Outline: Chapter 1 Introduction Importance of knowing the numbers Measuring success What is entrepreneurial financial management? Ethics and entrepreneurial finance

Financial Management: The “Language” of Business Used to set clear financial goals Used to make decisions Used to forecast Used to manage cash flow Used to seek financing Used to determine an exit process for the business

Measuring “Success” Income for entrepreneur Wealth for entrepreneur Goals 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 risk Diversified investors concerned with systematic risk Non-diversified investors concerned with total risk Prefer more return Prefer quick return Prefer liquidity Investors face many different opportunities No investors are immune from these expectations

Finance Relationships Total Risk = Diversifiable Risk + Nondiversifiable Risk Required Rate of Return = Rf + Beta(Rm - Rf) Rf = Risk-Free Rate of Return Rm = Return on Market Index like SP500 Rm-Rf =Market Risk Premium Beta is a measure of Nondiversifiable Risk Beta < 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)

Figure 1-1 Building a Financial Forecast Setting Financial Goals Revenue Forecasting Monitoring Performance Expense Forecasting

Table 1-1 Example of Stakeholder Analysis StakeholderEthical PrincipleApplication 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 1-1 Example of Stakeholder Analysis (continued) StakeholderEthical PrincipleApplication Customers Fair pricingEstablish 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. income Integrating non-financial goals Importance of self-assessment The self-assessment process The business plan

Figure 2-1 Model for Entrepreneurial Financial Management Setting Financial Goals Revenue Forecasting Monitoring Performance Expense Forecasting

Integrating Non-Financial Goals Ethics and values Personal definition of “success” in business Family Community Personal interests

Importance of Self-Assessment Keeps your goals front and center Financial goals change Non-financial goals change Part of on-going exit planning

Outline: Chapter 3 Understanding Financial Statements Accounting equation  Assets = Liabilities + Owners’ Equity Basic financial statements Limitations of business financial statements

Basic Financial Statements Income Statement Balance Sheet Statement of Cash Flows

Outline: Chapter 4 Revenue Forecasting Common forecasting mistakes The link between the marketing plan and revenue forecasts Creating scenarios The link between the revenue forecast and the cash flow forecast The impact of business type on revenues A note on statistical forecasting techniques and the entrepreneur

Figure 4-1 Model for Entrepreneurial Financial Management Setting Financial Goals Revenue Forecasting Monitoring Performance Expense Forecasting

Common Forecasting Mistakes 1.The linear forecast mistake 2.The hockey stick forecast mistake 3.The 20/80 vs. 80/20 mistake

Marketing Plan and Forecasting Marketing PlanRevenue Forecasts Backbone

Marketing Plan and Revenue Forecasting 1.Identifying industry and market trends 2.Market research 3.Competitive analysis

Figure 4.3 Sample Competitive Grid Cleanliness of Facilities Hours of Operation SelectionPrice Joe’s Inc.Good8:00 – 6:00Moderate Jane’s Inc.Excellent8:00 – 8:00LargeHigh Sally & Jim’s Shop Fair9:00 – 4:00LimitedLow Your Own Business Excellent7:00 – 9:00The LargestModerate

Creating scenarios Make Three Forecasts 1.Best-case 2.Worst-case 3.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 financing Inventory assumptions Staffing decisions Space decisions Investors

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

Outline: Chapter 5 Expense Forecasting Cost behavior Break-even analysis The impact of business type on expenses Reducing expenses through bootstrapping

Cost behavior 1.Variable Costs 2.Fixed Costs 3.Mixed Costs

Type of ExpenseActivity Base Sales commissionsSales Materials costUnits produced Health insurance Number of employees Wages expenseNumber of hours worked Payroll tax expenseDollars of wages paid Variable Costs

Figure 5-1 Variable Cost Behavior Total Variable Cost Line Total Units Produced $

Fixed Costs 1.Committed fixed costs 2.Discretionary fixed costs

Figure 5-2 Fixed Cost Behavior Total Fixed Costs Total Units Produced $

Outline: Chapter 6 Integrated Financial Model The entrepreneur’s aspirations reconsidered Contribution format income statement Inventory of assumptions Determining the funds needed Time out of cash Assessment of risk/sensitivity Integrating into business plan/funding document