Outline: Chapter 1

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Nov 10, 2013 (3 years and 11 months ago)

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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


Copyright
2013
Cornwall,
Vang

& Hartman

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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2013
Cornwall,
Vang

& Hartman

Measuring “Success”


Income for entrepreneur


Wealth for entrepreneur


Goals derived from personal values of the
entrepreneur

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2013
Cornwall,
Vang

& Hartman

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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Cornwall,
Vang

& Hartman

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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Cornwall,
Vang

& Hartman

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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Cornwall,
Vang

& Hartman

Figure 1.1

Building a Financial Forecast

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Cornwall,
Vang

& Hartman

Setting
Financial
Goals

Revenue
Forecasting

Monitoring
Performance

Expense

Forecasting

Table
1.1

Example of Stakeholder Analysis



Stakeholder



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.


Table
1.1

Example of Stakeholder Analysis (continued)


Stakeholder



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


Outline: Chapter 2

Setting Financial Goals


Wealth vs. income


Integrating non
-
financial goals


Importance of self
-
assessment


The self
-
assessment process


The model and business plan


Copyright 2013
Cornwall,
Vang

& Hartman

Figure
2.1

Model for Entrepreneurial Financial Management


Setting
Financial
Goals

Revenue
Forecasting

Monitoring
Performance

Expense

Forecasting

Copyright 2013
Cornwall,
Vang

& Hartman

Life Cycle of a Business Venture

Figure 2.2

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Vang

& Hartman


Pre
-
Launch


Start
-
up


Growth

Maturity

“Quick and Dirty” Valuation

EBITDA

+ extra bonuses or compensation to owners

= adjusted EBITDA

X earnings multiple

= Valuation

-

Outstanding Loans

= Cash proceeds to owner

Copyright 2013
Cornwall,
Vang

& Hartman

Integrating Non
-
Financial Goals


Ethics and values


Personal definition of “success” in business


Family


Community


Personal interests


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Cornwall,
Vang

& Hartman

Business Plan Outline


Executive Summary


The Business Concept


Value Proposition and Industry Analysis


Marketing Plan


Operating Plan


Financial Plan

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Vang

& Hartman

Importance of Self
-
Assessment


Keeps your goals front and center


Financial goals change


Non
-
financial goals change


Part of on
-
going exit planning

Copyright 2013
Cornwall,
Vang

& Hartman

Outline: Chapter 3

Understanding Financial Statements


Accounting equation


Assets = Liabilities + Owners’ Equity


Basic financial statements


Limitations of business financial statements


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Vang

& Hartman

Basic Financial Statements



Income Statement



Balance Sheet



Statement of Cash Flows


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Cornwall,
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& Hartman

Income Statement

Exhibit 3.1

The Company

Month ended April 30, 2012

Sales






$35,000

100.0%

Cost of Goods Sold






10,000


28.6%

Gross Profit






25,000


71.4%


Operating Expenses


Rent Expense








10,000


28.6%


Utilities Expense








2,000


5.7%


Wages Expense






5,000


14.3%


Depreciation Expense







1,000



2.8%

Total Operating Expenses







18,000


51.4%


Earnings before interest and taxes (EBIT)





7,000


20.0%

Interest Expense






100


.3%

Earnings before taxes




$ 6,900


19.7%


Copyright 2013 Cornwall,
Vang

& Hartman

Balance Sheet

Exhibit 3.2

The Company

April 30, 2012

ASSETS

Current Assets


Cash






$ 58,900


Accounts Receivable







25,000


Inventory








30,000


Total Current Assets







113,900

Fixed Assets


Equipment









36,000


Less: Accumulated Depreciation





(1,000)


Net Fixed Assets








35,000

TOTAL ASSETS







$148,900

LIABILITIES

Current Liabilities


Notes Payable






$ 15,000


Accounts Payable







22,000


Wages Payable







5,000


Total Current Liabilities








42,000


STOCKHOLDERS’ EQUITY


Common Stock





100,000


Retained Earnings






6,900


Total Stockholders’ Equity




106,900


TOTAL LIAB. & STOCKHOLDERS’ EQUITY





$148,900


Copyright 2013 Cornwall,
Vang

& Hartman

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)

Copyright 2013 Cornwall,
Vang

& Hartman

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


Copyright 2013
Cornwall,
Vang

& Hartman

Figure
4.1

Model for Entrepreneurial Financial Management


Setting
Financial
Goals

Revenue
Forecasting

Monitoring
Performance

Expense

Forecasting

Copyright 2013
Cornwall,
Vang

& Hartman

Common Forecasting Mistakes


The linear forecast mistake



The hockey stick forecast mistake



The 20/80 vs. 80/20 mistake


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Vang

& Hartman

Marketing Plan and Forecasting

Marketing Plan

Revenue
Forecasts

Backbone

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Cornwall,
Vang

& Hartman

Marketing Plan and

Revenue Forecasting


Identifying industry and market trends



Market research



Competitive analysis


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Cornwall,
Vang

& Hartman

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

Copyright 2013
Cornwall,
Vang

& Hartman

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


Copyright 2013
Cornwall,
Vang

& Hartman

Creating scenarios

Make Three Forecasts

1.
Best
-
case

2.
Worst
-
case

3.
Most likely case


Track Key Assumptions

Copyright 2013
Cornwall,
Vang

& Hartman

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

Copyright 2013
Cornwall,
Vang

& Hartman

Importance of Revenue Forecasting



Bank financing


Inventory assumptions



Staffing decisions


Space decisions


Investors

Copyright 2013
Cornwall,
Vang

& Hartman

Outline: Chapter 5

Expense Forecasting


Defining costs


Cost behavior


Break
-
even analysis


The impact of business type on
expenses


Reducing expenses through
bootstrapping


Copyright 2013
Cornwall,
Vang

& Hartman

Figure
5.1

Model for Entrepreneurial Financial Management


Setting
Financial
Goals

Revenue
Forecasting

Monitoring
Performance

Expense

Forecasting

Copyright 2013
Cornwall,
Vang

& Hartman

Cost behavior


Variable Costs



Fixed Costs



Mixed Costs


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& Hartman

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


Table 5.1

Variable
Costs

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Cornwall,
Vang

& Hartman

Figure
5.1

Variable Cost Behavior


Total Variable
Cost Line


Total Units Produced

$

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Cornwall,
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& Hartman

Fixed Costs


Committed fixed costs



Discretionary fixed costs


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Cornwall,
Vang

& Hartman

Figure
5.2

Fixed Cost Behavior


Total Fixed
Costs

Total Units Produced

$

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Cornwall,
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& Hartman

Example


Merchandising Company

Exhibit 5.1

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& Hartman

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

monthly rent

Office salaries

12,000

12.0

# people x monthly pay

Depreciation

500

.5

cost of equip./mos. of life

Total gen. & admin.

15,000

15.0

EBIT

500

.5

Breakeven Analysis

Breakeven
Quantity

=

Fixed

Costs

____________________________________

Price per unit

-

Variable cost

per unit

Copyright 2013 Cornwall,
Vang

& Hartman

Outline: Chapter 6

Integrated Financial Model


The entrepreneur’s aspirations reconsidered


Contribution format income statement


Earnings before interest and taxes


Inventory of assumptions


Social ventures


Determining the funds needed


Time out of cash


Assessment of risk/sensitivity


Integrating into business plan/funding
document


Copyright 2013
Cornwall,
Vang

& Hartman

Figure 6.1

Building a Financial Forecast

Copyright 2013
Cornwall,
Vang

& Hartman

Setting
Financial
Goals

Revenue
Forecasting

Monitoring
Performance

Expense

Forecasting

Time Out of Cash

Time Out of Cash =



Cash









Operating Cash Outflow per Month

Copyright 2013 Cornwall,
Vang

& Hartman