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AVB II 2006 Jay A. Smith 1 Classes 8-9 Project Review & Finance for Venture Business.

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Presentation on theme: "AVB II 2006 Jay A. Smith 1 Classes 8-9 Project Review & Finance for Venture Business."— Presentation transcript:

1 AVB II 2006 Jay A. Smith 1 Classes 8-9 Project Review & Finance for Venture Business

2 AVB II 2006 Jay A. Smith 2 Revised Class Schedule as of 1/12 Office Hour: 11:00-12:30 VBL 285-8675 1/12( ) 14:30-17:40 More Finance & Accounting/Business Plans & Assignment 1/19( ) 14:30-17:40 Capital, Financing & Bootstrapping/Business Plan Overview 1/26( ) 14:30-17:40 Special Topics In Venture Business/Business Plan Workshop 2/2( ) 14:30-17:40 Final Student Business Plan Presentations jay@eng.kagoshima-u.ac.jp www.venturesmith.us

3 AVB II 2006 Jay A. Smith 3 Announcements 2006 Business Plan Competition Prize Student Plans/Marketing Review Articles Finance Review Assignment

4 AVB II 2006 Jay A. Smith 4 Final Assignment PowerPoint (15 minute +Q&A) (E?) Short (3-5p) Business Plan (J/E?) Springboard format Demo/prototype for Presentation

5 AVB II 2006 Jay A. Smith 5 AVB I team

6 AVB II 2006 Jay A. Smith 6 Prior Assignment: Customer & Market Customer Profile and Market Positioning What kinds of customers are you targeting How are you positioning the product to these customers? Initial target customer list? Market research (how big an opportunity) Market size, Segment target size, Growth Sales, promotion and channel strategy Current channels, competition issues/strategy How can we best and realistically reach the customer? Creating awareness, interest, trial, purchase, repurchase

7 AVB II 2006 Jay A. Smith 7 Finance Strategy Supports Business Business, Technology Environments Opportunity Social, Government Environments Business Strategy Marketing Strategy Operations Strategy Organization Human Resource Production R&D Finance Strategy Leverage Make/buy Lease/own Do strategies support, fit each other, have flexibility, balance/manage risk?

8 AVB II 2006 Jay A. Smith 8 Venture Companies Need Financing Time Potential Profit Reward Money Losses & Investments

9 AVB II 2006 Jay A. Smith 9 Finance Provides Cash Cash is good – the food of business Nearly everything a business does uses cash Salaries, building, equipment, supplies, taxes Insufficient cash leads to bankruptcy ( you can t eat an airplane ) Too much cash is wasteful should be invested or returned Cash = Sales or Income accounting is on an accrual basis

10 AVB II 2006 Jay A. Smith 10 Sales & Marketing Sales (Revenue): Money received for selling product or service Source of funds for business operations Basis for business existence Marketing: how a company gets sales COMPANY Customers Product/Service Money

11 AVB II 2006 Jay A. Smith 11 Sources & Uses of Cash Sources of Cash Sales revenue collections Outsider investments (financing via stock, loans) Sales of assets of the company Uses of Cash Expenses (salaries, bills, supplies, taxes) Assets (plants, equipment, property, inventory)

12 AVB II 2006 Jay A. Smith 12 Timing – Cash Flow Management Cash now is better than cash later Collect from customer sooner Pay supplier later Conserve cash Now (It is always now ) Partnering, lease, borrow, trade, buy used, negotiate Making versus buying? But don t be too stingy on key success factors

13 AVB II 2006 Jay A. Smith 13 Key Financial Statements Balance Sheet Picture of business at one point in time End of Quarter End of Year Balance Sheet as of March 31. Income Statement Business operations during a period of time Daily Weekly Monthly Quarterly / Yearly Income Statement for the Year Ending March 31.

14 AVB II 2006 Jay A. Smith 14 MBA Hand Out – Income Statement Sales (Net Sales = Gross Sales – Returns) Expenses (product costs, indirect costs overhead) Marketing R&D (S)G&A Depreciation (non-cash, usually small for VB) Gross Profit Operating Profit/Income Net Profit/Income

15 AVB II 2006 Jay A. Smith 15 100 19921993 Sales2,013.92,873.2 Cost of Sales1,564.02,440.4 Gross Profit449.5432.8 Operating Expenses: SG&A268.0422.9 R&D42.448.9 Total Operating Expenses 310.3471.8 Operating Income (Loss)139.1(39.0) Net Income (Loss)101.6(35.8)

16 AVB II 2006 Jay A. Smith 16 Income Statement (P&L, Profit & Loss Statement)

17 AVB II 2006 Jay A. Smith 17 100 199119921993 889.92,013.92,873.2 607.81,564.02,440.4 282.2449.5432.8 182.2268.0422.9 33.142.448.9 215.3310.3471.8 66.9139.1-39.0 50.9101.6-35.8 100.0 68.377.784.9 31.722.315.1 20.513.314.7 3.72.11.7 24.215.416.4 7.56.9-1.3 5.75.0-1.3

18 AVB II 2006 Jay A. Smith 18 Compare to Other Companies

19 AVB II 2006 Jay A. Smith 19 MBA Hand Out – Balance Sheet Assets Current Cash & Securities Accounts Receivable Inventory Long-Term Property Plant Equipment Long-term Securities Liabilities - Current Accounts Payable Notes Payable Current Long-Term Debt Liabilities – Long-Term Long-Term Debt Mortgages Equity Paid-In Capital Retained Earnings

20 AVB II 2006 Jay A. Smith 20 Balance Sheet Assets Debt & Equity Short Term Assets & Investments Long Term Assets Long-term Investment Assets Short Term Debt Long Term Debt Equity BALANCE SHEET EQUITY == MARKET VALUE OF THE COMPANY (VALUATION) BALANCE SHEET EQUITY + Investments from outside + Retained Earnings (Cumulative earnings/losses) ASSETS = DEBT + EQUITY EQUITY = ASSETS – DEBT DEBT = ASSETS – EQUITY LEVERAGE = DEBT / EQUITY Assets: things the company owns Equity: ownership of the company (stock) Debt: what the company owes (loans, bonds)

21 AVB II 2006 Jay A. Smith 21 Park24 Comparative Balance Sheet Current Assets PP&E Long-Term Assets Intangible Assets Total Assets Investments Current Liabilities Long-Term Liabilities Shareholder Equity Retained Earnings Common Stock Add l Paid In Cap. Revaluation AS OF DATE

22 AVB II 2006 Jay A. Smith 22 Dupont Model Net Income Sales Assets Net Income ROE = x x = Sales Assets Equity Equity (ROS) (Turns) ROA Leverage Return on Equity = Return on Assets x Leverage (ROE)(ROA) ROA = Net Income Assets Debt Equity Assets Equity = 1 -

23 AVB II 2006 Jay A. Smith 23 Finance Strategy Supports Business Business, Technology Environments Opportunity Social, Government Environments Business Strategy Marketing Strategy Operations Strategy Organization Human Resource Production R&D Finance Strategy Leverage Make/buy Lease/own Do strategies support, fit each other, have flexibility, balance/manage risk? ROS ROA Leverage

24 AVB II 2006 Jay A. Smith 24 Business Performance Ratios Allows to compare (like batting average) to other comparable companies versus management expectations Profit Margin (profit/net sales) Gross profit margin (sales – cost of sales) / sales Operating profit margin (operating income/ sales) Net profit margin [Return on Sales (ROS)] (net income/sales) Asset Utilization (sales/assets) Inventory turnover (sales/inventory) Same-store sales (sales/same-store yr vs. yr.) Return on Assets (ROA) Leverage (assets/debt, debt/equity) Return on Equity (ROE) = Net Income/Equity

25 AVB II 2006 Jay A. Smith 25 Business Model + Business Strategy Strategy: Development, protection, adjustment of business model over time Plan for executing on Key Success Factors Goal: Sustainable Competitive Advantage Profit Sales - Product Costs Units Overhead = x - Year Unit Year Year )( Year 1, Year 2, Year 3… Σ Maximizing Net Present Value

26 AVB II 2006 Jay A. Smith 26 Key Success Factors Key skills, functions, actions needed to maintain and strengthen business model and strategy Subscriptions/Memberships Get many members (acquisition effectiveness) Get members at low cost (acquisition efficiency) Keep members from leaving (retention rate) Increase spending per member (share of wallet) Transaction-based Command above average pricing (value effectiveness) Lower product costs (production efficiency) Lower fixed overhead costs

27 AVB II 2006 Jay A. Smith 27 iPhone & Apple mac iPod Shuffle/nano/ Intel chip

28 AVB II 2006 Jay A. Smith 28 Apple Business Strategy 1995, 2005 1995: The Company designs, manufactures and markets microprocessor-based personal computers and related personal computing and communicating solutions for sale primarily to education, home, business and government customers. Substantially all of the Company's net sales to date have been derived from the sale of personal computers from its Apple Macintosh(registered trademark) line of computers and related software and peripherals. The Company operates in one principal industry segment across geographically diverse marketplaces. 2005: The Company is committed to bringing the best personal computing and music experience to students, educators, creative professionals, businesses, government agencies, and consumers through its innovative hardware, software, peripherals, services, and Internet offerings. The Company s business strategy leverages its unique ability, through the design and development of its own operating system, hardware, and many software applications and technologies, to bring to its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design. The Company believes continual investment in research and development is critical to facilitate innovation of new and improved products and technologies. Besides updates to its existing line of personal computers and related software, services, peripherals, and networking solutions, the Company continues to capitalize on the convergence of digital consumer electronics and the computer by creating innovations like the iPod and iTunes Music Store. The Company s strategy also includes expanding its distribution network to effectively reach more of its targeted customers and provide them a high-quality sales and after-sales support experience. Apple Annual Reports filed on form 10-K with SEC

29 AVB II 2006 Jay A. Smith 29 Apple Product Mix Shift (2005 10k) Sept. Fiscal Year

30 AVB II 2006 Jay A. Smith 30 Venture Forecasting Issues Venture forecasts are inherently inaccurate Little or no historical data or trends Expanding into new areas Key: identify, model drivers accurately Renewal rates, advertising yield, production yield, What happens if basic assumptions change Time Potential Profit Reward Money Losses & Investments Time Potential Profit Reward Money Losses & Investments

31 AVB II 2006 Jay A. Smith 31 Drucker on the Forecasting Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.

32 AVB II 2006 Jay A. Smith 32 Pro-forma Statements Forecasts of Key Financial Statements Income Statement, Balance Sheet Assumptions Note pages provide very important information Discuss model assumptions, relationships Run-rate Annualized business size at any given time 11 run-rate= 7,730 x 12 = 92,765

33 AVB II 2006 Jay A. Smith 33 Forecast Income Statement

34 AVB II 2006 Jay A. Smith 34 Sample Pro-Forma Cash Flow Forecast Depreciation: accounting method to expense cost of an asset. Non-cash expense

35 AVB II 2006 Jay A. Smith 35 Price Issues What does it cost to produce? Cars, Soda, Computers Pharmaceuticals, Software How much value does it have to customer? Does price fit with my positioning? Irion furniture ….

36 AVB II 2006 Jay A. Smith 36 Price & Margin Cost Price to Channel Price to customer Price x Units=Sales Margin x Units = Gross Profit

37 AVB II 2006 Jay A. Smith 37 Model Driven Pro-Forma P&L Strategy Implication: Get More Members Sooner

38 AVB II 2006 Jay A. Smith 38 Breakeven Time Potential Profit Reward Money Losses & Investments Time Potential Profit Reward Money Losses & Investments Breakeven How much does company need to sell to cover its costs Revenue = Costs Profit/loss = 0

39 AVB II 2006 Jay A. Smith 39 Variable & Fixed Costs Variable Costs: Increases directly with each product sold (volume) Materials, parts, production, commission, shipping Fixed Costs Does not change with volume (# of units) produced Management salaries, rent, R&D, buildings, equipment, marketing Breakeven # units sold x contribution per unit = fixed costs After breakeven, contribution becomes profit

40 AVB II 2006 Jay A. Smith 40 Contribution = Revenue – Variable Costs Cost Price to Channel Price to customer Variable Cost

41 AVB II 2006 Jay A. Smith 41 Breakeven Examples

42 AVB II 2006 Jay A. Smith 42 Using Breakeven Sense of risk How many customers do I need? Compare to market size Compare to market share Is my pricing right? Are my costs too high?

43 AVB II 2006 Jay A. Smith 43 Suggested Readings Books WWW nikkei.co.jp Nihon Keizai Shimbun nikkei.co.jp economist.com Economist Magazine (UK) bloomberg.co.jp kyodo.co.jp Dhbr.net


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