1. FINANCE Seminar Activity 3

2. Learning Objectives ◦ Explain the sources and availability of finance to a startup or growing business. ◦ Evaluate the performance of an organisation using appropriate financial measures.

3. Why do most new ventures need to find external sources of funding? ◦ Regular/reoccurring costs from the onset: ◦ Salaries need to be paid, regardless of timing of cash inflow ◦ Inventory needs to be purchased before selling can begin ◦ Advertising needs to attract customers before revenue comes in ◦ Necessary investments in capital: ◦ Real estate rentals/purchases ◦ Equipment purchases/rentals ◦ Set-up costs ◦ Products may need development time before coming to market ◦ Up-front costs may come about years before the product comes to market ◦ Any of all of these may exceed the business’s own financing capability.

4. What Other Things May Require External Financing (After The Start-Up Phase)? ◦ Seasonal fluctuations in working capital ◦ Variable Costs: Raw Materials; Variable Labour Costs ◦ Working Capital: Credit to Customers; Financing Stock ◦ Unforeseen circumstances: currency fluxuations, natural disasters, changes in laws/policies/taxes.

5. Sources Of Finance: ◦ Short Term: ◦ Bank overdraft ◦ Short term loans ◦ Relationship-based (family/friends, investors) ◦ Financial Institution ◦ Long Term: ◦ Equity- Requires return, part of company, and often exit strategy ◦ Relationship-based ◦ Angel finance ◦ Venture capitalists ◦ Strategic Partners ◦ Government ◦ Loans- Require interest, security, and regular repayments ◦ Relationship-based (family/friends) ◦ Financial Institution ◦ Lease and hire purchase- ◦ Crowdfunding (often online) ◦ Grants- often done via means testing

6. Another Perspective: Government Banks Loan Companies Individuals Business Angels Formal VC Funds Micro Loans Peer 2 Peer Customers Business Owner(s) Equity Investments Loans Credit Facilities Vendor Financing Cheap Credit Loan Guarantees Funds for Lending Tax Incentives Co- Investment Funds for Investment

7. Analysis Of A Company’s Finances ◦ Profit and Loss Account, aka Income Statement ◦ Shows sales and costs, with resulting profit or losses ◦ Used to forecast ◦ Often calculated monthly ◦ Cash Flow Statement ◦ Has the same elements as profit and loss account ◦ Also includes credit given to customers; credit received from suppliers ◦ Calculated weekly or monthly ◦ Balance Sheet aka Statement of Financial Position ◦ Summary of where and how much what money has been spent. ◦ Usually calculated annually, does not give insight into flows, rather is a ‘snapshot’ of where the company is at the time of calculation.

8. Discussion questions ◦ What types of finance are best for a startup? ◦ What different types of financial analyses might a venture capitalist want to see verses a financial institution when considering financing a company or increasing existing financing. Why? ◦ Which financial analysis model is most useful to understand where a company is financially? Why? ◦ Would you recommend an entrepreneur opt for loans from friends and family, from investors without an emotional attachment, or from a financial institution? Why?

9. Case Study: EstatesDirect.com ◦ Online estate agent company ◦ Started in 2010 ◦ Market themselves as an alternative to traditional ‘High Street’ estate agencies, with lower overhead costs that are passed on to the customer. ◦ Provide customized ‘packages’ for a seller that can include premium listings, legal quotes and removal vans.

10. Case Study: EstatesDirect.com ◦ In their own words: ◦ EstatesDirect.com is not a typical online estate agent, nor a typical traditional agent, we are a personal estate agency service that charges a fair fixed fee to market, let and sell any property regardless of value, location or size. ◦ We have listened to our customers and adapted our business model so that we can now market and sell a property from as little as £355 and find a landlord a tenant from as little as just £55, competing with the online agents, whilst still offering the support and expertise of a traditional high street agent.

11. Case study: EstatesDirect.com ◦ Pre-video discussion: ◦ Where would you predict that Estatesdirect.com obtained its startup funding? Draw a graph/chart to illustrate your prediction. ◦ How do you think this type of business, an online startup, may differ in its funding sources than a retail business or even a traditional real-estate firm? ◦ How should Estatesdirect.com evaluate its performance using financial measures?

12. Video ◦ Embed/show video

13. Case Study Discussion Questions ◦ If Estates Direct needed emergency funding, where would you recommend they seek it? ◦ What trade-offs has EstatesDirect.com had to make for the type of financing it has utilized? ◦ What advantages does EstatesDirect.com gain from the type of financing it utilizes? ◦ If you were financial institution and Mr. Grove came to you with a loan application, what questions would you want to be satisfied before approving a loan?