1. ANALYZING START-UP RESOURCES
CHAPTER Nine

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

3. 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)

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

5. 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?

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

7. 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?

8. 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

9. Sales Forecast Timeline

10. 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

11. 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

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

13. 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?”

14. 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

15. 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

16. 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)

17. 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.

18. 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 _________

19. Computing Cash Flows Operating Activities

20. Computing Cash Flows Capital Improvements

21. Computing Cash Flows Financing Activities

22. 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

23. 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.

24. 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

25. END