Chapters 1-6 - Dr Jeff Cornwall
Download
Report
Transcript Chapters 1-6 - Dr Jeff Cornwall
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
Copyright 2013 Cornwall, Vang & Hartman
Measuring “Success”
Income for entrepreneur
Wealth for entrepreneur
Goals derived from personal values of the
entrepreneur
Copyright 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
Copyright 2013 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
Copyright 2013 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)
Copyright 2013 Cornwall, Vang & Hartman
Figure 1.1
Building a Financial Forecast
Setting
Financial
Goals
Revenue
Forecasting
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Table 1.1
Example of Stakeholder Analysis
Stakeholder
Family
Ethical Principle
Application
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
Fair pricing
Establish revenue forecasts that are
Customers
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 Manage cash flow to allow for
the community.
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
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Life Cycle of a Business Venture
Figure 2.2
Maturity
Pre-Launch
Start-up
Growth
Copyright 2013 Cornwall, Vang & Hartman
“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
Copyright 2013 Cornwall, Vang & Hartman
Business Plan Outline
Executive Summary
The Business Concept
Value Proposition and Industry Analysis
Marketing Plan
Operating Plan
Financial Plan
Copyright 2013 Cornwall, 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
Copyright 2013 Cornwall, Vang & Hartman
Basic Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
Copyright 2013 Cornwall, Vang & 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%
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%
Operating Expenses
Rent Expense
Interest Expense
Earnings before taxes
100
.3%
$ 6,900
19.7%
Copyright 2013 Cornwall, Vang & Hartman
Balance Sheet
Exhibit 3.2
The Company
April 30, 2012
ASSETS
Current Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Fixed Assets
Equipment
Less: Accumulated Depreciation
Net Fixed Assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Notes Payable
Accounts Payable
Wages Payable
Total Current Liabilities
STOCKHOLDERS’ EQUITY
Common Stock
Retained Earnings
Total Stockholders’ Equity
TOTAL LIAB. & STOCKHOLDERS’ EQUITY
$ 58,900
25,000
30,000
113,900
36,000
(1,000)
35,000
$148,900
$ 15,000
22,000
5,000
42,000
100,000
6,900
106,900
$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
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Common Forecasting Mistakes
The linear forecast mistake
The hockey stick forecast mistake
The 20/80 vs. 80/20 mistake
Copyright 2013 Cornwall, Vang & Hartman
Marketing Plan and Forecasting
Marketing Plan
Backbone
Revenue
Forecasts
Copyright 2013 Cornwall, Vang & Hartman
Marketing Plan and
Revenue Forecasting
Identifying industry and market trends
Market research
Competitive analysis
Copyright 2013 Cornwall, Vang & Hartman
Sample Competitive Grid
Figure 4.3
Joe’s Inc.
Jane’s Inc.
Sally &
Jim’s Shop
Dr. C’s
Place (New
Business)
Cleanliness
of Facilities
Hours of
Operation
Selection
Price
Generally clean
in public areas,
but back rooms
usually messy
Consistently
clean and orderly
throughout all
facilities
Public areas
somewhat messy
and disorganized
and back areas
very messy
Plan to be
spotless
throughout
8:00 – 6:00
Most commonly
purchased products
available
$5 - $20
8:00 – 8:00
All commonly
purchased available
and some specialty
items in stock
$12 - $30
9:00 – 4:00
Many common
items not in stock –
usually have to
special order
$3 - $15
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
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Cost behavior
Variable Costs
Fixed Costs
Mixed Costs
Copyright 2013 Cornwall, Vang & Hartman
Table 5.1
Variable Costs
Type of Expense
Sales commissions
Materials cost
Health insurance
Wages expense
Payroll tax expense
Activity Base
Sales
Units produced
Number of employees
Number of hours worked
Dollars of wages paid
Copyright 2013 Cornwall, Vang & Hartman
Figure 5.1
Variable Cost Behavior
$
Total Variable
Cost Line
Total Units Produced
Copyright 2013 Cornwall, Vang & Hartman
Fixed Costs
Committed fixed costs
Discretionary fixed costs
Copyright 2013 Cornwall, Vang & Hartman
Figure 5.2
Fixed Cost Behavior
$
Total Fixed
Costs
Total Units Produced
Copyright 2013 Cornwall, Vang & Hartman
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
Sales salaries
15,000
35.0 35% of sales
# of salespeople x monthly
15.0 base
Sales commissions
1,500
1.5 1.5% of sales
Store rent
3,500
3.5 monthly rent
Total selling expenses
Office rent
Office salaries
Depreciation
Total gen. & admin.
EBIT
20,000
2,500
12,000
500
20.0
2.5 monthly rent
12.0 # people x monthly pay
.5 cost of equip./mos. of life
15,000
15.0
500
.5
Copyright 2013 Cornwall, Vang & Hartman
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
Setting
Financial
Goals
Revenue
Forecasting
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Time Out of Cash
Time Out of Cash =
Cash
Operating Cash Outflow per Month
Copyright 2013 Cornwall, Vang & Hartman