will you use equity financing? If so, do you plan to give them a percentage of ownership in the company. If so, how much ownership and what will their role be?

Funding Your Business There are two types of financing available for your business: Equity Financing Debt Financing When obtaining financing, you must consider your company’s debt-to-equity ratio, or the relation between the dollars you have borrowed (debt) and the dollars you have invested in your business (equity). This ratio measures how much money a company can safely borrow over time. Total Liabilities / Total Equity

Equity Capital Equity Capital is money invested in a business in return for a share in the profits of the business. Entrepreneurs may seek additional equity when they do not have the funds to fully finance their business. Sources of equity capital include: Friends and relatives Venture Capitalists (individual or a company that makes a living by investing in start-up companies) Crowdfunding (use of internet to fund a business venture or project) (Example - GoFundMe)

Debt Capital Debt Capital is money loaned to a business with the understanding that the money will repaid within a certain time period, usually with interest You can borrow money from Friends and relatives Banks

Friends and Relatives Family may be willing to loan you money. Before borrowing the money, you should consider how the loan may affect your relationship. If you take a loan from friends and relatives, you should prepare a formal agreement that details the terms of the loan. Keep in mind, friends and relatives may have the money today to lend to you, but may be counting on the money being paid back as soon as possible.

Commercial Bank Loans Entrepreneurs usually have an established relationship with a bank and begin looking for funds there. There are different types of loans that banks offer their customers: Secured loans Unsecured loans

Secured Loans Loans that are backed by collateral. Collateral is property that the borrower forfeits if he or she defaults on the loan. Banks demand collateral so that they have same recourse if the borrower fails to repay the loan. Types of secured loans include: Line of credit. Long-term loan. (Loan payable is longer than a year). Accounts receivable financing Inventory financing.

Unsecured Loans Loans that are not guaranteed with collateral. These loans are made only to the bank’s most creditworthy customers. These loans are usually made for specific purposes. These are usually short term loans. (Loans less than a year).

Business Loan Rejections Main reasons that banks turn down loan applicants include: The business is a start-up Lack of a solid business plan Lack of adequate experience Lack of confidence in the borrower Inadequate investment in the business

Other Sources of Loans Small Business Administration (SBA) Small Business Investment Companies (SBICs) Department of Housing Urban Development (HUD) Economic Development Administration (EDA) Government Minority specific loans