1. Outline: Chapter 1 Introduction
Importance of knowing the numbers
Measuring success
What is entrepreneurial financial management?
What Makes Entrepreneurial Finance Similar to Traditional Finance?
What Makes Entrepreneurial Finance Different from Traditional Finance?
Ethics and entrepreneurial finance
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2. 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
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3. Measuring “Success” Income for entrepreneur Wealth for entrepreneur
Goals derived from personal values of the entrepreneur
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4. 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
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5. 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
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6. 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)
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7. Figure 1.1 Building a Financial Forecast
Setting Financial Goals
Revenue Forecasting
Expense
Forecasting
Monitoring Performance
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8. Table 1.1 Example of Stakeholder Analysis
Ethical Principle
Application
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.
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9. Table 1.1 Example of Stakeholder Analysis (continued)
Ethical Principle
Application
Customers
Fair pricing
Establish 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
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10. Outline: Chapter 2 Setting Financial Goals
Wealth vs. income
Integrating non-financial goals
Importance of self-assessment
The self-assessment process
The business plan
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11. Figure 2.1 Model for Entrepreneurial Financial Management
Setting Financial Goals
Revenue Forecasting
Expense
Forecasting
Monitoring Performance
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12. Life Cycle of a Business Venture Figure 2.2
Pre-Launch
Start-up
Growth
Maturity
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13. “Quick and Dirty” Valuation
EBITDA + extra bonuses or compensation to owners = adjusted EBITDA X earnings multiple = Valuation - Outstanding Loans = Cash proceeds to owner
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14. Integrating Non-Financial Goals
Ethics and values
Personal definition of “success” in business
Family
Community
Personal interests
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15. Business Plan Outline Executive Summary The Business Concept
Industry Analysis
Marketing Plan
Operating Plan
Financing Plan
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16. Importance of Self-Assessment
Keeps your goals front and center
Financial goals change
Non-financial goals change
Part of on-going exit planning
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17. Outline: Chapter 3 Understanding Financial Statements
Accounting equation
Assets = Liabilities + Owners’ Equity
Basic financial statements
Limitations of business financial statements
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18. Basic Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
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19. Income Statement
Exhibit 3.1 The Company Month ended April 30, 2002 Sales $35, % Cost of Goods Sold 10, % Gross Profit 25, % Operating Expenses Rent Expense 10, % Utilities Expense 2, % Wages Expense 5, % Depreciation Expense 1, % Total Operating Expenses 18, % Earnings before interest and taxes (EBIT) 7, % Interest Expense % Earnings before taxes $ 6, %
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20. Balance Sheet Exhibit 3.2 The Company April 30, 2002 ASSETS
Current Assets
Cash $ 58,900
Accounts Receivable ,000
Inventory ,000
Total Current Assets ,900
Fixed Assets
Equipment ,000
Less: Accumulated Depreciation (1,000)
Net Fixed Assets ,000
TOTAL ASSETS $148,900
LIABILITIES
Current Liabilities
Notes Payable $ 15,000
Accounts Payable ,000
Wages Payable ,000
Total Current Liabilities ,000
 STOCKHOLDERS’ EQUITY
Common Stock ,000
Retained Earnings ,900
Total Stockholders’ Equity ,900
 TOTAL LIAB. & STOCKHOLDERS’ EQUITY $148,900
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21. Limitations of Financial Statements
Not all assets of a company are included (e.g. employees or brand names)
Intellectual property not reflected as an asset
Assets are reflected at historical cost
Estimates must be used for depreciation, the collectibility of accounts receivable, the salability of inventory, and the amount of warranty liability outstanding
Financial statements affected by the choice of accounting methods (e.g. FIFO, LIFO or average cost)
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22. 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
Quantitative Forecasting Techniques
Importance of Revenue Forecasting
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23. Figure 4.1 Model for Entrepreneurial Financial Management
Setting Financial Goals
Revenue Forecasting
Expense
Forecasting
Monitoring Performance
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24. Common Forecasting Mistakes
The linear forecast mistake
The hockey stick forecast mistake
The 20/80 vs. 80/20 mistake
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25. Marketing Plan and Forecasting
Revenue Forecasts
Backbone
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26. Marketing Plan and Revenue Forecasting
Identifying industry and market trends
Market research
Competitive analysis
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27. Sample Competitive Grid Figure 4.3
Cleanliness of Facilities
Hours of Operation
Selection
Price
Joe’s Inc.
Generally clean in public areas, but back rooms usually messy
8:00 – 6:00
Most commonly purchased products available
$5 - $20
Jane’s Inc.
Consistently clean and orderly throughout all facilities
8:00 – 8:00
All commonly purchased available and some specialty items in stock
$12 - $30
Sally & Jim’s Shop
Public areas somewhat messy and disorganized and back areas very messy
9:00 – 4:00
Many common items not in stock – usually have to special order
$3 - $15
Dr. C’s Place (New Business)
Plan to be spotless throughout
7:00 – 9:00
All common items plus specialty items not found at competitors’ stores
$5 - $35
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28. Basic Guidelines for Revenue Forecasts
Market research to assure the quality of the assumptions behind the revenue forecasts
Validate assumptions with more than one source of data
Plan based on more conservative assumptions
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29. Creating scenarios Make Three Forecasts Best-case Worst-case
Most likely case
Track Key Assumptions
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30. Revenue Forecast and the Cash Flow Forecast
Determine if credit is to be extended to customers
Estimate the percentage of the sales that will be on credit
Determine how long it will take to collect credit sales
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31. Importance of Revenue Forecasting
Bank financing
Inventory assumptions
Staffing decisions
Space decisions
Investors
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32. Outline: Chapter 5 Expense Forecasting
Defining costs
Cost behavior
Break-even analysis
The impact of business type on expenses
Reducing expenses through bootstrapping
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33. Figure 5.1 Model for Entrepreneurial Financial Management
Setting Financial Goals
Revenue Forecasting
Expense
Forecasting
Monitoring Performance
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34. Cost behavior Variable Costs Fixed Costs Mixed Costs
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35. Variable Costs Type of Expense Activity Base Sales commissions Sales
Materials cost Units produced
Health insurance Number of employees
Wages expense Number of hours worked
Payroll tax expense Dollars of wages paid
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36. Figure 5.1 Variable Cost Behavior$
Total Variable Cost Line
Total Units Produced
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37. Fixed Costs Committed fixed costs Discretionary fixed costs
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38. Figure 5.2 Fixed Cost Behavior$
Total Fixed Costs
Total Units Produced
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39. Example – Merchandising Company Exhibit 5.1
Assumptions used
Sales
$100,000
100.0%
COGS
65,000
65.0
65% of sales
Gross profit
35,000
35.0
35% of sales
Sales salaries
15,000
15.0
# of salespeople x monthly base
Sales commissions
1,500
1.5
1.5% of sales
Store rent
3,500
3.5
monthly rent
Total selling expenses
20,000
20.0
Office rent
2,500
2.5
Office salaries
12,000
12.0
# people x monthly pay
Depreciation
500 .5
cost of equip./mos. of life
Total gen. & admin.
EBIT
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40. ____________________________________
Breakeven Analysis
Breakeven Quantity =
Fixed Costs
____________________________________
Price per unit -
Variable cost per unit
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41. 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
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42. Figure 6.1 Building a Financial Forecast
Setting Financial Goals
Revenue Forecasting
Expense
Forecasting
Monitoring Performance
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43. Time Out of Cash Time Out of Cash = Cash
Operating Cash Outflow per Month
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