Outline: Chapter 7 Monitoring Financial Performance

1. Outline: Chapter 7Monitoring Financial Performance • Tracking assumptions • Establishing milestones • Getting the numbers needed to manage • Using numbers to manage • Working with accountants

2. Table 7.1Sample List of Assumptions

3. Using Numbers to Manage • Financial Statement Analysis • Ratio Analysis • Liquidity ratios • Activity ratios • Profitability ratios • Solvency and coverage ratios

4. Outline: Chapter 8Internal Sources of Funds: Bootstrapping Techniques • Why bootstrap? • Bootstrap marketing • The basic bootstrap marketing tools • Bootstrap advertising • Human resource management • Administrative overhead • Production, operations, & inventory bootstrapping

5. Bootstrapping Techniques and tools that can help achieve the same outcomes while greatly reducing costs.

6. Why Bootstrap? • Often necessary for small businesses to get started • Difficulty in raising money for growth • Preserves the value and wealth of a business

7. Bootstrap Marketing • Know your customer • Impact of message more important than “volume” • Remember your niche and the benefits you bring • Spend your marketing dollars carefully • Marketing is a process, not an event

8. The Basic Bootstrap Marketing Tools • Business cards • Brochures • Banners, signs, and trade show displays • Newsletters • Direct mailing/e-mailing

9. Bootstrap Advertising • Yellow pages • Newspaper and magazine ads • Radio • Television

10. Human Resources Bootstrapping • Employee “stretching” • Independent contractors • Employee leasing and temporary employees • Student interns • Equity compensation • Non-monetary benefits

11. Administrative Overhead Bootstrapping • Space • Furnishings and office equipment • Administrative salaries

12. Operations & Inventory Bootstrapping • Outsourcing • Just-in-time inventory techniques • Effective cost accounting

13. Outline: Chapter 9Day-to-Day Cash Flow Management and Forecasting • Why is cash flow different from net income? • How is cash flow measured? • Interpreting a statement of cash flows • Investors and creditors use of the cash flow statement • Effective cash management • Emotional side of cash flow management

14. Measuring Cash Flow • Cash Flow from Operating Activities • Cash Flow from Investing Activities • Cash Flow from Financing Activities

15. Figure 9-1Example of Cash Flow Cycle Over the Life Cycle of a Business Profits 0 Cash flow Start-up to Early Stage Growth Stage Maturity

16. Reasons for Cash Flow Problems • Difficulty in collecting receivables • Seasonality of sales • Unexpected variation in sales • Policies on how payments are made to suppliers • Large expenditures up front for customer projects • Capital projects • Ineffective inventory management

17. Outline: Chapter 10External Sources of Funds: Debt • Short-term debt • Long-term debt • Forms of debt overlooked by entrepreneurs • Working with bankers • Creating an array of debt financing • Downside of debt

18. Short-term Debt • Expected to be paid within one year • Most often used to finance short-term expenditures such as inventory, supplies, payroll, etc.

19. Short-term Debt • Trade debt • Banks • Asset-based lenders • Factors

20. Long-term Debt • Beyond one year • Most often used to fund fixed asset purchases

21. Long-term Debt • Banks: term loans • Leasing companies • Real estate lenders

22. Overlooked Forms of Debt • Property leases • Long-term employment agreements • SBA or other government backed lending programs

23. Table 10.1SBA Size Standards

24. Criteria for Lending by Bankers • Ability of the business to generate enough cash flow to easily make interest and principle payments • Entrepreneur’s ability to personally pay back the loan if the business fails • Assets to serve as collateral

25. Key Loan Documents • Loan proposal • Loan document • Personal guarantees

26. Downside of Debt • Increased risk during economic slowdown • Impact on proceeds from business sale • Restrictive covenants • Personal guarantees

27. Outline: Chapter 11External Sources of Funds: Equity • Sources of equity funding • Downside of equity financing • Working with outside investors • Developing a financing plan

28. Sources of Equity Funding • Funding from the entrepreneur • Family and friends • Strategic partners • Angel investors • Private placement • SBICs

29. Downside of Equity Financing • Dilution of ownership • The risk of sharks • Dynamics of adding on new partners

30. Working with Equity Investors • Business plan • Confidentiality agreement • Letter of Intent • Modifications of shareholder agreements

31. Creating an Array of Financing • Prioritize financing needs based on forecasts • Focus financing only on what is critical for operations • Create an inventory of all assets and what proportion of each can be financed

32. Creating an Array of Financing (continued)

33. Creating an Array of Financing (continued) • Identify best source of financing for each asset • Multiple funding sources are likely • Remember to bootstrap!

34. Outline: Chapter 12Financing the High Growth Business • Integrating profitability expectations in the business plan • Stages of the firm • Stages of business funding • The dark side of venture capital financing • Initial contact with a venture capitalist • Initial public offering (IPO)

35. Stages of High Growth Business Funding • Initial stage • First round financing • Second round financing • Late round financing

36. Initial Stage Funding • File for incorporation • Write business plan • Find office and development space • Completion of initial design • Hire key development personnel • Complete prototype unit • Complete prototype testing

37. First Round Financing • Secure key vendors • Hire key service or manufacturing personnel • Rent or build manufacturing facility • Purchase manufacturing equipment • Market testing • First sales contract • Production of first manufactured unit • First 100, 1000, 10000 units, etc.

38. Second Round Financing • Break-even level of sales • Development of next generation of product

39. Late Round Financing • Initial public offering • Sale of business

40. Initial Contact with a Venture Capitalist • Funding amount • Duration • Summary of the project • Use of funding • Confirm how the transaction will be liquidated • Existing investment in the project • Names of bankers, lawyers, accountants and consultants • Unusual or sensitive information

41. Venture Capital Term Sheet • Amount the venture capitalist wishes to invest. • Percentage of ownership to the venture capitalist. • The nature of the investment such as loan, stock, warrants, etc. • Governance rights of the venture capitalist. • Right to eventually register shares for a public offering. • Remaining conditions to be met by the entrepreneur such as periodic reports, financial statements, etc. • An estimate of valuation of the company. • Specific requirements on what the money is to be used for or specific assets that must be purchased with the funds.

42. Advantages of Initial Public Offering • Diversification and liquidity • Ability to raise new cash • Valuation • Future business deals • Publicity

43. Disadvantages of Initial Public Offering • Reporting costs • Disclosure of information • Maintenance of control

44. Process of the IPO • Selecting an investment banking firm • The decision to underwrite or not underwrite • Getting the paperwork in order and certifying the price of the offering • The road show • Determine the size of the book • The first day of trading