Financial_innovation_PatrickOHalloran - Carleton University

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Nov 10, 2013 (4 years and 3 days ago)

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TTMG 5103

Module

Innovation Financial Management


Patrick O’Halloran

TIM Program, Carleton University

Agenda


Objective


Financial Planning & Management


Financial Terminology


Methods and Techniques


Conclusions


References

Objective(s)


Identify key financial terminology essential to
understand the intricacies of the financial
domain.


Identify Methods/Techniques to manage
finance in association with innovation


Agenda


Objective


Financial Planning & Management


Financial Terminology


Methods and Techniques


Conclusions


References


Financial Management



Financial Management


What does it involve?


Planning


How much capital you will need and when?


Funding


Where do we get the capital we initially need to
operate efficiently and to exploit its opportunities?


Two Types of capital: Debt and Equity


Financial Management


Capital Investment


What assets do you need to invest in and what
are the considerations involved in choosing
them?


Financial Control


How do you keep the accounts balanced and
track profit and losses?


Financial Reporting


What happens at the end of the year?


Owe vs. Own?


Moment of Truth


Discussion


Examples


Euro Disney


Youtube


Chrysler and Daimler

Agenda


Objective


Financial Planning & Management


Financial Terminology


Methods and Techniques


Conclusions


References

Financial Terminology


Time Value of Money


Question: If you are offered


Option A: $100,000 today


Option B: $100,000 in three years


Which would you take? Why?



Net Present Value


The present value of an investment's future
net cash flows minus the initial investment.


n
r
PV
FV
)
1
(


Financial Terminology


NPV


Example


Condo in Nepean costs $180,000. Predicted that a
year from now it will cost $195,000. Buy the condo
or bonds with 6% interest.




962
,
3
000
,
180
183,962
183,962
06
.
0
1
000
,
195






NPV
V
P
%
3
.
8
000
,
180
000
,
180
000
,
195

return

of

Rate
Investment
Profit




Financial Terminology


Fixed Costs:


A fixed cost is one that does not vary with the
level of output


Rent, Rates, Salaries, Accountancy etc.


Sunk Costs:


A sunk cost is an investment that can not be
recovered if a project is shut down and
equipment sold.


Brand name promotion, pre
-
ordered movie ticket
etc.

Financial Terminology


Free Cash Flow
-

FCF


Represents the cash that a company is
able to generate less the cost to maintain
or expand its’ asset base


Weighted Average Cost of Capital


WACC


The Weighted Average Cost of Capital is your
market based cost of debt and cost of equity
weighted by the proportion of your debt to
equity.




Financial Terminology


Discounted Cash Flow


DCF


A Discounted Cash Flow analysis tells you
how much an investor would be willing to pay
for the present value of a company’s future
FCF


Real Options


Real options are features of a project that
provide flexibility.


Economic Value Added


EVA™


Method to
link performance incentives more
closely to increases in shareholder wealth

DCF vs. Real Options


Along with NPV, the DCF tool ignores
flexibility of managers based with project
criteria


scaling project based on
needs/issues.


NPV and hence DCF methodologies have an
aversion to risk, and incorporating it into the
typical model can lead to negative NPV and
hence break the NPV rule.


Leads to incorrect assumptions.

Innovation Killers


Why do smart companies fail when it comes
to innovation?


Too much focus on most profitable customers


Misuse of Financial Analysis tools


Underestimation of real returns and benefit of
innovation investment


Myopic view on investments based on Earnings
-
per
-
share


Fixed and sunk costs
-

not accounting for
obselescence



Innovation Killers


How does it manifest itself?


Underestimation


do
-
nothing scenario as
baseline state



A

C

How cash flow typically looks

When investing in an

innovation

More accurate baseline for such

Innovation calculations

More likely scenario when

Choosing do
-
nothing mode of

operation

DCF and NPV calculations

Based on incorrect baseline

B

Moment of Truth


Discussion


Examples

Agenda


Objective


Financial Planning & Management


Financial Terminology


Methods and Techniques


Conclusions


References

Discovery Driven Planning


Planning for New Ventures vs. Conventional


Unknown vs. Facts


Need to envision what is unknown, uncertain and not
yet obvious to the competition.


High ratio of assumptions to knowledge.


Discovery Driven Planning (McGrath &
MacMillan, 1995)


Little is known and much is assumed.


Converts assumptions into knowledge as strategic
ventures unfold




Discovery Driven Planning


Steps Involved


‘Key Assumptions Checklist’ identifies the
business hurdles and assumptions for the
initiative.


‘Reverse Income Statement’ models the
business economics.


‘Pro
-
Forma Operations Specs’ defines
operations needed to run the business.


‘Milestone Planning Chart’ specifies when the
assumption needs to be tested.

Technique 11


Document Initial Assumptions


Document verified knowledge and determine
unverified assumptions and unknowns


Prepare Reverse Income Statement


Determine level of profit margin and amount of
profit to make the project worth while, then
determine revenue to meet this goal.


Estimate Operating Specifications


What are the ongoing overhead costs (pro
forma operations specs.

Technique 11


Update Income Statement


Now that we have the estimated costs update
the initial income statement. Are we still on
track?


Identify Critical Assumptions


Which of these if not controlled could seriously
effect your innovation financially.


Link Assumptions to Milestones


Test and Validate Assumptions

Financial Models


Equity Financing


Venture Capitalist


Angel Investors


Public Stock Markets


IPO


Debt Financing


Banks


Mindset Change


New Light at the end of tunnel


Bootstrapping


bioscience model

Moment of Truth


Discussion


Examples

Agenda


Objective


Financial Planning & Management


Financial Terminology


Methods and Techniques


Conclusions


References

Conclusions


Assumptions must be validated or prioritized
for all innovation objectives.


Traditional techniques for investment
decisions are not set in stone


Options for decisions points should be
incorporated into your business/investment
plans.


Traditional financing models are also being
questioned.


Moment of Truth


Discussion


Examples

References


Ridlehoover, J. (2004) Applying Monte Carlo Simulation and Risk
Analysis to the Facility Location Problem. The Engineering Economist,
Vol. 49, No. 3, pp. 237
-
252.


Davis, C. R. (2002) Calculated Risk: A Framework for Evaluating
Product Development. MIT Sloan Management Review. Vol. 43, No.
4, pp. 71
-
77.


Christensen, C, et al (2008), Innovation Killers

How Financial Tools
Destroy Your Capacity to Do New Things, Harvard Business Review,
January, pp. 98
-
105.


References


Willoughby, K (2008). How do entrepreneurial technology
firms
really get financed and what difference does it make?
International Journal of Innovation and Technology
Management Vol.5, No.1 pp. 1


28.