What Is It and What Does It Mean? Business Finance What Is It and What Does It Mean? Ask the students Objectives: Understand the broad concept of business finance How businesses communicate Financial statement concepts Where the money comes from Basic cost concepts ROI © Career Partners, Inc. 2017-18

Is It About Money?

Is It About Numbers?

Is It About Communication?

Business Finance Activities Allocation of resources Management Accounting Investing Debt management Glossary - www.esquaredculpeper.com Study the Glossary

Equity – Funds you saved Where’s The Money? Equity – Funds you saved Debt – Funds you borrowed Earnings – Profits that turn into equity Crowd funding Venture Capitalists Business Incubators Family and friends

Costs and expenses Sales volume Purchase quantities Numbers? What Numbers?? Sales volume Purchase quantities Costs and expenses Number of transaction types Online hits Inventory counts ACCOUNTING SYSTEM! Checkbook QuickBooks Excel Spreadsheet

How Businesses Communicate! Financial Statements Byproduct of an accounting system Types of Financial Statements Balance sheet Profit and loss statement Cash flow statement

Income Statement Sales revenue $1,000 Less cost of sales (800) Equals gross profit $ 200 Less operating expenses (75) Equals net profit $ 125

Income Statement Ratio Gross Profit Percentage = 20 (Gross Profit/Sales Revenue) How much gross profit would we make if sales revenue was $50,000?

Direct/Overhead Costs Fixed/Variable Costs Direct/Overhead Costs

Fixed/Variable Costs Fixed costs are those that remain the same in total regardless of the amount of production or activity Variable costs are those that vary (increase or decrease) depending upon production volume or activity Fixed – rent, advertising, insurance Variable

Direct Costs Direct costs are those associated with making a product or providing a service that tend to be variable in nature. Examples: Cost of materials Production labor Equipment costs

Overhead Costs Overhead costs are those associated with operating a business no matter the amount of product sales or services provided and tend to be fixed in nature. Examples: Management salaries Utilities Insurance Legal and accounting

Characteristics of Venture Capital What is Venture Capital? Characteristics of Venture Capital Private equity capital Early stage High growth potential Potentially high “Return On Investment” -- ROI -- So what does it all mean for E-Squared? When you have a business and want to expand or you want to start a new business you will need money – i.e. capital. You can try banks, you can try other places or you can try to get a venture capitalist to partner with you on this adventure. For purposes of E Squared, venture capital is your only resource. Venture Capitalists are typically business people who are willing to invest (i.e. give you money) for a portion of your company. They can help you with their connections and business experience. But in order for you to attract an investor of any kind, you have to prove the ability of your company to make a profit. They are not going to invest unless they are going to make money on their money. VC investments Cash in exchange for company shares

“Annual Profit / Investment” Return on Investment Return on Investment (ROI) “Annual Profit / Investment” This is an Annual Concept The annual profit made on an investment is called Return on Investment. For investors to be convinced of investing in your company they will want to know when the company can be expected to make a profit and how much. This stream of profit is used to determine their return on investment on paper. For an investor to realize the actual return on the investment, he or she must receive dividends or sell some or all of their shares of the company’s stock.

Suppose you invest $10,000 in the stock of a startup company. ROI Suppose you invest $10,000 in the stock of a startup company. What is your ROI if you receive dividends of $1,500 per year? What is your approximate ROI if you sell your stock for $16,000 after 3 years? This is to make sure that the class understands that ROI is ANNUAL return (not total return). Ask the class for answers to each of the 2 questions. Have them explain the answer before showing the correct answers. The 2nd example is simplified to get the concept across. The true ROI after the 3-year period is something less than 20%.

Questions?