Transcript Slide 1

BUSINESS MODELS AND
FINANCIAL ANALYSIS
JANUARY 18, 2012
BURGES HALL, RM 411
2
BUSINESS PLAN DEVELOPMENT
The Business Plan is a key document that articulates what key
features will drive your business opportunity. These can include:
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Mission Statement
Key members of the Team
Technology and intellectual positions
Opportunities and market summary
Business model: entry and growth strategy
Competition
Five-year goals and objectives
Five-year financial plan
Risks and rewards
BUSINESS MODELS
Wikipedia: A business model describes
the rationale of how an organization
creates, delivers and captures economic,
social or other forms of value. The
process of business model design is part
of the business strategy.
BUSINESS MODELS
There are 9 basic business model building blocks
(Osterwalder, Alexander &Pigneur, Yves . Business
Model Generation: John Wiley & Sons, Inc. 2010)
What are you going to make and sell or service??
1) Value Propositions
2) Key Activities
3) Key Resources
4) Key Partners
5) Customer segments
6) Channels—sales and disribution
7) Customer Relationships
8) Cost Structure
9) Revenue Streams
BUSINESS MODELS, continued
1) Value Propositions
a) What will you do to solve customer problems
and satisfy customer (unmet) needs?
b) What will you do to differentiate your product
and/or service?
Probability of Product Success
% Companies Who Succeeded
90%
82%
80%
70%
60%
50%
42%
40%
+34%
Market share
30%
20%
10%
0%
18%
+12%
Market share
Me-Too
Moderate
Advantage
Highly
Differentiated
Impact of Differentiated Products
7
BUSINESS MODELS, continued
2) Key Activities
Examples
Microsoft—software development
Dell—supply chain management
McKinsey—problem solving
Newco—outsourcing decisions
HOW WILL YOU CREATE A COMPETITIVE
ADVANTAGE?
BUSINESS MODELS, continued
3) Key Resources
a) Physical—manufacturing facilities, buildings,
distribution networks
b) Intellectual—brands, patents and copyrights,
customer databases
c) Human—people are particularly prominent in
certain business models, such as pharma
d) Financial—financial resources or guarantees
such as lines of credit
BUSINESS MODELS, continued
4) Key Partners
a) Strategic alliances between non-competitors
b) Strategic partnerships between competitors
c) Joint Ventures
d) Buyer-supplier relationships
e) Outsourcing manufacturing
BUSINESS MODELS, continued
5) Customer Segments—defines the different groups
of people or organizations an enterprise aims to
reach and serve
a) Mass Market
b) Niche Market
c) Segmented: big/small; innovative/commodity
d) Diversified
BUSINESS MODELS, continued
6) Channels—how a company communicates with
and reaches its customer segments
a) Awareness of our products and services
b) Evaluation of the Value Propositions
c) Purchase (of specific products?)
d) Delivery of Value Proposition
e) After Sales Support
LIST DIFFERENT SALES CHANNELTYPES
LIST DIFFERENT CHANNELS OF DISTRIBUTION
BUSINESS MODELS, continued
7) Customer Relationships—what type of
relationship does each of our customer segments
require (desire)?
Some examples
a) Personal assistance
b) Dedicated personal assistance
c) Self-service
d) Automated services ( set up to offer book or
movie recommendations)
BUSINESS MODELS, continued
8) Cost Structure—describes all costs incurred to
operate a business model
a) Cost-driven
b) Value-driven
c) Fixed costs
d) Variable costs
e) Economies of scale
BUSINESS MODELS, continued
9) Revenue Streams
Examples include
a) Asset sale
b) Usage fee
c) Subscription fee
d) Lending/renting/leasing
e) Licensing
There are a broad range of Pricing Mechanisms
including list prices, volume dependent,
auctions, product feature dependent, yield
management
BUSINESS MODELS
Some Examples:
1) Bait and hook—razor blade strategy; cell phones
and air time; computer printers and ink cartridges
2) Southwest airlines—low frills; fast on and off
airplane
3) BASF: Verbund—consume everything that goes
into plant—”no waste”
SWOT ANALYSIS
Once a business model is developed,
it can be tested using a SWOT analysis on each
of the building blocks.
a) Strengths—internal
b) Weaknesses--harmful
c) Opportunities—external
d) Threats—harmful
This analysis can reveal interesting paths to
innovation and continuous improvement.
SWOT ANALYSIS, continued
Value Proposition (VP)Assessment
Assessing Strengths/Weaknesses
1) Our VP are well aligned with customer needs:
scale 5-1
2) Our VP and customer needs are misaligned; scale
-1 to -5
Assessing Opportunities
1) What other jobs could we do on behalf of
customers?: scale of 1-5
Assessing Threats
1) Are substitute products and services available?
Scale of 1-5
2) Are we in danger of losing any partners?
Scale of 1-5
FINANCIAL ANALYSIS
DEFINITION
Profit and Loss Statement: A statement showing the revenues, expenses
and income of a company. Also known as income statement.
Balance Sheet: A quantitative summary of a company's financial
condition including assets, liabilities and net worth. The first part of a
balance sheet shows all the productive assets a company owns and the
second part shows all the financing methods.
Cash Flow Statement: A summary of where a company’s money came
from and where it went.
Net Present Value (NPV): The difference between the present value of
cash inflows and the present value of cash outflows.
PROFIT & LOSS STATEMENT
NEWCO
(000)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Revenues
Sales
$40
Grants
$500
$1,000
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
$100
Sub-total
$40
$600
$1,000
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
COGS
$16
$206
$401
$609
$1,234
$1,800
$2,432
$3,082
$3,594
$4,067
Gross Margin
$24
$394
$599
$891
$1,766
$2,700
$3,568
$4,418
$5,406
$6,433
GM,%
60.0%
58.8%
59.9%
59.4%
58.9%
60.0%
59.5%
58.9%
60.1%
61.3%
SARs
$176
$352
$430
$568
$600
$810
$1,080
$1,350
$1,620
$1,890
% SAR
440%
70%
43%
38%
20%
18%
18%
18%
18%
18%
Operating Income
-$152
$42
$169
$323
$1,166
$1,890
$2,488
$3,068
$3,786
$4,543
Taxes
$0
$0
$40
$113
$408
$662
$871
$1,074
$1,325
$1,590
Net Income
-$152
$42
$129
$210
$758
$1,229
$1,617
$1,994
$2,461
$2,953
Other Income
PROFIT & LOSS STATEMENT
NEWCO
(000)
2010
2011
2012
2013
2014
COMMENTS
Revenues
Sales
$40
Grants
$500
$1,000
$1,500
$3,000 Net sales of products and services
$100
Federal/state grants
Sub-total
$40
$600
$1,000
$1,500
$3,000
COGS
$16
$206
$401
$609
$1,234 Cost Of Goods Sold: includes raw materials and manfg costs
Gross Margin
$24
$394
$599
$891
$1,766 Operating profit; also called Gross Profit
GM,%
60.0%
58.8%
59.9%
59.4%
SARs
$176
$352
$430
$568
$600 Sales, Administration, Research expenses
% SAR
440%
70%
43%
38%
20% Ratio of SAR and sales revenues
Operating Income
-$152
$42
$169
$323
58.9% Ratio of gross margin and sales revenues
$1,166
Other Income
Can include revenue from interest
Taxes
$0
$15
$59
$113
$408
Net Income
-$152
$27
$110
$210
$758
BALANCE SHEET: QUESTIONS
1. How much cash do you have?
2. How much do customers owe you?
3. How much equity has been purchased?
Balance Sheet--#1 (3rd year)
ASSETS
Current Assets
Cash
Accounts receivable
(less doubtful accounts)
Inventory
Temporary investment
Prepaid expenses
Total Current Assets
Fixed Assets
Start-up Costs
Patent Costs
Buildings
LIABILITIES
$130,000
$15,000
$25,000
$170,000
$100,000
$20,000
Current Liabilities
Accounts payable
Short-term notes
Current portion of long-term notes
Interest payable
Taxes payable
Accrued payroll
Total Current Liabilities
Total Liabilities
$115,000
(less accumulated depreciation)
Furniture and fixtures
$10,000
(less accumulated depreciation)
Total Net Fixed Assets
$195,000
Capital stock
Retained earnings
Total Shareholders' Equity
$365,000
TOTAL LIABILITIES & EQUITY
OK
$15,000
$100,000
$100,000
$65,000
Balance Sheet Check
$5,000
Long-term Liabilities
Mortgage
Other long-term liabilities
Total Long-Term Liabilities
(less accumulated depreciation)
Equipment and computers
TOTAL ASSETS
$10,000
SHAREHOLDERS' EQUITY
$500,000
-$250,000
$250,000
$365,000
Balance Sheet--#1 (3rd Year)
ASSETS
Current Assets
Cash
Accounts receivable
(less doubtful accounts)
Inventory
Temporary investment
Prepaid expenses
Total Current Assets
Fixed Assets
Start-up Costs
Patent Costs
Buildings
(less accumulated depreciation)
Equipment and Computers
(less accumulated depreciation)
Furniture and fixtures
(less accumulated depreciation)
Total Net Fixed Assets
TOTAL ASSETS
$130,000
$15,000
$25,000
$170,000
Total Current Liabilities
$5,000
$15,000
$100,000
$100,000
$65,000
Total Liabilities
$115,000
$10,000
SHAREHOLDERS' EQUITY
Capital stock
Retained earnings
Total Shareholders' Equity
$195,000
TOTAL LIABILITIES & EQUITY
OK
RATIOS
Current Ratio
Quick Ratio
Cash Ratio
Working Capital
$10,000
Long-term Liabilities
Mortgage
Other long-term liabilities
Total Long-Term Liabilities
$100,000
$20,000
$365,000
Balance Sheet Check
LIABILITIES
Current Liabilities
Accounts payable
Short-term notes
Current portion of long-term notes
Interest payable
Taxes payable
Accrued payroll
11.33
9.67
8.67
$155,000
Current Ratio = Current Assets/Current Liabilities
Quick Ratio = (Current Assets-Inventories)/ Current Liabilities
Cash Ratio = Cash/Current Liabilities
Working Capital = Current Assets - Current Liabilities
$500,000
-$250,000
$250,000
$365,000
CASH FLOW STATEMENT: QUESTIONS
1. In what year are you cash-flow positive?
2. How much cash do you generate in 2016?
3. How much more working capital do you need in
2013?
CASH FLOW STATEMENT
NEWCO
(000)
2010
Revenues
2011
2012
2013
2014
2015
2016
2017
2018
2019
$40
$500
$1,000
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
Sub-total
$40
$500
$1,000
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
COGS
$13
$165
$321
$487
$987
$1,440
$1,946
$2,466
$2,875
$3,254
Gross Margin
$27
$335
$679
$1,013
$2,013
$3,060
$4,054
$5,034
$6,125
$7,246
SARs
$176
$352
$430
$568
$600
$810
$1,080
$1,350
$1,620
$1,890
Operating Income
-$149
-$17
$249
$445
$1,413
$2,250
$2,974
$3,684
$4,505
$5,356
Taxes
$0
$0
$87
$156
$495
$788
$1,041
$1,289
$1,577
$1,875
Net Income
-$149
-$17
$162
$289
$918
$1,463
$1,933
$2,395
$2,928
$3,481
Working Cap change
-$1
-$13
-$14
-$27
-$56
-$64
-$98
-$108
-$132
-$139
Cash from Operations
-$150
-$30
$148
$262
$862
$1,399
$1,835
$2,287
$2,796
$3,342
Grants
Other Income
Capital
-$35
Investment
$200
Cash Flow
$15
-$30
$148
$262
$862
$1,399
$1,835
$2,287
$2,796
$3,342
Year-End Cash
$15
-$15
$133
$395
$1,257
$2,656
$4,491
$6,778
$9,574
$12,916
FINANCIAL ANALYSIS
Net Present Value (NPV)
To calculate in Excel; “=NPV(Discount rate,%, Year 1,$:Year X,$)”
 NPV compares the value of a dollar today to the value of that same
dollar in the future, taking inflation/risk into account. The larger the
NPV, the better.
 Discount rate represents the business risk. The higher the rate, the
greater the risk.
MODIFIED INCOME STATEMENT
NEWCO Base Case
(000)
Revenues
2010
$40
2011
$500
2012
$1,000
2013
$1,500
2014
$3,000
2015
$4,500
2016
$6,000
2017
$7,500
2018
$9,000
2019
$10,500
Sub-total
$40
$500
$1,000
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
Production, units
1.0
12.7
25.6
39.0
78.9
120.0
162.2
205.5
250.0
295.8
COGS
Gross Margin
GM,%
$13
$27
67.5%
$165
$335
67.1%
$321
$679
67.9%
$487
$1,013
67.5%
$987
$2,013
67.1%
$1,440
$3,060
68.0%
$1,946
$4,054
67.6%
$2,466
$5,034
67.1%
$2,875
$6,125
68.1%
$3,254
$7,246
69.0%
SARs
% SAR
$176
440%
$352
70%
$430
43%
$568
38%
$600
20%
$810
18%
$1,080
18%
$1,350
18%
$1,620
18%
$1,890
18%
Operating Income
-$149
-$17
$249
$445
$1,413
$2,250
$2,974
$3,684
$4,505
$5,356
Taxes @ 35%
Net Income
$0
-$149
$0
-$17
$87
$162
$156
$289
$495
$919
$788
$1,463
$1,041
$1,933
$1,289
$2,395
$1,577
$2,928
$1,875
$3,482
Working Cap change
$1
$13
$14
$27
$56
$64
$98
$108
$132
$139
Cash from Operations
-$150
-$29
$148
$263
$863
$1,398
$1,835
$2,287
$2,796
$3,343
Capital
Cash Flow
Cumulative Cash
$35
-$185
-$185
-$29
-$214
$148
-$66
$263
$197
$863
$1,059
$1,398
$2,458
$1,835
$4,293
$2,287
$6,580
$2,796
$9,376
$3,343
$12,719
Discount Rate
35%
NPV
$1,195
'10-'19
MODIFIED INCOME STATEMENT
NEWCO Higher Sales
(000)
Revenues
2010
$40
2011
$1,000
2012
$1,500
2013
$3,000
2014
$4,500
2015
$6,000
2016
$7,500
2017
$9,000
2018
$10,500
2019
$12,000
Sub-total
$40
$1,000
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
$12,000
Production, units
1.0
25.3
38.5
77.9
118.4
160.0
202.7
246.6
291.7
338.0
COGS
Gross Margin
GM,%
$13
$27
67.5%
$329
$671
67.1%
$481
$1,019
67.9%
$974
$2,026
67.5%
$1,480
$3,020
67.1%
$1,920
$4,080
68.0%
$2,432
$5,068
67.6%
$2,959
$6,041
67.1%
$3,354
$7,146
68.1%
$3,718
$8,282
69.0%
SARs
% SAR
$176
440%
$452
45%
$530
35%
$568
19%
$900
20%
$1,080
18%
$1,350
18%
$1,620
18%
$1,890
18%
$2,160
18%
Operating Income
-$149
$219
$489
$1,458
$2,120
$3,000
$3,718
$4,421
$5,256
$6,122
Taxes @ 35%
Net Income
$0
-$149
$0
$219
$171
$318
$510
$948
$742
$1,378
$1,050
$1,950
$1,301
$2,416
$1,547
$2,874
$1,840
$3,416
$2,143
$3,979
Working Cap change
$1
$26
$14
$67
$56
$104
$99
$148
$132
$178
Cash from Operations
-$150
$193
$304
$880
$1,322
$1,846
$2,318
$2,726
$3,285
$3,801
Capital
Cash Flow
Cumulative Cash
$35
-$185
-$185
$193
$7
$304
$312
$880
$1,192
$1,322
$2,514
$1,846
$4,360
$2,318
$6,678
$2,726
$9,403
$3,285
$12,688
$3,801
$16,489
Discount Rate
35%
NPV
$1,897
'10-'19
MODIFIED INCOME STATEMENT
NEWCO Higher Unit Costs
(000)
Revenues
2010
$40
2011
$500
2012
$1,000
2013
$1,500
2014
$3,000
2015
$4,500
2016
$6,000
2017
$7,500
2018
$9,000
2019
$10,500
Sub-total
$40
$500
$1,000
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
Production, units
1.0
12.7
25.6
39.0
78.9
120.0
162.2
205.5
250.0
295.8
COGS
Gross Margin
GM,%
$16
$24
59.4%
$206
$294
58.9%
$401
$599
59.9%
$609
$891
59.4%
$1,234
$1,766
58.9%
$1,800
$2,700
60.0%
$2,432
$3,568
59.5%
$3,082
$4,418
58.9%
$3,594
$5,406
60.1%
$4,067
$6,433
61.3%
SARs
% SAR
$176
440%
$352
70%
$430
43%
$568
38%
$600
20%
$810
18%
$1,080
18%
$1,350
18%
$1,620
18%
$1,890
18%
Operating Income
-$152
-$58
$169
$323
$1,166
$1,890
$2,488
$3,068
$3,786
$4,543
Taxes @ 35%
Net Income
$0
-$152
$0
-$58
$59
$110
$113
$210
$408
$758
$662
$1,229
$871
$1,617
$1,074
$1,994
$1,325
$2,461
$1,590
$2,953
Working Cap change
$1
$16
$18
$33
$70
$80
$122
$134
$165
$174
Cash from Operations
-$154
-$73
$92
$177
$689
$1,148
$1,495
$1,860
$2,296
$2,779
Capital
Cash Flow
Cumulative Cash
$35
-$189
-$189
-$73
-$262
$92
-$170
$177
$7
$689
$696
$1,148
$1,844
$1,495
$3,339
$1,860
$5,198
$2,296
$7,494
$2,779
$10,273
Discount Rate
35%
NPV
$898
'10-'19
MODIFIED INCOME STATEMENT/PROCESS
IMPROVEMENT
1. Which is the better Case and why?
MODIFIED INCOME STATEMENT
Process Improvement Project
2010
Base Case
2012
$1,000
2013
$1,500
2014
$3,000
(000)
2X Capital Investment/30% Reduction in COGS
2010
2011
2012
2013
2014
$40
$500
$1,000
$1,500
$3,000
Revenues
$40
2011
$500
Sub-total
$40
$500
$1,000
$1,500
$3,000
$40
$500
$1,000
$1,500
$3,000
Production, units
1.0
12.5
25.0
37.5
75.0
1.0
12.5
25.0
37.5
75.0
COGS
Gross Margin
GM,%
$13
$27
67.5%
$163
$338
67.5%
$325
$675
67.5%
$488
$1,013
67.5%
$975
$2,025
67.5%
$10
$30
75.0%
$125
$375
75.0%
$250
$750
75.0%
$375
$1,125
75.0%
$750
$2,250
75.0%
SARs
% SAR
$176
440%
$352
70%
$430
43%
$568
38%
$600
20%
$176
440%
$352
70%
$430
43%
$568
38%
$600
20%
Operating Income
-$149
-$15
$245
$445
$1,425
-$146
$23
$320
$557
$1,650
Taxes @ 35%
Net Income
$0
-$149
$0
-$15
$86
$159
$156
$289
$499
$926
$0
-$146
$0
$23
$112
$208
$195
$362
$578
$1,073
Working Cap change
$1
$12
$15
$26
$55
$1
$10
$11
$20
$43
Cash from Operations
-$150
-$27
$145
$263
$871
-$147
$13
$197
$342
$1,030
Capital
Cash Flow
Cumulative Cash
$35
-$185
-$185
-$27
-$212
$145
-$67
$263
$196
$871
$1,067
$70
-$217
-$217
$13
-$203
$197
-$7
$342
$335
$1,030
$1,365
Discount Rate
35%
NPV Valuation
$180
'10-'14
Discount Rate
35%
NPV
$259
'10-'14
FINANCIAL ANALYSIS
SUMMARY
Analyzing the financial situation of a company is
a complicated process. One needs to use more than
one tool to develop an accurate picture of the true
financial situation of a business. The use of a P&L
Statement, a Balance Sheet and a Cash-Flow
Statement are essential.
Net Present Value (NPV) is a powerful financial
tool and should be used to help analyze different
business cases.