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Entrepreneurial Finance
 

Entrepreneurial Finance

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    Entrepreneurial Finance Entrepreneurial Finance Presentation Transcript

    • Management of Technological Innovation Andrew Maxwell
    • Entrepreneurial finance
    • Why you need to start with financial forecasting
      • Establishes cash needs of business
      • Allows entrepreneurs to compare expected value of strategic alternatives
      • Demonstrates value of company to investors
      • Helps identify appropriate benchmarks for measuring company development
    • Most importantly growing companies need cash
      • Understand why they need cash
      • How much they are likely to need
      • In the next lesson we will identify:
        • Ways of reducing the amount of cash required
        • Sources of cash, types of investment
        • What entrepreneurs will have to give up to get required cash and deal structures
    • Three types of financial statements
      • Balance sheet is a “snap shot” of a company’s affairs; it shows companies’ assets and liabilities, shareholders’ equity and change from year to year
      • Income statement shows companies’ revenue and expenses, plus profit for a specific period
      • Cash flow shows how much cash the company generates or needs in a period
      • All three statements are important and linked together
    • The importance of each
      • The income statement shows the health of the company and provides important guidance for entrepreneurs’ weekly/monthly decisions.
      • The cash flow statement and forecast provides guidance on daily tactics to preserve cash and ultimately on how much cash to borrow.
      • The balance sheet is used for valuation, comparison and progress assessment. It is more a consequence of the other two.
    • Forecasting revenue
      • Use market research to identify market size and pricing strategy
      • Use the adoption curve to forecast number of units sold
      • Create a three to five year revenue forecast
      • Use the unit numbers to forecast marginal cost
      • Calculate the fixed costs
      • Create a Profit and Loss account
    • Typical P and L 2008 2009 2010 Sales $100,000 $400,000 $1,000,000 Cost of Sales $50,000 $180,000 $400,000 Gross Margin $50,000 $220,000 $600,000 Other costs $200,000 $300,000 $400,000 Profit ($150,000) $80,000 $200,000
    • What is included in other costs?
      • Salaries
      • Rent
      • Overheads
      • Marketing
      • Research and development (special case)
    • Calculating a simple initial balance sheet: Step 1 Investment in the business
    • Step 2: Accounting for set up costs of business
    • Step 3: Accounting for leasehold improvements
    • Step 4: Accounting for fixed asset purchase
    • Step 5: Accounting of purchase for inventory
    • Step 6: Accounting for sales
    • A Step-By-Step Example:
    • A Step-By-Step Example:
    • A Step-By-Step Example:
    • Step 10: Accounting for depreciation & amortization
    • Key Components of Cash Flows
      • Sales
      • - Cost of Goods Sold
      • - Selling, General and Administration Expenses Net Income
      • - Interest
      • - Income Taxes
      • +Non-cash expenses e.g.depreciation
      • = Cash Flows From Operating Activities
      • - Increase in Accounts Receivable
      • - Increase in Inventory Change in Net Working Capital
      • + Increase in Accounts Payable
      • - Purchases of Fixed Assets Net Capital Expenditures
      • + Sales of Fixed Assets
      • - Payments to Owners of Business
      • = Cash Generated (Used) By Business Available for Repayment of Debts
    • Cash flows prior to sales
      • + Initial investment from entrepreneur
      • - Cost of setting up company
      • - Acquisition of licenses
      • Labour/materials
      • Travel and general
      • Rent/utilities
      • Capital (even if leased)
      • Legal and professional services
      • + Bank or credit card loans
      • + SRED
      • + Government grants
      • = Cash Flows From Research (cash hole)
    • Key Components of Cash Flows Components of Cash Flows for Sylvia’s Satins
    • Financing Cash Flow Deficiencies
      • If Sylvia’s Satins used up $31,000 cash in its on-going operations, how was this financed?
      • Opening Cash Balance $20,000
      • Less: Cash Used $31,000
      • Cash Surplus (Deficiency) - $11,000
      • Deficiency was financed by overdraft
    • Eleven Key Cash Flow Drivers
          • Relationship with Cash Flow
      • Sales Growth usually negative
      • Gross Margin % (Gross Profit/Sales) positive
      • Selling, General and Administration
      • (SGA) as % of Sales negative
      • Interest Expense negative
      • Non-cash Expenses positive
      • 6. Income Tax Rate negative
      • 7. Average Collection Period (ACP) negative
      • 8. Inventory Conversion Period negative
      • 9. Accounts Payable Period positive
      • 10. Net Capital Expenditures negative
      • 11. Owner’s Withdrawals from Firm negative
    • Impact of Doubling of Sales on Cash Flow of Firm
    • Relationship of sales growth to cash flow
      • With increased sales, Sylvia’s Satins would increase its profit from $3,900 to $8,700 but experience an increase in cash outflow from -$31,000 to -$43,000 and therefore end the year with a higher bank overdraft
      • Situation would be worse where firm experiences substantial growth and is capital intensive i.e. it needs more capital expenditures to facilitate expansion
      • These expenditures place greater pressure on the cash flow of the firm (a fact that is probably true for all the businesses for which you are developing business plans
    • Preparing Comprehensive Pro Forma Financial Statements Sales Forecast Production Forecast Cash Flow Forecast Pro Forma Income Statement Pro Forma Balance Sheet Sales, production and cash flow forecasts - monthly pro forma income and balance sheets - annually