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Financials

Financials. Profit Model & Resources Needed – Revisited. Profit Model = Revenues (i.e., what customers are reasonably willing to pay) – Resources Needed (i.e., all of the expenses you might have to spend money on)

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Financials

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  1. Financials

  2. Profit Model & Resources Needed – Revisited • Profit Model = Revenues (i.e., what customers are reasonably willing to pay) – Resources Needed (i.e., all of the expenses you might have to spend money on) • A critical problem that many start-ups have (including both Avenue 2 and Market Driver) is that revenues are too low and expenses are too high • Whatever you think your revenues will be, they will probably start out being a fraction of that • Whatever you think your expenses will be, they will probably start out being a multiple of that • The business will consume almost if not all of its’ own revenues (i.e., it will not pay you a salary for your personal cost of living expenses) • It will also consume almost every penny you can beg, borrow, or steal, so make sure you think ahead about your capital acquisition plan

  3. Profit Model & Resources Needed – Revisited • What are customers reasonably willing to pay? • Look at your customer vignettes and your product/service vignettes • Estimate revenues based on your customer acquisition goals and your price charged for each product/service vignette • Do you have enough product/service vignettes? • Are your customer acquisition goals high enough? • Can you really acquire that many customers given your competition? • What are all the possible expenses you may have to spend money on? • Variable Costs (raw materials (incl. transportation if relevant), labor (incl. payroll taxes & benefits), et cetera) • What quantities do you have to buy them in? • Marketing Costs (brand development, advertising, networking (incl. meals & expenses and transportation), et cetera) • Overhead Costs (office space, utilities, telecom/internet, information systems (hardware/software), R&D/product development, training & development, IT services, accounting services, legal services, et cetera) • Executive Compensation (i.e., what you and your partners can expect to earn above & beyond the equity value you’re building)

  4. Profit Model & Resources Needed – Examples • Profit Model: Bakery (i.e., Sucré) • Resources Needed: Landscaping • Using Hoovers’ income statement ratios to build your statement of cash flows

  5. Financial Statements • Statement of Cash Flows (monthly - 1 year pro forma) • Should be different monthly if business has seasonal fluctuations in revenues or expenses • Think about timing of payments vs. timing of expenses • Income Statement (annual - 5 years pro forma) • Balance Sheet (annual - 5 years pro forma) • Statement of Shareholder Equity (annual - 5 years pro forma)

  6. Ratio Analysis – Revisited • Profitability Ratios • FROM HOOVERS: Pre-Tax Return on Net Worth • FROM YOUR ANNUAL PRO-FORMAS: (Operating Revenue – Interest Expense – Depreciation/Amortization) / Shareholders’ Equity • Liquidity Ratios • FROM HOOVERS: Current Ratio • FROM YOUR ANNUAL PRO-FORMAS: Assets / Liabilities • Leverage Ratios • FROM HOOVERS: Total Debt to Net Worth • FROM YOUR ANNUAL PRO-FORMAS: Liabilities / Shareholders’ Equity • Activity Ratios • FROM HOOVERS: Inventory Turnover • FROM YOUR ANNUAL PRO-FORMAS: Varies depending on how much inventory you have and what your variable costs are (COGS / Inventory)

  7. Collecting Money • It is surprisingly easy to collect money online. For client payments and supplier purchase up to a few thousand dollars per transaction, entrepreneurial businesses can use Paypal (eBay) without any credit approval process whatsoever. It takes all of about 10 minutes to set up Paypal’s application (https://www.paypal.com/webapps/mpp/merchant). • Businesses (or individual entrepreneurs) that have decent credit ratings can also collect larger per-transaction sums through Paypal or through more robust payment processing vendors such as TSYS, Merchant Warehouse, and Advanced Payment Solutions. • Each of these online collection/purchasing vendors charges a fee of a few percentage points for each transaction.

  8. Collecting Money

  9. Capital Acquisition Plan • Credit Card Debt & Lines of Credit (initial) • Credit rating, personal financial situation of founders • Bank Debt (once you get up and running) • Assets of business • Financial statements of business • Business plan • Equity Investors (initial) • Individuals • Friends & family with personal savings of $10,000+ • The higher the personal savings, the less risky it is for them to peel off a couple grand. • Should get some sort of personal enjoyment/satisfaction out of business in exchange for risk assumed. • Advice Partners • Larger, more established business partners who have an interest in seeing your business succeed • Venture Capital/Angel Investors/Crowdsourcing • Crowdsourcing is an emerging micro-capital investment market. Keep your materials in circulation. • VENTURE CAPIAL & ANGEL INVESTMENT ALMOST NEVER HAPPENS – ESPECIALLY FOR LIFESTYLE BUSINESSES. But keep your materials in circulation – “you can’t win if you don’t play”.

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