BA 346 Working as an Entrepreneur Week 8

Guest Speaker  Kenneth Pogson, AKA “Cat Daddy”

Money for Entrepreneurs Planning funding sources Financial planning for entrepreneurs Cost structure Alternate funding strategies

Money for Entrepeneurs  The majority of startups fail in their first 5 years Mainly for financial issues?  Finance is the most misunderstood topic in entrepreneurship  How the entrepreneurial financing model works Multiple rounds of financing Different sources Plan ahead so future investors are not scared away

Money  Money, cash, and cash equivalents  Understand the basics of managing cash flow  Strategies for preventing and coping with cash flow problems  Developing a cash budget

 U.S. Dallas Federal Reserve “Money is a medium of exchange accepted by the community, meaning it’s what people buy things with and sell things for. Money provides a standard for measuring value, so that the worth of different goods and services can be compared. And lastly, money is a store of value that can be saved for later purchases.” 14-7 What is money

 Two purposes of money  Two purposes of money: To make exchanges To keep track of wealth not  Remember, a profit on your accounting spreadsheet or in your account book is not money in your hand medium of exchangestore of value measure of wealth  Money is a medium of exchange, store of value, and measure of wealth 14-8 Purposes of Money

 Cash  Cash: cash is money immediately available to be spent Cash equivalents Cash equivalents: assets that may be quickly converted to cash Currency Currency: bills and coins printed by governments to represent money Demand deposits Demand deposits: money held in checking and savings accounts Commercial paper Commercial paper: notes issued by credit-worthy corporations 14-9 Cash and Cash Equivalents

 Money  Money: cash, cash equivalents, profits, and banking  Differences are important Represents the lifeblood of the business, and knowing how to use it can make the difference between boom and bankruptcy Importance of Money

Planning funding sources  Where does it come from? Personal savings Friends & family Borrowing  Personal bank loan  Credit cards – good or bad idea?  SBA loans Angel Investors and Venture Capitalists  What’s the difference?  What are they looking for?  How much will you need?  How explicit are the arrangements?

Financial planning for entrepreneurs  Project realistic figures 3-5 years out  Ask experts  List assumptions explicitly  Frequent revisions Assumptions Projections  How much of this is guesswork?

Cost structure  What goes into costs? Job vs Process

Alternate funding strategies  Strategy depends on what you want to accomplish Startup Buying a business Running the business Expanding  May require special skills or knowledge Good CFO Commercial mortgage broker Lawyer

Startup  Ask landlord to lend or invest  Contract financing (prepayment for service)

Buying a business  Seller financing Payments Earnout  Stay in partnership with the seller  Use assets in the business as collateral  Contract to sell assets in the business  Contract to license intellectual property or manufacturing rights  Assume liabilities with the business Pre-negotiate with lenders for more favorable terms

Running the business  Bartering for what you need  Take the discount for rapid payment  Partnering to use someone else’s credit  Sublease unneeded space, expand later

Expanding  Growth Concepts Growth Rates: Internal vs Sustainable Return on Assets Return on Equity Reinvestment Rate  Increase sales  Get credit before you need it  Pre-arrange with vendors for better invoice terms  Sell receivables

Partnering with Other Organizations  Finding funds, skills, resources, etc.  Why partner with corporations & non-profits  WIIFM?  How to partner with corps & non- profits How it works Finding potential partners How to set up the arrangement

 Almost 2/3 of all small businesses experience money problems continuing problem 20% of small business managers reported that cash flow is a continuing problem cash flow problems  Three primary causes of cash flow problems: Difficulty collecting money due Seasonal variation in sales Unexpected decreases in sales Money In / Money Out

Building a Cash Budget (example)

Building a Cash Budget (example cont’d) 72k + 10k + 20k 180k – 102k 78k + 22k Amount owed X (12% ÷ 12 mos)

14-24 Cash Shortage Issues

14-25 The Cash-to-Cash Cycle

cash-to-cash cycle  The cash-to-cash cycle of a pushcart vendor is only a few hours; construction projects may take years to complete  Many small businesses experience difficulty because: receiving and spending cash The mismatch in time between receiving and spending cash size of payments received and size of payments to be made Mismatch in time between size of payments received and size of payments to be made Cash Cycle Depends on Type of Business

three sources  Cash can come from only three sources: selling Cash can be obtained by selling products and services investments Cash can be obtained from investments the business has made financing Cash through financing Managing Cash Flow

 Forecasting sales receipts  Forecasting sales receipts: sales forecast is the cash receipts forecast credit cards cash drains  Businesses whose customers make heavy use of their credit cards can face serious cash drains  Many businesses have either relatively few large sales events or highly seasonal sales that complicate forecasting Forecasting

wait some period of time  If you provide credit to your customers, you will always wait some period of time for some of your money never You will also have some customers who never pay collect cash You never know exactly when you will collect cash Reasonable estimate Reasonable estimate of their amount and timing can be made 14-29

 Forecasting cash disbursements  Forecasting cash disbursements: Estimates of expenses Knowledge of your business’s payment patterns Predict how much and when cash should be paid out Need to know how much money we will have on the first day of the year to put together a cash budget for the first quarter 14-30

 Cash-flow forecast will help you predict the amount of money that will be coming into and flowing out of your business  Take these steps to ensure your new business will maintain its positive cash flow Know what to expect Predict and plan for the slow times Make projections for the future Managing Your Cash Flow

attention and understanding  Best prevention is attention and understanding your business’s operations Maintain an accurate forecast of cash needs increase cash flows  Techniques to increase cash flows Taking deposits and progress payments Offering discounts for prompt payments Asking for your money Taking on noncore paying projects Factoring receivables Preventing Cash Flow Problems

Two factors Two factors of cash outflows that must be controlled:  The amount of cash being paid out  The timing of cash being paid out Waste Waste also affects cash outflow Techniques to decrease cash outflows Techniques to decrease cash outflows:

Trade discounts Non-cash employee incentives Use of temporary agencies Consignment Barter Control of the timing of paying out cash Timing of purchases Negotiation of terms with suppliers Strategies to improve cash outflows

14-35 Controlling Cash Shortages

Workshop  Cash Budget