Financials

Profit Model & Resources Needed – Revisited Profit Model = Revenues (i.e., what customers are reasonably willing to pay) – Resources Needed (i.e., all of the expenses you might have to spend money on) A critical problem that many start-ups have (including both Avenue 2 and Market Driver) is that revenues are too low and expenses are too high –Whatever you think your revenues will be, they will probably start out being a fraction of that –Whatever you think your expenses will be, they will probably start out being a multiple of that –The business will consume almost if not all of its’ own revenues (i.e., it will not pay you a salary for your personal cost of living expenses) –It will also consume almost every penny you can beg, borrow, or steal, so make sure you think ahead about your capital acquisition plan

Profit Model & Resources Needed – Revisited What are customers reasonably willing to pay? –Look at your customer vignettes and your product/service vignettes –Estimate revenues based on your customer acquisition goals and your price charged for each product/service vignette Do you have enough product/service vignettes? Are your customer acquisition goals high enough? Can you really acquire that many customers given your competition? What are all the possible expenses you may have to spend money on? –Variable Costs (raw materials (incl. transportation if relevant), labor (incl. payroll taxes & benefits), et cetera) What quantities do you have to buy them in? –Marketing Costs (brand development, advertising, networking (incl. meals & expenses and transportation), et cetera) –Overhead Costs (office space, utilities, telecom/internet, information systems (hardware/software), R&D/product development, training & development, IT services, accounting services, legal services, et cetera) –Executive Compensation (i.e., what you and your partners can expect to earn above & beyond the equity value you’re building)

Profit Model & Resources Needed – Examples Profit Model: Bakery (i.e., Sucré) Resources Needed: Landscaping Using Hoovers’ income statement ratios to build your statement of cash flows

Financial Statements Statement of Cash Flows (monthly - 1 year pro forma) –Should be different monthly if business has seasonal fluctuations in revenues or expenses –Think about timing of payments vs. timing of expenses Income Statement (annual - 5 years pro forma) Balance Sheet (annual - 5 years pro forma) Statement of Shareholder Equity (annual - 5 years pro forma)

Ratio Analysis – Revisited Profitability Ratios –FROM HOOVERS: Pre-Tax Return on Net Worth –FROM YOUR ANNUAL PRO-FORMAS: (Operating Revenue – Interest Expense – Depreciation/Amortization) / Shareholders’ Equity Liquidity Ratios –FROM HOOVERS: Current Ratio –FROM YOUR ANNUAL PRO-FORMAS: Assets / Liabilities Leverage Ratios –FROM HOOVERS: Total Debt to Net Worth –FROM YOUR ANNUAL PRO-FORMAS: Liabilities / Shareholders’ Equity Activity Ratios –FROM HOOVERS: Inventory Turnover –FROM YOUR ANNUAL PRO-FORMAS: Varies depending on how much inventory you have and what your variable costs are (COGS / Inventory)

Collecting Money It is surprisingly easy to collect money online. For client payments and supplier purchase up to a few thousand dollars per transaction, entrepreneurial businesses can use Paypal (eBay) without any credit approval process whatsoever. It takes all of about 10 minutes to set up Paypal’s application ( Businesses (or individual entrepreneurs) that have decent credit ratings can also collect larger per-transaction sums through Paypal or through more robust payment processing vendors such as TSYS, Merchant Warehouse, and Advanced Payment Solutions. Each of these online collection/purchasing vendors charges a fee of a few percentage points for each transaction.

Collecting Money ServicePrice*Comments** PayPalBasic application is free to install. More advanced packages cost $5- 30/month. 2.9% (3.9% for international transactions). Allows individual entrepreneurs and small businesses to collect one-time credit card payments up to $1,000 or so without going through a vendor credit approval process. Credit Card Vendors  TSYS VariesOffers robust suite of payment processing options, including payment processing, trade credit for customers, and extensive reporting features. Requires a long-term contract.  Merchant Warehouse 2.19%May have more breadth of options for point-of-sale payment processing.  Advanced Payment Solutions VariesMay offer better balance between online payment processing and more traditional banking services such as check processing.

Capital Acquisition Plan Credit Card Debt & Lines of Credit (initial) –Credit rating, personal financial situation of founders Bank Debt (once you get up and running) –Assets of business –Financial statements of business –Business plan Equity Investors (initial) –Individuals Friends & family with personal savings of $10,000+ –The higher the personal savings, the less risky it is for them to peel off a couple grand. –Should get some sort of personal enjoyment/satisfaction out of business in exchange for risk assumed. –Advice Partners Larger, more established business partners who have an interest in seeing your business succeed –Venture Capital/Angel Investors/Crowdsourcing Crowdsourcing is an emerging micro-capital investment market. Keep your materials in circulation. VENTURE CAPIAL & ANGEL INVESTMENT ALMOST NEVER HAPPENS – ESPECIALLY FOR LIFESTYLE BUSINESSES. But keep your materials in circulation – “you can’t win if you don’t play”.