Outline: Chapter 1 Introduction

1. Outline: Chapter 1Introduction • Importance of knowing the numbers • Measuring success • What is entrepreneurial financial management? • What Makes Entrepreneurial Finance Similar to Traditional Finance? • What Makes Entrepreneurial Finance Different from Traditional Finance? • Ethics and entrepreneurial finance Copyright 2009 Cornwall, Vang & Hartman

2. Financial Management:The “Language” of Business • Used to set clear financial goals • Used to make decisions • Used to forecast • Used to manage cash flow • Used to seek financing • Used to determine an exit process for the business Copyright 2009 Cornwall, Vang & Hartman

3. Measuring “Success” • Income for entrepreneur • Wealth for entrepreneur • Goals derived from personal values of the entrepreneur Copyright 2009 Cornwall, Vang & Hartman

4. Differences between Traditional and Entrepreneurial Finance • Lack of historical data to measure risk • Lack of historical data and liquidity complicate the practice of finance in early stage firms Copyright 2009 Cornwall, Vang & Hartman

5. Perspective of Investors • Prefer less risk • Diversified investors concerned with systematic risk • Non-diversified investors concerned with total risk • Prefer more return • Prefer quick return • Prefer liquidity • Investors face many different opportunities • No investors are immune from these expectations Copyright 2009 Cornwall, Vang & Hartman

6. Finance Relationships • Total Risk = Diversifiable Risk + Nondiversifiable Risk • Required Rate of Return = Rf + Beta(Rm - Rf) • Rf = Risk-Free Rate of Return • Rm = Return on Market Index like SP500 • Rm-Rf =Market Risk Premium • Beta is a measure of Nondiversifiable Risk • Beta < 1 means asset is less volatile than market (safe asset) • Beta = 1 means asset is just as volatile as market (average asset) • Beta > 1 means asset is more volatile than market (risky asset) Copyright 2009 Cornwall, Vang & Hartman

7. Figure 1.1Building a Financial Forecast Setting Financial Goals Revenue Forecasting Expense Forecasting Monitoring Performance Copyright 2009 Cornwall, Vang & Hartman

8. Table 1.1Example of Stakeholder Analysis Copyright 2009 Cornwall, Vang & Hartman

9. Table 1.1Example of Stakeholder Analysis (continued) Copyright 2009 Cornwall, Vang & Hartman

10. Outline: Chapter 2 Setting Financial Goals • Wealth vs. income • Integrating non-financial goals • Importance of self-assessment • The self-assessment process • The business plan Copyright 2009 Cornwall, Vang & Hartman

11. Figure 2.1Model for Entrepreneurial Financial Management Setting Financial Goals Revenue Forecasting Expense Forecasting Monitoring Performance Copyright 2009 Cornwall, Vang & Hartman

12. Life Cycle of a Business VentureFigure 2.2 Pre-Launch Start-up Growth Maturity Copyright 2009 Cornwall, Vang & Hartman

13. “Quick and Dirty” Valuation EBITDA + extra bonuses or compensation to owners = adjusted EBITDA X earnings multiple = Valuation - Outstanding Loans = Cash proceeds to owner Copyright 2009 Cornwall, Vang & Hartman

14. Integrating Non-Financial Goals • Ethics and values • Personal definition of “success” in business • Family • Community • Personal interests Copyright 2009 Cornwall, Vang & Hartman

15. Business Plan Outline • Executive Summary • The Business Concept • Industry Analysis • Marketing Plan • Operating Plan • Financing Plan Copyright 2009 Cornwall, Vang & Hartman

16. Importance of Self-Assessment • Keeps your goals front and center • Financial goals change • Non-financial goals change • Part of on-going exit planning Copyright 2009 Cornwall, Vang & Hartman

17. Outline: Chapter 3 Understanding Financial Statements • Accounting equation • Assets = Liabilities + Owners’ Equity • Basic financial statements • Limitations of business financial statements Copyright 2009 Cornwall, Vang & Hartman

18. Basic Financial Statements • Income Statement • Balance Sheet • Statement of Cash Flows Copyright 2009 Cornwall, Vang & Hartman

19. Income Statement Exhibit 3.1 The Company Month ended April 30, 2002 Sales $35,000 100.0% Cost of Goods Sold 10,000 28.6% Gross Profit 25,000 71.4%  Operating Expenses Rent Expense 10,000 28.6% Utilities Expense 2,000 5.7% Wages Expense 5,000 14.3% Depreciation Expense 1,000 2.8% Total Operating Expenses 18,000 51.4%  Earnings before interest and taxes (EBIT) 7,000 20.0% Interest Expense 100 .3% Earnings before taxes $ 6,900 19.7% Copyright 2009 Cornwall, Vang & Hartman

20. Balance Sheet Exhibit 3.2 The Company April 30, 2002 ASSETS Current Assets Cash $ 58,900 Accounts Receivable 25,000 Inventory 30,000 Total Current Assets 113,900 Fixed Assets Equipment 36,000 Less: Accumulated Depreciation (1,000) Net Fixed Assets 35,000 TOTAL ASSETS $148,900 LIABILITIES Current Liabilities Notes Payable $ 15,000 Accounts Payable 22,000 Wages Payable 5,000 Total Current Liabilities 42,000  STOCKHOLDERS’ EQUITY Common Stock 100,000 Retained Earnings 6,900 Total Stockholders’ Equity 106,900  TOTAL LIAB. & STOCKHOLDERS’ EQUITY $148,900 Copyright 2009 Cornwall, Vang & Hartman

21. Limitations of Financial Statements • Not all assets of a company are included (e.g. employees or brand names) • Intellectual property not reflected as an asset • Assets are reflected at historical cost • Estimates must be used for depreciation, the collectibility of accounts receivable, the salability of inventory, and the amount of warranty liability outstanding • Financial statements affected by the choice of accounting methods (e.g. FIFO, LIFO or average cost) Copyright 2009 Cornwall, Vang & Hartman

22. Outline: Chapter 4Revenue Forecasting • Common Forecasting Mistakes • The Link Between the Marketing Plan and Revenue Forecasts • Creating Scenarios • The Link Between the Revenue Forecast and the Cash Flow Forecast • The Impact of Business Type on Revenues • Quantitative Forecasting Techniques • Importance of Revenue Forecasting Copyright 2009 Cornwall, Vang & Hartman

23. Figure 4.1Model for Entrepreneurial Financial Management Setting Financial Goals Revenue Forecasting Expense Forecasting Monitoring Performance Copyright 2009 Cornwall, Vang & Hartman

24. Common Forecasting Mistakes • The linear forecast mistake • The hockey stick forecast mistake • The 20/80 vs. 80/20 mistake Copyright 2009 Cornwall, Vang & Hartman

25. Marketing Plan and Forecasting Marketing Plan Revenue Forecasts Backbone Copyright 2009 Cornwall, Vang & Hartman

26. Marketing Plan and Revenue Forecasting • Identifying industry and market trends • Market research • Competitive analysis Copyright 2009 Cornwall, Vang & Hartman

27. Sample Competitive GridFigure 4.3 Copyright 2009 Cornwall, Vang & Hartman

28. Basic Guidelines for Revenue Forecasts • Market research to assure the quality of the assumptions behind the revenue forecasts • Validate assumptions with more than one source of data • Plan based on more conservative assumptions Copyright 2009 Cornwall, Vang & Hartman

29. Creating scenarios Make Three Forecasts • Best-case • Worst-case • Most likely case Track Key Assumptions Copyright 2009 Cornwall, Vang & Hartman

30. Revenue Forecast and the Cash Flow Forecast • Determine if credit is to be extended to customers • Estimate the percentage of the sales that will be on credit • Determine how long it will take to collect credit sales Copyright 2009 Cornwall, Vang & Hartman

31. Importance of Revenue Forecasting • Bank financing • Inventory assumptions • Staffing decisions • Space decisions • Investors Copyright 2009 Cornwall, Vang & Hartman

32. Outline: Chapter 5Expense Forecasting • Defining costs • Cost behavior • Break-even analysis • The impact of business type on expenses • Reducing expenses through bootstrapping Copyright 2009 Cornwall, Vang & Hartman

33. Figure 5.1Model for Entrepreneurial Financial Management Setting Financial Goals Revenue Forecasting Expense Forecasting Monitoring Performance Copyright 2009 Cornwall, Vang & Hartman

34. Cost behavior • Variable Costs • Fixed Costs • Mixed Costs Copyright 2009 Cornwall, Vang & Hartman

35. Variable Costs Type of ExpenseActivity Base Sales commissions Sales Materials cost Units produced Health insurance Number of employees Wages expense Number of hours worked Payroll tax expense Dollars of wages paid Copyright 2009 Cornwall, Vang & Hartman

36. Figure 5.1Variable Cost Behavior $ Total Variable Cost Line Total Units Produced Copyright 2009 Cornwall, Vang & Hartman

37. Fixed Costs • Committed fixed costs • Discretionary fixed costs Copyright 2009 Cornwall, Vang & Hartman

38. Figure 5.2Fixed Cost Behavior $ Total Fixed Costs Total Units Produced Copyright 2009 Cornwall, Vang & Hartman

39. Example – Merchandising CompanyExhibit 5.1 Copyright 2009 Cornwall, Vang & Hartman

40. Breakeven Analysis Copyright 2009 Cornwall, Vang & Hartman

41. Outline: Chapter 6Integrated Financial Model • The entrepreneur’s aspirations reconsidered • Contribution format income statement • Inventory of assumptions • Determining the funds needed • Time out of cash • Assessment of risk/sensitivity • Integrating into business plan/funding document Copyright 2009 Cornwall, Vang & Hartman

42. Figure 6.1Building a Financial Forecast Setting Financial Goals Revenue Forecasting Expense Forecasting Monitoring Performance Copyright 2009 Cornwall, Vang & Hartman

43. Time Out of Cash Time Out of Cash = Cash Operating Cash Outflow per Month Copyright 2009 Cornwall, Vang & Hartman