Startup4Chinese: Inspire, empower and connect entrepreneur minds. Find out more at http://Startup4Chinese.com. And our meetup group: http://meetup.com/Startup-4-Chinese-GTA/. The video of this presentation: part 1- https://www.youtube.com/watch?v=AFLaARQ6ktk part 2 - https://www.youtube.com/watch?v=o_SM4n89f6M Companies a lot of times fail because they overlooked the basics of running a business. Startups, too, often fail to execute the basics and create pitfalls later on. Accounting is your business doctor - it tracks how your business’s been doing lately, finds out root causes and plans a path for you to get well. No companies can grow and be viable in the long run without proper accounting management. It reveals everything from sales - such as customer adoption rate, operations - such as operating inefficiencies, to strategic issues - such as positioning and branding. This presentation will touch important accounting basics and classic business failure cases studies. It’ll also give out useful tips for business owners. 很多时候公司的失败是由于未做到管理生意的基本面而造成的。未作这些基本点的初创公司在创业初期不会感觉到有什么问题，但是没多久就会造成事后的悲催。 财务是你生意上的医生 —— 它统计着你生意的近况，诊断出问题的根源并且设计出一条改善你“健康”的道路。现今没有任何公司可以不使用现代财务管理工具而可以长期健康的生长。财务工具能帮你扯去公司运营表面现象的面纱，暴露一切问题：从销售的客户获取率，运营的效率，到战略上的问题比如定位和品牌。 这次的交流内容会涉及财务基础（针对非财务专业），现实生活中经典的公司案例（北美地区公司案例），然后会给初创公司的创业者们有用的tips. Speaker: Jason Lu Experience: 10+ years experience in business development (North America and the Asia Pacific), project valuation & acquisition, product costing, corporate finance consulting. Currently working as a consultant to help turnaround medium-sized and small businesses. 经验： 10多年经验——北美和亚太地区业务拓展（曾拓展超出两亿美金的年销售额），项目估值和并购（超过2,000万美金价值的项目并购），财务成本，公司财务顾问。目前作为顾问帮助挽转GTA地区的中小公司。 Education: MBA 14’ – Schulich School of Business, York University Chartered Professional Accountant (CPA): 2016 – present B.Eng. - Hefei University of Technology, China 教育背景： MBA 14’ – Schulich School of Business, York University Chartered Professional Accountant (CPA): 2016 – present B.Eng. – Hefei University of Technology, China

1. Avoid Financial Trouble
- guidelines for non-finance background founder
Jason Lu
May 13, 2018

2. Introduction – Jason Lu
 Finance (4+ years)
 Solar energy M&A
 Financial Planning & Analysis
 Product costing
 Business Development (6+ years)
 PVD coating
 Automotive
 Current: Chief Consultant at Rebound Finance Accounting
 Education
 Schulich School of Business, York University – MBA
 CPA – 2016 to present
 Hefei University of Technology (合肥工业大学）- B.Eng.

3. Objectives
 Get to know important accounting skills for running a business
 Understand why financials are so important to business owners

4. Agenda
 Why accounting?
 Accounting 101
 Case in point - two extremes
1. Case 1: Only passion. Don’t care about the fundamentals
2. Case 2: Greed overtook “core” – what made you success

5. Agenda
 Why accounting?
 Accounting 101
 Case in point - two extremes
1. Case 1: Only passion. Don’t care about the fundamentals
2. Case 2: Greed overtook “core” – what made you success

6. Key questions
 What is accounting?
 Why do you care?

7. Source: CB Insights (Feb. 2018)
https://www.cbinsights.com/research/startup-failure-reasons-top/
29%
18%
47%
+
=
Why do you care?

8. Agenda
 Why accounting?
 Accounting 101
 Case in point - two extremes
1. Case 1: Only passion. Don’t care about the fundamentals
2. Case 2: Greed overtook “core” – what made you success

9. What is accounting

10. Important Accounting Basics
 Accounting Equation: Asset = Liability + Equity

11. Balance sheet sample

12. Income statement sample

13. Cash flow statement sample

14. Things that are important to you
 Cost/Price
 Debt
 Cash

15. Agenda
 Accounting 101
 Case in point - two extremes
1. Case 1: Only passion. Don’t care about the fundamentals
2. Case 2: Greed overtook “core” – what made you success

16. Things that are important to you
 Cost/Price
 Debt
 Cash

17. Case in point
 Cause: Family type 2 diabetes history
 Vision: Better performance and health
 Ways to achieve his vision:
 Mostly accessible to everyone
 Delivery whole foods in a bottle
 100% natural
 No added sugar and additives
 Product size: small bottles & jugs
 Distribution: retail sale in a gym + off-site events

18. Symptoms
 Good news:
 34 months into business
 Customer loved the product and the owner!
 Sales were going up in general
 Bad news:
 Operating in loss for 97% of the time
 Thousands of dollars of net cash outflow monthly and no sign of narrowing the gap
 Owner is not happy with employees
 Employees are not happy
What’s the issue?

19. Issues
 Financial records: Only first 25 months’ data available
 Bookkeeper
 Income Statements:
 Cash based
 Cash Flow Statements:
 What is that?
Lacks the basic understanding of the importance of financials

20. Income Statements
Net Sales 78,577.09 100%
EXPENSE
Cost of Goods Sold
Total Cost of Goods Sold 51,017.46 65%
Gross Profit 27,559.63 35%
Operating Expense
Wages & Salaries 41,918.29 53%
EI Expense 1,022.56 1%
CPP Expense 1,192.50 2%
Others 1,098.50 Note: combined
Total Operating expense 45,231.85 58%
General & Administrative Expenses
Office Supplies & other equipment 4,853.40 6%
Miscellaneous Expenses 5,927.18 8%
Rent 8,250.00
Others 10,057.26 Note: combined
Total General & Admin. Expenses 29,087.84 37%
TOTAL EXPENSE 125,337.15 160%
NET INCOME -46,760.06
64% payroll!
65% Raw Material*
129% Sales!
* Accounting record error
Sorry
confi
denti
al

21. Cost
Cost behavior Product A
Cost driver units 500
Raw Material
Base variable cost 1.100
Additional ingredients variable cost NA
Bottle variable cost 0.300
Cap variable cost 0.500
Label variable cost 0.040
1.940
Direct Labor variable cost
Rate 15.000
Hrs/week 24.000
360.000
Output in ml 56,000
3.21
MOH fixed cost
Pre-determined rate 0.002
Cost driver amounts 500
MOH allocation 64%
0.653
COGS 5.81
Non-mfg OH fixed cost 20.643
Non-mfg OH allocation 16%
3.32
Operating cost 9.13
Sorry
confi
denti
al

22. Contribution Margin example
Variable cost:
1. Ingredients: $1
2. Bottle + cap + label: $0.5
3. Direct labor: $1
Total VC= $2.5
Fixed cost:
1. Owner’s salary: $4,000/month
2. Store manager’s salary: $3,000/month
3. Rent: $2,000/month
Total FC = $8,000/month
Contribution margin:
Price: $5
Less: Total variable cost $2.5
Contribution margin = $2.5
Break-even:
Total FC/Contribution margin
= $8,000/$2.5
= 3,200 units

23. Contribution Margin
Options:
1. Shut down the production, stop selling
2. Increase price, which involves re-branding – extremely difficult
3. Shrink product size – risky
Product A Product A1 Product B Product B1 Product C Product C1
Base 1.10 4.40 0.88 3.52 0.98 3.91
Other ingredients - - 1.00 3.98 0.36 1.46
Bottle 0.30 0.32 0.30 0.32 0.30 0.32
Cap 0.50 0.50 0.50 0.50 0.50 0.50
Label 0.04 0.04 0.04 0.04 0.04 0.04
DL 3.21 12.86 3.21 12.86 3.21 12.86
Variable Cost 5.15 18.12 5.93 21.22 5.40 19.09
Current Price 3.54 13.27 4.00 16.81 4.42 16.81
Contribution Margin 1.61- 4.84- 1.93- 4.40- 0.97- 2.27-
Sorry confidential

24. Lessons learned
 Pay attention to your fundamentals!
 You need to make money to survive
 Contribution Margin must be > $0 in order to continue your business
 At the minimum – price your product based on cost

25. Agenda
 Accounting 101
 Business operations from finance and accounting perspective
 Case in point - two extremes
1. Case 1: Only passion. Don’t care about the fundamentals
2. Case 2: Greed overtook “core” – what made you success

26. Things that are important to you
 Cost/Price
 Debt
 Cash

27. Case in point - SunEdison

29. End of 2012

30. Creative financial engineering
YieldCo A
SunEd
YieldCo B
Sell projectsSell projects
Ownership
Source: SunEdison
• Incentives
• Executive compensation
• Stock price valuation
• Corporate governance
• Conflict of interests

31. End of 2012

32. $11.7B
~$6.9B
Low interest rate

33. $2.4B
Q1 15’
$350M
Q2 15’

34. End of 2012
First Wind

35. $2.4B
Q1 15’
$350M
Q2 15’
$2.2B
Q3 15’ (announced)
Vivint Solar

36. End of 2012
First Wind Vivint Solar
$11.7B debt$6.9B debt

37. Balance Sheet - Debt piling up
Year 2015 2014 2013 2012 2011 2010 2009 2008
Total Current Assets 2,788 2,385 1,459 1,886 1,737 1,250 1,454
Net Property Plant And Equipment 7,074 3,123 2,673 2,393 2,034 1,461 1,041
Investment And Advances 149 41 50 55 110 298 285
Other Non Current Assets - - - - - - -
Deferred Charges - - - 45 139 95 70
Intangibles 660 - 114 149 395 332 -
Deposits And Other Assets 829 1,132 406 354 196 131 87
Total Assets 11,500 6,681 4,702 4,882 4,612 3,567 2,937
Total Current Liabilities 3,145 1,889 1,136 1,437 1,284 509 473
Mortgages - - - - - - -
Deferred Charges Taxes Income 204 90 175 209 190 106 89
Convertible Debt - - - - - - -
Long Term Debt 6,120 3,179 2,267 1,779 611 384 26
Non Current Capital Leases - - - - - - -
Other Long Term Liabilities 546 1,181 446 672 231 360 232
Total Liabilities 14,845 10,015 6,339 4,036 4,097 2,316 1,360 855
Minority Interest - - 11 - - - 35
Preferred Stock - - - - - - -
Common Stock Net 3 3 2 2 2 2 2
Capital Surplus 1,698 458 648 622 558 507 426
Retained Earnings - 1,348 - 168 425 578 2,114 2,079 2,147
Treasury Stock 9 0 460 460 456 453 437
Other Liabilities 1,141 49 51 43 78 71 - 56
Shareholders Equity 1,485 1,485 341 666 785 2,296 2,207 2,082
Total Liabilities And Shareholders Equity 11,500 6,681 4,702 4,882 4,612 3,567 2,937
update Date - - - - - - -
Debt/Equity 10.0 6.7 18.6 6.1 5.2 1.0 0.6 0.4
Source: Amigobulls.com - Watch Analyze Invest

38. Cash Flow - cash problem
Year 2014 2013 2012 2011 2010 2009 2008
Net Income Cash Flow - 1,272 - 614 - 149 - 1,520 48 - 70 387
Depreciation Depletion Amortization C F 357 268 247 668 165 124 104
Net Increase Decrease In Assets Liabilities - 151 - 485 - 380 282 158 - 49 - 247
Cash From Used In Discontinued Operations - - - - - - -
Other Adjustments Net 296 124 18 555 - 24 27 396
Net Cash From Used By Operating Activities - 770 - 707 - 264 - 15 348 33 641
Increase Decrease In Prop Plant And Equipment - 230 - 133 - 139 - 409 - 352 - 225 - 303
Acquisition Disposition Of Subsidiaires - 719 - 7 - - 164 - 74 - 189 -
Increase Decrease In Investments - 46 17 - 42 45 252 140 - 32
Other Cas Inflow From Investment Activities - 1,645 - 737 - 332 - 736 - 348 - 26 -
Net Cash From Used By Invesment Activities - 2,640 - 861 - 513 - 1,263 - 522 - 300 - 335
Issuance Purchase Of Equity Shares 139 510 - 1 - 4 - 3 - 15 - 301
Issuance Repayment Of Debt Securities 2,524 1,265 850 1,351 299 17 - 6
Increase Decrease In Bank And Other Borrowings - - - - - - -
Payment Of Dividends And Other Cash
Distributions - 8 - - - - 18 - - 3
Other Cash From Used By Financing Activities 1,147 - 180 - 85 - 197 - 34 - 93 157
Net Cash From Used By Financing Activities 3,802 1,595 765 1,151 243 - 92 - 153
Source: Amigobulls.com - Watch Analyze Invest

39. Balance Sheet - Debt piling up
Year 2015 2014 2013 2012 2011 2010 2009 2008
Total Current Assets 2,788 2,385 1,459 1,886 1,737 1,250 1,454
Net Property Plant And Equipment 7,074 3,123 2,673 2,393 2,034 1,461 1,041
Investment And Advances 149 41 50 55 110 298 285
Other Non Current Assets - - - - - - -
Deferred Charges - - - 45 139 95 70
Intangibles 660 - 114 149 395 332 -
Deposits And Other Assets 829 1,132 406 354 196 131 87
Total Assets 11,500 6,681 4,702 4,882 4,612 3,567 2,937
Total Current Liabilities 3,145 1,889 1,136 1,437 1,284 509 473
Mortgages - - - - - - -
Deferred Charges Taxes Income 204 90 175 209 190 106 89
Convertible Debt - - - - - - -
Long Term Debt 6,120 3,179 2,267 1,779 611 384 26
Non Current Capital Leases - - - - - - -
Other Long Term Liabilities 546 1,181 446 672 231 360 232
Total Liabilities 14,845 10,015 6,339 4,036 4,097 2,316 1,360 855
Minority Interest - - 11 - - - 35
Preferred Stock - - - - - - -
Common Stock Net 3 3 2 2 2 2 2
Capital Surplus 1,698 458 648 622 558 507 426
Retained Earnings - 1,348 - 168 425 578 2,114 2,079 2,147
Treasury Stock 9 0 460 460 456 453 437
Other Liabilities 1,141 49 51 43 78 71 - 56
Shareholders Equity 1,485 1,485 341 666 785 2,296 2,207 2,082
Total Liabilities And Shareholders Equity 11,500 6,681 4,702 4,882 4,612 3,567 2,937
update Date - - - - - - -
Debt/Equity 10.0 6.7 18.6 6.1 5.2 1.0 0.6 0.4
Source: Amigobulls.com - Watch Analyze Invest

40. No capacity
Asset = Liability + Equity
Balance Sheet (2014)
$11.5B
$3.2B
$1.4B
$6.9B

41. No capacity
Short-term Liability
and Debt Service
required
$3.2 B
-$0.8 B
Operating C/F
$4 B
Financing needed

42. Re-cap & Lessons Learned
End of 2012
First Wind Vivint Solar
$11.7B debt$6.9B debt
Bankrupt

43. Key take-aways & Tips
 Do a good bookkeeping from day 1
 Wave Accounting
 QuickBooks
 Hire a good bookkeeper at the minimum
 Pricing based on cost and market
 Don’t start a business with loans
 Cash is king!
 Watch how you spend cash
 Watch how you collect cash
 Have a good accountant working with you

44. Why do you care?

45. Contact Info
 Email: jasonlu@reboundaccounting.com
 Phone: 905-966-3561
 WeChat: 315-749-434

46. Study resources
 Investopedia.com
 Accountingcoach.com