ANALYZING START-UP RESOURCES CHAPTER Nine

The Fundamental Question How Much Money Does Your New Venture Need?????

Gathering Entrepreneurial Resources Start-up resources include: People (founding team, advisors, independent contractors) Physical assets (equipment, inventory, office or plant space) Financial (cash, equity, debt)

Bootstrapping Minimizing resources to keep low overhead Creating innovative combinations of resources to generate competitive advantage and wealth

Identifying Resource Needs Questions to answer Who does the work in this business? Where do these people work? What do they need to do the work? What information is being generated? Where does that information go?

Finding the Right Numbers- Triangulation Entrepreneur’s knowledge The Industry Venture Numbers The Market/Customer

Financial Forecasting Pro forma Financial Statements Reports that provide projections of a firm’s financial position Purposes of pro forma statements How profitable can the firm be expected to be, given the projected sales levels and the expected sales/expense relationships? What will determine the amount and type of financing (debt or equity) to be used? Will the firm have adequate cash flows? If so, how will they be used; if not, where will the additional cash come from? Assessing Risk Is the business financially feasible? Is there enough money to make the effort worthwhile?

The Income Statement: An Overview Operating Activities Sales Revenue = Operating Income Earnings Before Taxes Net Income Available to Owners Cost of producing or acquiring product or service (cost of goods sold) Gross profit Marketing and selling expenses, general and administrative expenses and depreciation (operating expenses) , – Financing Activities Interest expense on debt (financing costs) Taxes Income taxes

Sales Forecast Timeline

Estimating Sales and Expenditures Develop timeline of seasonal patterns and key events that might change sales’ levels. Identify potential key events which could change sales estimates Calculate the impact of the change on the estimate Determine the probability of the occurrence

Estimating Sales and Expenditures (continued) Percentage increase in sales over 3-5 year period depends upon: Growth rates in the product/service market segment Innovations that make the product/service more attractive to the consumer Technological innovations that results in lower cost of products/services to the consumer

Estimating Sales and Expenditures (continued) Forecasting expenditures-items to consider: Cost of goods sold (COGS) Selling, general and administrative expenses (S, G, & A) Taxes

Forecasting Profitability Net Income Depends On: Amount of sales Quantity and Price Margins Economics of the Business Model “If we’re doing so well, then why am I always so broke?”

The Balance Sheet Balance Sheet A report showing a firm’s assets, liabilities, and owners’ equity at a specific point in time Outstanding debt + Owner’s equity = Total assets

The Balance Sheet: An Overview Current Assets Cash Accounts receivable Inventories Other Assets Long-term investments, patents + Total Assets = Fixed Assets Machinery and equipment Buildings and land Debt Capital Accounts payable Accrued expenses Short-term notes Long-term notes Mortgages Total Debt and Equity Owner's Equity Owner's net worth or Partnership equity Common stock equity Assets Debt (Liabilities) and Equity (Net Worth) Current Debt Long-term Debt The Balance Sheet: An Overview

The Fit of the Income Statement and the Balance Sheet Income statement reports the profits from January 1, 2002 through December 31, 2002 2002 Balance Sheet Reports a firm's financial position at end of 2002 January 1 December 31 2001 Balance Sheet Reports a firm's financial position at beginning of 2002 (end of 2001)

Determining Cash Flow: Key Terms Accrual-Basis Accounting A method of accounting that matches revenues when they are earned against the expenses associated with those revenues. Cash-Basis Accounting A method of accounting that reports transactions only when cash is received or a payment is made.

Computing Cash Flows Computation from three sources Cash from Operating Activities __________ Cash into Capital Improvements __________ Cash from Financing Activities __________ Net of the Above Three Determines the Net Cash Flow _________

Computing Cash Flows Operating Activities

Computing Cash Flows Capital Improvements

Computing Cash Flows Financing Activities

Return on Invested Capital: An Overview Capital invested by the firm's creditors and equity investors (owners) Firm's total assets Profits and cash flows Rate of return on total capital becomes Creditors Equity investors Operating income Total assets Return on creditor's capital equity Interest rate charged on debt Net income Common equity compute equals Shared by Used to produce --- profits and cash flows Return on Invested Capital: An Overview

Ratio Analysis Dupont Chain OROI Debt Ratio ROE Multiplicity of relationships ROS * TA * Leverage = ROE OROI OPM * TA Debt Ratio ROE Liquidity The degree to which a firm has working capital available to meet maturing debt obligations. Current Ratio The firm’s relative liquidity, determined by dividing current assets by current liabilities Debt Ratio Debt as a fraction of assets; total debt divided by total assets. Spontaneous financing—debts such as accounts payable that increase as the firm grows.

An Exercise in Building Pro Forma Financial Statements NAICS ProFormas Demonstrate an understanding of entrepreneurial resource gathering Explain how to find the right numbers Estimate sales and expenditures for the new venture Prepare the pro forma income statement Forecast start-up cash needs With the use of Industry Information, The ONLY assumptiona left to defend are 1) Quanity, 2) Price, 3) Growth

END