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Financial Management for Entrepreneurs

University of Hawaii Business Plan Competition Help Session. 2-2. Attribution/Sources. Peter Gardner, General Partner, Allegis Capital (from Berkeley BPC website)Harrison and Horngren, Financial Accounting, 4e, Prentice HallHanson and Mowen, Management Accounting, 5e, SouthwesternPalo Alto Softwa

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Financial Management for Entrepreneurs

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    1. University of Hawaii Business Plan Competition Help Session 2-1 Financial Management for Entrepreneurs Shirley J. Daniel Professor of Accounting, Henry A. Walker Distinguished Professor of Business Enterprise

    2. University of Hawaii Business Plan Competition Help Session 2-2 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

    3. University of Hawaii Business Plan Competition Help Session 2-3 2 Helpful Websites Free: Berkeley Business Plan Competition (Workshops - 2002) http://bplan.berkeley.edu/ Palo Alto Software Business Plan Pro www.paloalto.com

    4. University of Hawaii Business Plan Competition Help Session 2-4 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

    5. University of Hawaii Business Plan Competition Help Session 2-5 The economic model of business - 4 considerations Operating Leverage (fixed costs) Contribution Margin Volume Product Mix

    6. University of Hawaii Business Plan Competition Help Session 2-6 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

    7. University of Hawaii Business Plan Competition Help Session 2-7 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

    8. University of Hawaii Business Plan Competition Help Session 2-8

    9. University of Hawaii Business Plan Competition Help Session 2-9 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

    10. University of Hawaii Business Plan Competition Help Session 2-10 Revenue Model Addressable market size Pricing Customer ROI Gross margin Sales cycle Channels vs. direct Reasonable ramp Modest penetration assumptions

    11. University of Hawaii Business Plan Competition Help Session 2-11 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

    12. University of Hawaii Business Plan Competition Help Session 2-12 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

    13. University of Hawaii Business Plan Competition Help Session 2-13 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?

    14. University of Hawaii Business Plan Competition Help Session 2-14 Fundraising Assumptions Long-term capital formation strategy Time rounds to milestones Dilution is cumulative Start early Know your customer (VC, etc.)

    15. University of Hawaii Business Plan Competition Help Session 2-15 VC’s Financial Models Run financial projections Apply comparable multiples Calc. projected future value Apply ownership after dilution Achieve hurdle for multiple, IRR?

    16. University of Hawaii Business Plan Competition Help Session 2-16 Factors in Structuring Deals Ownership hurdles Time before next round Maintain incentives Leave room for step-ups Dry powder Co-investors

    17. University of Hawaii Business Plan Competition Help Session 2-17 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

    18. University of Hawaii Business Plan Competition Help Session 2-18 Examples

    19. University of Hawaii Business Plan Competition Help Session 2-19 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

    20. University of Hawaii Business Plan Competition Help Session 2-20 RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS

    21. University of Hawaii Business Plan Competition Help Session 2-21

    22. University of Hawaii Business Plan Competition Help Session 2-22

    23. University of Hawaii Business Plan Competition Help Session 2-23 THE ACCOUNTING EQUATION The accounting equation presents the resources of the business and the claims to those resources

    24. University of Hawaii Business Plan Competition Help Session 2-24 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

    25. University of Hawaii Business Plan Competition Help Session 2-25 ANALYSIS OF TRANSACTONS

    26. University of Hawaii Business Plan Competition Help Session 2-26

    27. University of Hawaii Business Plan Competition Help Session 2-27

    28. University of Hawaii Business Plan Competition Help Session 2-28

    29. University of Hawaii Business Plan Competition Help Session 2-29 Financial Management for Entrepreneurs Cost-Volume-Profit Analysis: A Managerial Planning Tool (Break Even)

    30. University of Hawaii Business Plan Competition Help Session 2-30 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?

    31. University of Hawaii Business Plan Competition Help Session 2-31 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?

    32. University of Hawaii Business Plan Competition Help Session 2-32 Cost Behavior

    33. University of Hawaii Business Plan Competition Help Session 2-33 Mixed-Cost Behavior

    34. University of Hawaii Business Plan Competition Help Session 2-34 Cost-Volume-Profit Graph

    35. University of Hawaii Business Plan Competition Help Session 2-35 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?

    36. University of Hawaii Business Plan Competition Help Session 2-36 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.

    37. University of Hawaii Business Plan Competition Help Session 2-37 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 taxes 0 Less: Income taxes 0 Profit after taxes $ 0 =====

    38. University of Hawaii Business Plan Competition Help Session 2-38 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 Unit 6 Selling Price per Unit 10

    39. University of Hawaii Business Plan Competition Help Session 2-39 CVP Example: Targeted Pretax Income 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 ====

    40. University of Hawaii Business Plan Competition Help Session 2-40 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!

    41. University of Hawaii Business Plan Competition Help Session 2-41 2 Helpful Websites Free: Berkeley Business Plan Competition (Workshops - 2002) http://bplan.berkeley.edu/ Palo Alto Software Business Plan Pro www.paloalto.com

    42. University of Hawaii Business Plan Competition Help Session 2-42 Financial Management for Entrepreneurs Q & A

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