Financial management for entrepreneurs l.jpg
This presentation is the property of its rightful owner.
Sponsored Links
1 / 42

Financial Management for Entrepreneurs PowerPoint PPT Presentation

Financial Management for Entrepreneurs Shirley J. Daniel Professor of Accounting, Henry A. Walker Distinguished Professor of Business Enterprise Attribution/Sources Peter Gardner, General Partner, Allegis Capital (from Berkeley BPC website)

Download Presentation

Financial Management for Entrepreneurs

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Financial management for entrepreneurs l.jpg

Financial Management for Entrepreneurs

Shirley J. Daniel

Professor of Accounting,

Henry A. Walker Distinguished Professor of Business Enterprise

University of Hawaii Business Plan Competition Help Session


Attribution sources l.jpg

Attribution/Sources

  • Peter Gardner, General Partner, Allegis Capital (from Berkeley BPC website)

  • Harrison and Horngren, Financial Accounting, 4e, Prentice Hall

  • Hanson and Mowen, Management Accounting, 5e, Southwestern

  • Palo Alto Software, Business Planning Software

University of Hawaii Business Plan Competition Help Session


2 helpful websites l.jpg

2 Helpful Websites

  • Free: Berkeley Business Plan Competition (Workshops - 2002)

    http://bplan.berkeley.edu/

  • Palo Alto Software Business Plan Pro

    www.paloalto.com

University of Hawaii Business Plan Competition Help Session


Typical financial issues faced by entrepreneurs l.jpg

Typical financial issues faced by entrepreneurs

  • Planning future initiatives

  • Managing the business operations

  • Obtaining financing (debt or equity)

  • Compliance with government reporting

  • Cash Flow

  • Cash Flow

  • Cash Flow

University of Hawaii Business Plan Competition Help Session


The economic model of business 4 considerations l.jpg

The economic model of business - 4 considerations

  • Operating Leverage (fixed costs)

  • Contribution Margin

  • Volume

  • Product Mix

University of Hawaii Business Plan Competition Help Session


The vc perspective l.jpg

The VC Perspective

  • Fear vs. Greed

  • Have seen the good, bad and ugly

  • Driven by percentage ownership

  • Limited capacity for deals

  • Long-term capital formation strategy

  • Time is limiting factor

  • Trust

University of Hawaii Business Plan Competition Help Session


Investment criteria l.jpg

Investment Criteria

  • “Quality” seed and early-stage investments

  • Exceptional management teams

  • Defensible, proprietary technology/IP

  • Big, addressable markets

  • High margin business

  • Consistency with our domain expertise

  • Opportunities to leverage LP’s

  • Strong investment syndicate, min. 2 VC’s

University of Hawaii Business Plan Competition Help Session


Slide8 l.jpg

University of Hawaii Business Plan Competition Help Session


General l.jpg

General

  • Focus on the variables you can control, and be conservative on the ones you can’t

  • Use industry standard format and labels

  • Monthly for first 12-24 mos., then quarterly

  • Proof for inconsistencies and lumpiness

  • Know the “levers” in the model and spend extra time on them

University of Hawaii Business Plan Competition Help Session


Revenue model l.jpg

Revenue Model

  • Addressable market size

  • Pricing

  • Customer ROI

  • Gross margin

  • Sales cycle

  • Channels vs. direct

  • Reasonable ramp

  • Modest penetration assumptions

University of Hawaii Business Plan Competition Help Session


Expense model l.jpg

Expense Model

  • Control the “burn”: early keys are headcount and salary structure

  • Small teams are more efficient

  • “Center of gravity” should shift with time

  • Bad habits start early

  • Don’t build ahead of market adoption

University of Hawaii Business Plan Competition Help Session


Cash flow l.jpg

Cash Flow

  • Assume the worst, then double it

  • Match expenses with revenue

  • Balance sheet items are real

  • Debt vs. Equity

  • Think long-term

  • Heavy capital requirements are scary – find operational leverage

University of Hawaii Business Plan Competition Help Session


Comparables l.jpg

Comparables

  • Who do you resemble?

  • How are they valued? (NI, EBITDA, etc.)

  • What are their multiples?

  • What does the Street look for?

  • Who invested in them?

  • What are their operating metrics?

University of Hawaii Business Plan Competition Help Session


Fundraising assumptions l.jpg

Fundraising Assumptions

  • Long-term capital formation strategy

  • Time rounds to milestones

  • Dilution is cumulative

  • Start early

  • Know your customer (VC, etc.)

University of Hawaii Business Plan Competition Help Session


Vc s financial models l.jpg

VC’s Financial Models

  • Run financial projections

  • Apply comparable multiples

  • Calc. projected future value

  • Apply ownership after dilution

  • Achieve hurdle for multiple, IRR?

University of Hawaii Business Plan Competition Help Session


Factors in structuring deals l.jpg

Factors in Structuring Deals

  • Ownership hurdles

  • Time before next round

  • Maintain incentives

  • Leave room for step-ups

  • Dry powder

  • Co-investors

University of Hawaii Business Plan Competition Help Session


Vc fund structure l.jpg

VC Fund Structure

  • Sample Early-Stage VC model:

    • $200M fund for 20 deals

    • Subtract $30M for ops.

    • Avg. of $8M per deal over its life

    • Reserves of 75-150%

    • Avg. 20% start, 10-12% at liquidity

    • Initial investment of $3-5M

    • Post-money capped at $25M

University of Hawaii Business Plan Competition Help Session


Examples l.jpg

Examples

University of Hawaii Business Plan Competition Help Session


Summary l.jpg

Summary

  • Cash is king

  • You’re only as good as your worst assumption

  • Know the economics in your market

  • Admit what you don’t know

  • Adapt

  • Timing is everything

University of Hawaii Business Plan Competition Help Session


Relationships among the financial statements l.jpg

RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS

University of Hawaii Business Plan Competition Help Session


Slide21 l.jpg

Question Answer Financial Statement

1.

2.

3.

4.

University of Hawaii Business Plan Competition Help Session


Slide22 l.jpg

University of Hawaii Business Plan Competition Help Session


The accounting equation l.jpg

THE ACCOUNTING EQUATION

  • The accounting equation presents the resources of the business and the claims to those resources

Economic Resources = Claims to Economic Resources

or

Assets = Liabilities + Owners’ Equity

University of Hawaii Business Plan Competition Help Session


Accounting for business transactions l.jpg

ACCOUNTING FOR BUSINESS TRANSACTIONS

  • The table on the next slide summarizes the 11 transactions and provides the data that Air & Sea Travel used to create its financial statements

    • Data for the statement of cash flows are aligned under the Cash account

    • Income statement data appear as revenues and expenses under Retained Earnings

    • The balance sheet data are composed of the ending balances of the assets, liabilities, and stockholders’ equities

    • The statement of retained earnings, which shows net income (loss) and dividends, can be prepared from the Retained Earnings column

University of Hawaii Business Plan Competition Help Session


Analysis of transactons l.jpg

ANALYSIS OF TRANSACTONS

Income Statement Data

Statement of Retained Earnings Data

University of Hawaii Business Plan Competition Help Session


Slide26 l.jpg

+

Common Stock

+

Retained Earnings

-

Dividends

+

Revenues

-

Expenses

The accounting equation can be expanded to include revenues and expenses

Liabilities

Assets

+

=

Stockholders’

Equity

University of Hawaii Business Plan Competition Help Session


Slide27 l.jpg

Payments to suppliers

Collections from customers

Operating Activities

Payments to employees

Receipts of interest and dividends on investments

Payments of interest and income tax

Other operating receipts

Other operating disbursements

Acquisition of plant assets

Sale of plant assets

Investing Activities

Purchase of investments that are not cash equivalents

Sale of investments that are not cash equivalents

Making loans

Receipts on loans receivable

Payment of dividends

Issuing stock

Financing Activities

Purchase of treasury stock

Selling treasury stock

Payment of principal amounts of debts

Borrowing money

University of Hawaii Business Plan Competition Help Session


Slide28 l.jpg

Converting from the Accrual Basis to the Cash Basis for the Statement of Cash Flows

Adjust

Revenues to Cash

Receipts

Revenues

Cash

Flows from

Operating Activities

Net

Income

Adjust

Expenses to Cash

Payments

Expenses

Accrual-Basis Accounting

Cash-Basis Accounting

The direct method is easier to understand, and it provides more information for decision making

University of Hawaii Business Plan Competition Help Session


Financial management for entrepreneurs29 l.jpg

Financial Management for Entrepreneurs

Cost-Volume-Profit Analysis: A Managerial Planning Tool

(Break Even)

University of Hawaii Business Plan Competition Help Session


Sample questions raised and answered by cvp analysis l.jpg

Sample Questions Raised and Answered by CVP Analysis

1.How many units must be sold (or how much sales revenue must be generated) in order to break even?

2.How many units must be sold to earn a before-tax profit equal to a specific dollar amount? A before-tax profit equal to 15 percent of revenues? An after-tax profit of a specific dollar amount?

3.Will total profits increase if the unit price is increased and units sold decrease?

University of Hawaii Business Plan Competition Help Session


Sample questions raised and answered by cvp analysis continued l.jpg

Sample Questions Raised and Answered by CVP Analysis (continued)

4.What is the effect on total profit if fixed costs increase and sales increase by specific amounts?

5.What is the effect on total profit if the selling price per unit is decreased and sales increase?

6.What is the effect on total profit if the sales mix is changed?

University of Hawaii Business Plan Competition Help Session


Cost behavior l.jpg

Cost Behavior

Fixed-Cost Behavior

Variable-Cost Behavior

$

$

Relevant Range

Units Produced Units Produced

University of Hawaii Business Plan Competition Help Session


Mixed cost behavior l.jpg

Mixed-Cost Behavior

Linearity Assumption

Total Costs

Cost

Fixed Costs

Variable Costs

Number of Units Produced

Total cost = Fixed cost + Total variable cost

University of Hawaii Business Plan Competition Help Session


Cost volume profit graph l.jpg

Cost-Volume-Profit Graph

Total Revenue

Revenue

Profit

Total Cost

Y

X = Break-even point in units

Y = Break-even point in revenue

Loss

X

Units sold

University of Hawaii Business Plan Competition Help Session


Simple cvp example l.jpg

Simple CVP Example

Fixed costs (F)= $40,000

Selling price per unit (P)= $10

Variable cost per unit (V)= $6

Tax rate= 40%

1.What is the break-even point in units?

2.What is the break-even point in dollars?

University of Hawaii Business Plan Competition Help Session


Simple cvp example bep l.jpg

Simple CVP Example: BEP

1.Let X = break-even point in units

Operating income=Sales revenue -Variable expenses - Fixed expenses

0=$10X -$6X - $40,000

$10X - $6X=$40,000

$4X=$40,000

X=10,000 units

2.Break-even point in sales dollars is:

10,000 x $10 or $100,000

This can be shown with a variable-costing income statement.

University of Hawaii Business Plan Competition Help Session


Variable costing income statement l.jpg

Variable-Costing Income Statement

Sales (10,000 x $10)$100,000

Less: Variable costs (10,000 x $6) 60,000

Contribution margin$ 40,000

Less: Fixed costs 40,000

Profit before taxes0

Less: Income taxes 0

Profit after taxes$ 0

=====

University of Hawaii Business Plan Competition Help Session


Sales revenue approach l.jpg

Sales Revenue Approach

Alternative approach to solving break-even point in sales dollars:

Let X equal break-even sales in dollars

Operating income=Sales revenue - Variable expenses - Fixed expenses

0=X - 0.6X - $40,000

X - 0.6X=$40,000

0.4X=$40,000

X=$100,000

Note: V is the variable cost percentage which is found by:

Variable Cost per Unit6

Selling Price per Unit10

= 0.6

University of Hawaii Business Plan Competition Help Session


Cvp example targeted pretax income l.jpg

CVP Example: Targeted Pretax Income

What sales in units and dollars are needed to obtain a targeted profit before taxes of $20,000?

Let X = break-even point in units

Sales$ = $10X

Less: Variable costs= 6X

Contribution margin$60,000= $ 4X

Less: Fixed costs 40,000

Profit before taxes$20,000

====

Therefore, $60,000= $4X

15,000 units= X

Sales in dollars is (15,000 x $10) = $150,000.

Check this by completing the variable-costing income statement.

University of Hawaii Business Plan Competition Help Session


Cvp example targeted pretax income continued l.jpg

CVP Example: Targeted Pretax Income (continued)

Sales $150,000= 15,000 x $10

Less: Variable costs 90,000= 15,000 x $6

Contribution margin$ 60,000

Less: Fixed costs 40,000

Profit before taxes$ 20,000

=======

Therefore, it checks!

University of Hawaii Business Plan Competition Help Session


2 helpful websites41 l.jpg

2 Helpful Websites

  • Free: Berkeley Business Plan Competition (Workshops - 2002)

    http://bplan.berkeley.edu/

  • Palo Alto Software Business Plan Pro

    www.paloalto.com

University of Hawaii Business Plan Competition Help Session


Financial management for entrepreneurs42 l.jpg

Financial Management for Entrepreneurs

Q & A

University of Hawaii Business Plan Competition Help Session


  • Login