<ul><li>BUS 529 </li></ul><ul><li>Lecture 2 </li></ul><ul><li>Business Plans, Financial Forecasting & Planning (Part I), S...
Business Models, Strategies and Plans <ul><li>Business Model : A (credible) story about how a business can make money for ...
Business Models -- Revenues <ul><li>Categories of revenue sources: </li></ul><ul><li>-- single stream from one product or ...
Business Models -- Costs <ul><li>Categories of costs: </li></ul><ul><li>--fixed production cost </li></ul><ul><li>--semi-v...
Business Strategy <ul><li>Porter’s Generic Competitive Strategies </li></ul><ul><li>-- overall cost leadership </li></ul><...
Business Plans <ul><li>The ideal plan is a written version of the business model and the business strategy. </li></ul><ul>...
Components of the Financial Plan <ul><li>Statement of the amount of financing sought, and why funding is needed.  </li></u...
How to Write a Great Business Plan by William Sahlman <ul><li>Relative importance of the business plan, and why </li></ul>...
Slope of the curve  indicates the burn rate
Attributes of a Good Financial Plan <ul><li>The plan focuses on the evolution of cash. </li></ul><ul><ul><li>For what purp...
Financial Forecasting and Business Plans <ul><li>Managerial accounting is more important than financial accounting </li></...
Overview of Sources of Funds & Securities Laws <ul><li>A Leitmotiv : </li></ul><ul><li>Raising money is hard work. Money i...
Idea Stage Concept Stage Product Develop- ment Stage Test marketing Stage Seed Financing A Round B  Round C  Round D  Roun...
 
External Equity Sources of Funds <ul><li>Entrepreneurs (& Families & Friends) </li></ul><ul><li>“ Angels” </li></ul><ul><l...
External Equity Sources of Funds <ul><li>-- Advantages of using Angels </li></ul><ul><li>-- will invest in early stage fir...
External Equity Sources of Funds: Venture Capital <ul><li>VC firms are limited partnerships </li></ul><ul><ul><li>limited ...
External Equity Sources of Funds   Private and Public Stock Offerings <ul><li>(this slide intentionally left blank) </li><...
Debt Sources of Funds Trade Credit, Commercial Banks & Finance Cos. <ul><li>Trade Credit </li></ul><ul><li>Unsecured finan...
Debt Sources of Funds Small Business Admin. (SBA) Loans <ul><li>Main program is the 7(a) program available mainly thru ban...
Other Sources of Funds: SBIR Grant Program <ul><li>S mall  B usiness  I nnovation  R esearch  </li></ul><ul><li>Small Busi...
<ul><li>Some successful bootstrapping behaviors: </li></ul><ul><li>Accept quick break-even, cash-generating projects. </li...
Bootstrap Finance Again <ul><li>Neal Hunter, founder, former CEO of Cree Research </li></ul><ul><li>Cree founded in 1987 b...
Summary and Conclusions <ul><li>Business plans are like war plans; they describe a future that never happens.  Preparing t...
Upcoming SlideShare
Loading in …5
×

BUS 529 Lecture 2 Business Plans, Financial Forecasting ...

1,086 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,086
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
12
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

BUS 529 Lecture 2 Business Plans, Financial Forecasting ...

  1. 1. <ul><li>BUS 529 </li></ul><ul><li>Lecture 2 </li></ul><ul><li>Business Plans, Financial Forecasting & Planning (Part I), Sources of Funds & Securities Law </li></ul><ul><li>Goals: </li></ul><ul><li>To discuss business plans, especially the financial aspects </li></ul><ul><li>To initiate a 3-part lecture on financial planning and forecasting </li></ul><ul><li>To present and overview of funding sources through the life cycle of the firm. </li></ul>
  2. 2. Business Models, Strategies and Plans <ul><li>Business Model : A (credible) story about how a business can make money for its owners, together with (credible) numbers that support the story. Includes a revenue model and a cost model. </li></ul><ul><li>Business Strategy : A firm’s theory about how to compete successfully. </li></ul><ul><li>Business Plan : (Ideally it is) a written version of the firm’s business model and business strategy. </li></ul><ul><li>Observation: A firm’s business model should influences the presentation of the financial forecasts in the firm’s business plan. </li></ul>
  3. 3. Business Models -- Revenues <ul><li>Categories of revenue sources: </li></ul><ul><li>-- single stream from one product or service </li></ul><ul><li>-- multiple streams from different products or services </li></ul><ul><li>-- interdependent streams / loss leaders (ex.: razors & razor blades; grocery stores) </li></ul><ul><li>Revenue Models </li></ul><ul><li>-- volume or unit-based (ex.: most goods) </li></ul><ul><li>-- licensing or royalty-based (e.g., HBSP) </li></ul><ul><li>-- transaction fee (ex: brokerage firms) </li></ul><ul><li>-- subscription / membership (e.g.: country clubs) </li></ul><ul><li>-- advertising-based (e.g., newspapers, Yahoo.com) </li></ul>
  4. 4. Business Models -- Costs <ul><li>Categories of costs: </li></ul><ul><li>--fixed production cost </li></ul><ul><li>--semi-variable production cost </li></ul><ul><li>--variable production cost </li></ul><ul><li>--infrequent (non-recurring?) production costs </li></ul><ul><li>Cost Structures / Cost Drivers </li></ul><ul><li>-- payroll-centered -- direct (ex.: professional services) </li></ul><ul><li>-- payroll-centered -- support (ex: insurance cos.) </li></ul><ul><li>-- inventory driven (ex.: car dealerships) </li></ul><ul><li>-- space/rent driven (e.g.: restaurants) </li></ul><ul><li>-- marketing/advertising driven (e.g., AOL) </li></ul><ul><li>-- fixed asset-driven (e.g., car makers; silicon chips?) </li></ul>
  5. 5. Business Strategy <ul><li>Porter’s Generic Competitive Strategies </li></ul><ul><li>-- overall cost leadership </li></ul><ul><li>-- differentiation </li></ul><ul><li>-- focus </li></ul><ul><li>Porter’s 5 Forces Driving Industry Competition </li></ul><ul><li>-- rivalry among existing firms </li></ul><ul><li>-- potential entrants </li></ul><ul><li>-- substitute products </li></ul><ul><li>-- bargaining power of suppliers </li></ul><ul><li>-- bargaining power of customers </li></ul>
  6. 6. Business Plans <ul><li>The ideal plan is a written version of the business model and the business strategy. </li></ul><ul><li>Components of a Business Plan </li></ul><ul><li>Introductory Page </li></ul><ul><li>Table of Contents </li></ul><ul><li>Executive Summary </li></ul><ul><li>Industry Analysis / Product Description / Marketing Plan </li></ul><ul><li>(Design and Development Plans) </li></ul><ul><li>Manufacturing / Operations Plan </li></ul><ul><li>Organizational Plan </li></ul><ul><li>Overall Schedule </li></ul><ul><li>Critical Risks, Problems and Assumptions </li></ul><ul><li>Financial Plan </li></ul>
  7. 7. Components of the Financial Plan <ul><li>Statement of the amount of financing sought, and why funding is needed. </li></ul><ul><li>Historical financial data back three years (if applicable): </li></ul><ul><ul><li>income statements </li></ul></ul><ul><ul><li>balance sheets </li></ul></ul><ul><ul><li>statements of cash flow </li></ul></ul><ul><li>Financial Projections </li></ul><ul><ul><li>monthly, years 1-3; annual, years 4,5 </li></ul></ul><ul><li>An indication of the gain from investing. </li></ul><ul><li>Probable exit strategy, and time-frame for exit. </li></ul>
  8. 8. How to Write a Great Business Plan by William Sahlman <ul><li>Relative importance of the business plan, and why </li></ul><ul><li>Factors to Emphasize in a Business Plan: </li></ul><ul><ul><li>The people </li></ul></ul><ul><ul><li>The opportunity </li></ul></ul><ul><ul><li>The context </li></ul></ul><ul><ul><li>The risks & rewards </li></ul></ul><ul><li>What numbers do matter: </li></ul><ul><ul><li>The breakeven point </li></ul></ul><ul><ul><li>When cash flow turns positive </li></ul></ul>
  9. 9. Slope of the curve indicates the burn rate
  10. 10. Attributes of a Good Financial Plan <ul><li>The plan focuses on the evolution of cash. </li></ul><ul><ul><li>For what purposes is the founder group seeking funding? (Acquisition of fixed assets? Current assets? R&D?) </li></ul></ul><ul><ul><li>How much cash does the founder group need, and what is the timing of the need? </li></ul></ul><ul><ul><li>When does the firm start to generate positive free cash flow? </li></ul></ul><ul><li>The plan reflects founders’ awareness that managerial accounting is more important than financial accounting. </li></ul><ul><ul><li>Conveying the business model clearly is more important than presenting projections in formats conforming to generally accepted accounting principles. </li></ul></ul>
  11. 11. Financial Forecasting and Business Plans <ul><li>Managerial accounting is more important than financial accounting </li></ul><ul><ul><li>Supporting schedules present key assumptions; these are needed for credibility. </li></ul></ul><ul><ul><li>Forecasts are guesses, so the assumptions are important. </li></ul></ul><ul><ul><li>Choosing the right level of aggregation can be tricky. </li></ul></ul><ul><ul><li>The “unstructured approach” shows that financial accounting need not be followed to be informative. </li></ul></ul><ul><li>Understanding how key financial statements helps in presenting informative projections. </li></ul>
  12. 12. Overview of Sources of Funds & Securities Laws <ul><li>A Leitmotiv : </li></ul><ul><li>Raising money is hard work. Money is nearly unavailable at the early stages of a firm’s life. At some point you will probably have to “bootstrap”: get by with small amounts of funds, usually personal ones, and use strategies and behaviors that generate cash flow. </li></ul><ul><li>Why is raising money such hard work? </li></ul><ul><li>-- asymmetric information </li></ul><ul><li>-- agency problems </li></ul><ul><li>-- “information opacity”; “informationally opaque” </li></ul><ul><li>These problems are very hard to overcome. That’s why “bootstrapping” is usually necessary. </li></ul><ul><li>starting a venture with modest personal funds </li></ul><ul><li>using personal funds plus revenue internally generated by the new firm to finance capital expenditures and growth. </li></ul>
  13. 13. Idea Stage Concept Stage Product Develop- ment Stage Test marketing Stage Seed Financing A Round B Round C Round D Round Mez- zaine Start-up Financing
  14. 15. External Equity Sources of Funds <ul><li>Entrepreneurs (& Families & Friends) </li></ul><ul><li>“ Angels” </li></ul><ul><li>--- &quot;The typical angel is a 47-year-old white male with a college education earning $100,000 per year and having a net worth (excluding a home) of $1 million. Most have substantial business and financial experience and prefer to invest in companies at the start-up or infant growth stage.” </li></ul><ul><li>--- probably invest mostly in the $250,000 - $1 m range, </li></ul><ul><li>-- less than what ventures capitalists invest </li></ul><ul><li>-- more than what entrepreneurs have </li></ul>
  15. 16. External Equity Sources of Funds <ul><li>-- Advantages of using Angels </li></ul><ul><li>-- will invest in early stage firms (unlike VCs) </li></ul><ul><li>-- will invest in high-tech firms </li></ul><ul><li>-- require lower returns: 35-50% per year </li></ul><ul><li> VC: 60-75% per year </li></ul><ul><li>-- take less equity and less control than VCs </li></ul><ul><li>-- Disadvantages of using Angels </li></ul><ul><li>-- may be unable to assess the business idea </li></ul><ul><li>-- may have no experience starting a business </li></ul><ul><li>-- may bring no useful skills or contacts </li></ul><ul><li>Angel Networks </li></ul><ul><ul><li>angels investing individually hold highly undiversified portfolios; networks circulate bplans and make pooled investments </li></ul></ul><ul><ul><li>to be an “accredited investor” angels must comply with SEC Rule 501. </li></ul></ul>
  16. 17. External Equity Sources of Funds: Venture Capital <ul><li>VC firms are limited partnerships </li></ul><ul><ul><li>limited partners are investors </li></ul></ul><ul><ul><li>general partners are the fund managers </li></ul></ul><ul><li>Key evaluation criteria: </li></ul><ul><ul><li>strong management </li></ul></ul><ul><ul><li>growth industry </li></ul></ul><ul><ul><li>unique opportunity </li></ul></ul><ul><ul><li>appropriate annual rates of return: </li></ul></ul><ul><ul><ul><li>seed stage: 60-75% </li></ul></ul></ul><ul><ul><ul><li>start-up stage: 50-60% </li></ul></ul></ul><ul><ul><ul><li>growth/expansion: 30-50% </li></ul></ul></ul><ul><ul><ul><li>harvest: 30% or less </li></ul></ul></ul><ul><li>VCs gather info before investing. (“due diligence”) </li></ul><ul><li>Advantages of VC: experience, expertise </li></ul><ul><li>Disadvantages of VC: want to run the show </li></ul>
  17. 18. External Equity Sources of Funds Private and Public Stock Offerings <ul><li>(this slide intentionally left blank) </li></ul>
  18. 19. Debt Sources of Funds Trade Credit, Commercial Banks & Finance Cos. <ul><li>Trade Credit </li></ul><ul><li>Unsecured financing provided by suppliers </li></ul><ul><li>Major source of funds </li></ul><ul><li>Evidence of ability to repay before extending credit. </li></ul><ul><li>Commercial Banks </li></ul><ul><li>Major source of funds </li></ul><ul><li>Mainly short-term lending (under 1 year) </li></ul><ul><li>Very conservative in lending practices </li></ul><ul><li>Banks want evidence of good stable cash flow. </li></ul><ul><li>Finance Companies </li></ul><ul><li>&quot;asset-based lending.&quot; </li></ul><ul><li>less conservative than banks: more stable funding </li></ul><ul><li>shun small loans </li></ul><ul><li>charge 2-10% more interest and fees than banks. </li></ul><ul><li>Factoring: buy AR at a discount (5%) </li></ul>
  19. 20. Debt Sources of Funds Small Business Admin. (SBA) Loans <ul><li>Main program is the 7(a) program available mainly thru banks; 80-90% of the loan is guaranteed by the SBA </li></ul><ul><li>eligibility requirements: </li></ul><ul><ul><li>business must be &quot;small&quot; </li></ul></ul><ul><ul><li>no speculation or real estate </li></ul></ul><ul><ul><li>data needed for application: </li></ul></ul><ul><ul><ul><li>existing ventures: 3 years of historical financials; 3 years of pro formas </li></ul></ul></ul><ul><ul><ul><li>start-ups: a business plan w/ pro formas; 20-30%+ equity from founders </li></ul></ul></ul><ul><li>Loan features: </li></ul><ul><ul><li>installment loans (level principal & interest) </li></ul></ul><ul><ul><li>amounts and terms-to-maturity by the bank </li></ul></ul><ul><ul><ul><li>the median loan is about $175,000 </li></ul></ul></ul><ul><ul><ul><li>average term is about 12 years </li></ul></ul></ul><ul><ul><li>interest rate: prime + 2.25 - 2.75% </li></ul></ul>
  20. 21. Other Sources of Funds: SBIR Grant Program <ul><li>S mall B usiness I nnovation R esearch </li></ul><ul><li>Small Business Innovation Development Act of 1982. Federal agencies with big R&D budgets award part of their funds to small businesses. </li></ul><ul><li>11 Fed agencies: DOD, NASA, DOE, HHS, NSF, USDA, DOT, Nuculear Regulatory Commission, EPA, DOI, DOEd. Each department develops a list of R&D areas in which it will fund research. </li></ul><ul><li>Types of awards: </li></ul><ul><ul><li>Phase I: up to $50,000 for feasibility study </li></ul></ul><ul><ul><li>Phase II: up to $500,000 for prototype development </li></ul></ul>
  21. 22. <ul><li>Some successful bootstrapping behaviors: </li></ul><ul><li>Accept quick break-even, cash-generating projects. </li></ul><ul><li>Control growth because growth eats cash. </li></ul><ul><li>Focus on cash alone. Bootstrappers need strong cash flow from the start to cover costs and save for expansion. </li></ul><ul><li>Cultivate banks before the business becomes creditworthy. </li></ul>Bootstrap Finance Again
  22. 23. Bootstrap Finance Again <ul><li>Neal Hunter, founder, former CEO of Cree Research </li></ul><ul><li>Cree founded in 1987 by 6 NCSU graduates </li></ul><ul><li>Raised $350m in equity before going public in ’93. </li></ul><ul><li>Funds raised: </li></ul><ul><ul><li>Months 1-2: $28,000 2 nd mortgage, credit cards </li></ul></ul><ul><ul><li>Months 3-4: $20,000 friends and family </li></ul></ul><ul><ul><li>Months 5-8: $400,000 private investors </li></ul></ul><ul><ul><li>Months 9–12: $2.8m private investors </li></ul></ul><ul><li>Sources of funds: home equity loans, credit cards, family and friends, government contracts (SBIR), private equity, operating income. </li></ul>
  23. 24. Summary and Conclusions <ul><li>Business plans are like war plans; they describe a future that never happens. Preparing them is useful nevertheless. You can’t get funding without one. </li></ul><ul><li>Financial projections can be useful if well-crafted. They must be supported by reasonable assumptions and focus on the things that matter: evolution of the firm’s ability to generate cash, eventual return on investment. </li></ul><ul><li>Raising money is really hard because start-up and young firms are informationally opaque. (Bootstrapping.) As firms become less opaque, more funding sources become available. </li></ul>

×