Topics  Importance of Financial Statements  Structure of a Financial Report Balance Sheet Profit and Loss Statement Cash Flow Statement  Specific Issues relating to Start ups  Funding options available to startups

Importance of Financial Statements  Measures how business is doing  Business decisions are made based on financials  Prospective investors use them to assess viability of investing in business  If you’ve borrowed money, then lenders will regularly want to review them  Required for compliance.e.g tax  Financials form an integral part of any credible business plan

Structure of a Financial Report  Directors Report  Directors Declaration  Balance Sheet  Profit and Loss Statement  Cash Flow Statement  Notes to the financial statements  Auditors Report (if required)

Balance Sheet  A balance sheet is a snapshot of a company’s financial position at a moment of time  It represents a summary of a company’s assets and liabilities  What is an Asset anything that is tangible or intangible owned by the company and capable of producing value in the future.  What is a Liability obligations of the company arising from past transactions or events.

Balance Sheet (Cont.)  If total assets minus total liabilities > 0, it means that the shareholders have positive shareholders equity  If total assets minus total liabilities <0 means that shareholders have a deficit

Balance Sheet (Cont.)  Assets and liabilities are split between current and non current  Current means asset can be converted to cash within one year or in the case of liabilities is due and payable within one year  A common measurement used when reviewing a balance sheet is a current ratio = current assets / current liabilities. It is an indicator of a company’s liquidity. The higher this ratio the more likely that the company will be able to meet its obligations A low ratio is potentially a danger signal that company may note be able to pay its debts

Typical Balance Sheet for Public Company

Profit & Loss (P&L)  A P&L is a statement of the financial performance of a company for a period of time.  Put differently, its a collation of total revenue generated less all expenses incurred for a period of time  The important thing to remember about an income statement is that it represents a period of time. This contrasts with a balance sheet, which represents a single moment in time.  Some key expenses explained Depreciation Amortisation Impairment Provisions  A key measurement of the profitability of a company is its earnings per share which is calculated as: Net Profit / Number of shares in issue

Typical structure of a P&L P&L ItemExplanation Net revenueNet revenue that the company has earned Cost of revenueDirect costs incurred in generating the net revenue Gross marginNet revenue minus direct costs GP%Gross margin/net revenue. Benchmark that can be used to measure performance against comparable industries Other revenuesTypically includes not operating revenues such as interest received, FX gains, grant revenues Operating costsIndirect costs in operating the company. Cost can be reflected by function (as in this example) or by nature e.g. employment costs, Sales and marketing Operations Research and development General and administrative Total operating costs Earnings before Interest, Depreciation and tax Commonly abbreviated to EBITDA Depreciation Taxation Net Profit

Example  Start business and put $10k of your own money into company  You also borrow $5k from family

Example (Cont.)  You buy a laptop for $1k that you estimate will last for 2 years 

Example (Cont.) You now start doing activities in your business. In month 1 the following is done:  You hire an employee and pay them $2k  You pay a lawyer $3k to register a trademark  You earn $80 interest on cash in bank

Cash Flow Statement  Cash flow is a statement of the movement in the cash flows of a company for a period of time.  Structure of cash flow statement Cash flows from operating activities Receipts from customers. Payments to suppliers and employees Interest received / (paid) Net cash provided by operating activities Cash flows from investing activities Payment for purchase of subsidiaries Purchase of intangible assets Payment of security deposits Purchase of plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Loans advanced/ (repaid) Net cash provided by financing activities Cash at beginning of financial year Net (decrease) increase in cash Cash at end of financial year

Start Up Tech company Specific Issues  Most start up tech companies show large losses in their P&L. Why? Obvious reason is that they don’t have revenue! Other reason is that in most cases, all R&D expenditures and other one off infrastructure spend is written off Often initial expenditures are large due to use of consultants, travel and other inefficiencies in commercialising the business!  Balance sheet is often not a true reflection of the assets of the company because in most cases the real asset of intellectual property is not shown  Therefore for a start up tech company, historical financial statements on their own have limited value in attracting investors, accessing grants etc.

Specific Alternative Funding Options for Australian Tech Companies Export Market Development Grants (EMDG) Administered by Austrade To encourage Aussie companies to engage in export activities Can claim up to 50% of eligible export related expenses Maximum grant is $150k Competitive program Cheap funding source Commercialisation Australia Government Grant Grant to assist in the commercialisation of a product or service 4 different grant programs Skills and knowledge – up to $50k Experienced executives – up to $200k Proof of concept -up to $250k Early stage commercialisation up to $2mill Competitive program, so application needs to be compelling Cheap funding source

Research & Development Tax Concession offsets Initiative that allows companies to claim r&d spend as an offset against taxes Allows companies that have tax losses to get cash refund from ATO for r&d incurred Other Federal Grants State based grant funding programsThere are a number of small state grants and programs that are available for start up tech companies Specific Alternative Funding Options for Australian Tech Companies (Cont.)

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