Chapter 9 Analyzing Start- up Financials “The First in a Series of Financial Presentations and Workshops”

Copyright © Houghton Mifflin Company. All rights reserved.9 | 2 Learning Objectives 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 Discuss the role of the balance sheet in the business plan

Copyright © Houghton Mifflin Company. All rights reserved.9 | 3 Identifying Start-up Resource Requirements Start-up resources include: –People (founding team, employees, advisors, independent contractors) –Physical assets (equipment, inventory, office or plant space) –Financial (cash, equity, debt)

Copyright © Houghton Mifflin Company. All rights reserved.9 | 4 Bootstrapping Minimizing resources to keep low overhead Creating innovative combinations of resources to generate competitive advantage and wealth

Copyright © Houghton Mifflin Company. All rights reserved.9 | 5 Constructing a Business Process Map 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?

Copyright © Houghton Mifflin Company. All rights reserved.9 | 6 Pricing Strategies Product pricing is a part of marketing strategy and financial strategy How a product or service is priced is a function of a company’s goals Customer goals also influence entrepreneurs’ pricing strategies

Copyright © Houghton Mifflin Company. All rights reserved.9 | 7 Common Start-up Pricing Strategies Premium Pricing Price Skimming Demand-based Pricing Captive Product Pricing Psychological Pricing Product Bundle Pricing Geographical Pricing

Copyright © Houghton Mifflin Company. All rights reserved.9 | 8 First Year Timeline, Milestones and Triggers

Copyright © Houghton Mifflin Company. All rights reserved.9 | 9 Finding the Right Numbers- Triangulation Entrepreneur’s knowledge The Market/Customer The Industry Venture Numbers

Copyright © Houghton Mifflin Company. All rights reserved.9 | 10 Develop Estimates for Financials Start with narrative assumptions Estimate new product/service demand Talk to customers Interview prospective end-users and intermediaries Use the entrepreneur’s knowledge and experience Go into limited production

Copyright © Houghton Mifflin Company. All rights reserved.9 | 11 Estimating Sales and Expenditures (continued) Percentage increase in sales influenced by: –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

Copyright © Houghton Mifflin Company. All rights reserved.9 | 12 Estimating Sales and Expenditures (continued) Forecasting expenditures-items to consider: –Cost of goods sold (COGS) –Selling, general and administrative expenses (S, G, & A) –Taxes

Copyright © Houghton Mifflin Company. All rights reserved.9 | 13 Preparing the Pro Forma Income Statement Sections of the Income Statement –Section 1: revenues from all sources –Section 2: operating expenses Forecasting Cash Needs - The Cash Flow Statement –Section 1: cash receipts –Section 2: cash disbursements

Copyright © Houghton Mifflin Company. All rights reserved.9 | 14 Preparing the Pro Forma Income Statement (continued) Assessing Risk –Is the business financially feasible? –Is there enough money to make the effort worthwhile?

Copyright © Houghton Mifflin Company. All rights reserved.9 | 15 Using Key Ratios to Gauge Progress Current ratio Acid test Profit margin Return on investment Inventory turnover Break-even analysis “Custom” METRICS…?

Copyright © Houghton Mifflin Company. All rights reserved.9 | 16 More Financials…On The Way Additional Lectures and Workshops Cash Flows, Present Value, Break-even and more Meet with Venture Lab for Input into Financials Presentation Techniques for Financials

Copyright © Houghton Mifflin Company. All rights reserved.9 | 17 Summary Understand 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 Discuss the role of the balance sheet in the business plan