1. ANALYZING START-UP RESOURCES
CHAPTER Nine

2. Gathering Entrepreneurial Resources
Start-up resources include:
People (founding team, advisors, independent contractors)
Physical assets (equipment, inventory, office or plant space)
Financial (cash, equity, debt)

3. Bootstrapping Minimizing resources to keep low overhead
Creating innovative combinations of resources to generate competitive advantage and wealth

4. Identifying Resource Needs
Questions to answer
Who does the work in this business?
Where do these people work?
What do they need to do the work?
What information is being generated?
Where does that information go?

5. Finding the Right Numbers- Triangulation
Entrepreneur’s knowledge
The Industry
Venture Numbers
The Market/Customer

6. Sales Forecast Timeline

7. Estimating Sales and Expenditures
Develop timeline of seasonal patterns and key events that might change sales’ levels.
Identify potential key events which could change sales estimates
Calculate the impact of the change on the estimate
Determine the probability of the occurrence

8. Estimating Sales and Expenditures (continued)
Percentage increase in sales over 3-5 year period depends upon:
Growth rates in the product/service market segment
Innovations that make the product/service more attractive to the consumer
Technological innovations that results in lower cost of products/services to the consumer

9. Estimating Sales and Expenditures (continued)
Forecasting expenditures-items to consider:
Cost of goods sold (COGS)
Selling, general and administrative expenses (S, G, & A)
Taxes

10. Preparing the Pro Forma Income Statement
Sections of the Income Statement
Section 1: revenues from all sources
Section 2: operating expenses
Forecasting cash needs- The Cash Flow Statement
Section 1: cash receipts
Section 2: cash disbursements

11. Preparing the Pro Forma Income Statement (continued)
Assessing Risk
Is the business financially feasible?
Is there enough money to make the effort worthwhile?

12. Tools & Information NAICS ProFormas
Demonstrate an understanding of entrepreneurial resource gathering
Explain how to find the right numbers
Estimate sales and expenditures for the new venture
Prepare the pro forma income statement
Forecast start-up cash needs
With the use of Industry Information, The ONLY assumptiona left to defend are 1) Quanity, 2) Price, 3) Growth

13. Understanding Financial Statements
Financial Statements (Accounting Statements)
Reports of a firm’s financial performance and resources, including an income statement and a balance sheet
Helps determine a startup’s financial requirements
Assesses the financial implications of a business plan

14. Understanding Financial Statements
Income Statement
A report showing the profit or loss from a firm’s operations over a given period of time.
“How profitable is the business?”
Sales – Expenses = Profits
Revenue from product or service sales
Costs of producing product or service
Operating expenses (marketing, selling, general and administrative expenses, and depreciation)
Financing costs (interest paid)
Tax payments

15. The Income Statement: An Overview
Operating Activities
Sales Revenue =
Operating Income
Earnings Before Taxes
Net Income Available
to Owners
Cost of producing or acquiring product or service
(cost of goods sold)
Gross profit
Marketing and selling expenses, general and administrative expenses and depreciation (operating expenses) , –
Financing Activities
Interest expense on debt (financing costs)
Taxes
Income taxes

16. The Balance Sheet Balance Sheet
A report showing a firm’s assets, liabilities, and owners’ equity at a specific point in time
Outstanding debt + Owner’s equity = Total assets

17. The Balance Sheet: Types of Assets
Current assets (working capital)
Assets that can be converted to cash within the firm’s operating cycle—cash, accounts receivable, and inventories.
Fixed Assets
Relatively permanent resources intended for the use of the firm.
Net fixed assets = gross fixed assets – accumulated depreciation
Other Assets
Intangible assets (patents, copyrights, goodwill)

18. The Balance Sheet: Types of Financing
Debt Capital
Financing provided by a creditor
Short-term (current) Debt
Accounts payable
Accrued expenses
Short-term notes
Long-Term Debt
Loans and mortgages from banks and other lenders with maturities greater than one year

19. The Balance Sheet: Types of Financing
Owners’ Equity
Money that the owners invest in the business
Owners are “residual owners” of the firm
Creditors have first claim on the assets of the firm.
Owners’ Equity =
Owners’ investment –
Owners’ cash withdrawals
Cumulative profits +
Earnings retained within Business

20. The Balance Sheet: An Overview
Current Assets
Cash
Accounts receivable
Inventories
Other Assets
Long-term investments, patents +
Total Assets =
Fixed Assets
Machinery and equipment
Buildings and land
Debt Capital
Accounts payable
Accrued expenses
Short-term notes
Long-term notes
Mortgages
Total Debt and Equity
Owner's Equity
Owner's net worth or
Partnership equity
Common stock equity
Assets
Debt (Liabilities) and
Equity (Net Worth)
Current Debt
Long-term Debt
The Balance Sheet: An Overview

21. Determining Cash Flow: Key Terms
Accrual-Basis Accounting
A method of accounting that matches revenues when they are earned against the expenses associated with those revenues.
Cash-Basis Accounting
A method of accounting that reports transactions only when cash is received or a payment is made.

22. Determining Cash Flow: Key Terms
Depreciation Expense
Costs related to a fixed asset, such as a building or equipment, distributed over its life.
Sustainable Growth
Growth that can be financed from the cash flows generated from operating the business.

23. The Fit of the Income Statement and the Balance Sheet
Income statement reports the profits from
January 1, 2002 through December 31, 2002
2002 Balance Sheet Reports a firm's financial position at end of 2002
January 1
December 31
2001 Balance Sheet Reports a firm's financial position at beginning of 2002 (end of 2001)

24. Computing Cash Flows from Assets
After-Tax Cash Flows from Operations
Cash
Flows
from Assets
Changes in Operating Working Capital
Changes in Long-Term Assets
After-tax cash flows
from operations
Investments in
operating
working capital
Investments
in long-term
assets
Cash
flows from assets =

25. Computing Other Cash Flows
After-Tax Cash Flows From Operations
Net income
Depreciation expense
Interest Expense
After-tax cash
flows from operations = +
Operating Work Capital
Current assets
Operating Working Capital = –
Account payable and accruals

26. Cash Flows from Financing
Interest and Dividends
Paid to Investors
Increase in Debt
(firm issues new debt)
Increase in Equity
(firm issues new stock)
Decrease in Debt
(firm repays debt)
Decrease in Equity
(firm repurchases outstanding stock)
Increases in Cash Flows from Financing
Decreases in Cash Flows from Financing

27. Financial Forecasting
Pro forma Financial Statements
Reports that provide projections of a firm’s financial position
Purposes of pro forma statements
How profitable can the firm be expected to be, given the projected sales levels and the expected sales expense relationships?
What will determine the amount and type of financing (debt or equity) to be used?
Will the firm have adequate cash flows? If so, how will they be used; if not, where will the additional cash come from?

28. Forecasting Profitability
Net Income Depends On:
Amount of sales
Cost of goods sold and operating expenses
Interest expense
Taxes
“If we’re doing so well, then why am I always so broke?”

29. Forecasting Assets and Financing Requirements
Estimating Asset Requirements
Use industry ratios for assets-to-sales
Use breakeven analysis and empirical data
Percentage-of-Sales Technique
Forecasting asset investment and financing requirements using a percentage of the total sales for a firm as the basis for forecasting the level of assets to be held by a firm.

30. Assets-to-Sales-Financing Relationships
Increase in Sales
Increase in
Asset Requirements
Financing Requirements
Results in

31. Ratio Analysis Liquidity Current Ratio Debt Ratio
The degree to which a firm has working capital available to meet maturing debt obligations.
Current Ratio
The firm’s relative liquidity, determined by dividing current assets by current liabilities
Debt Ratio
Debt as a fraction of assets; total debt divided by total assets.
Spontaneous financing—debts such as accounts payable that increase as the firm grows.

32. Sources of Equity Capital
External Equity
Owners’ original investment
Internal Equity
Profit retention (retained profits)
Forecasting financial requirements (in total)
Total sources of financing
Spontaneous financing
Profits retained within the business
Total asset requirements = +
External sources of financing

33. Return on Invested Capital: An Overview
Capital invested
by the
firm's creditors
and
equity investors
(owners)
Firm's
total assets
Profits and
cash flows
Rate of return
on total capital
becomes
Creditors
Equity
investors
Operating income
Total assets
Return on
creditor's
capital
equity
Interest rate
charged on debt
Net income
Common equity
compute
equals
Shared by
Return on Invested Capital: An Overview