1. Student Business Academy
Fundamentals of entrepreneurial finance

2. Why Most New Ventures Need Financing or Funding
10-2

3. The Importance of a Financial Plan
Common mistake among business owners: Failing to collect and analyze basic financial data.
Many entrepreneurs run their companies without any kind of financial plan.
Only 11% of business owners analyze their companies’ financial statements as part of the managerial planning process.
Financial planning is essential to running a successful business and is not that difficult!
Ch, 11: Creating a Successful Financial Plan
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4. Basic Financial Statements
Balance Sheet – “Snapshot.” Estimates the firm’s worth on a given date; built on the accounting equation: Assets = Liabilities + Owner’s Equity
Income Statement – “Moving picture.” Compares the firm’s expenses against its revenue over a period of time to show its net income (or loss): Net Income = Sales Revenue - Expenses
Statement of Cash Flows – Shows the change in the firm's working capital over a period of time by listing the sources and uses of funds.
Ch, 11: Creating a Successful Financial Plan
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5. Creating Projected Financial Statements
Helps the entrepreneur transform business goals into reality
Challenging for a business start-up
Start-ups should focus on creating projections for two years
Projected financial statements:
Income statements
Balance sheet
Ch, 11: Creating a Successful Financial Plan
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6. Twelve Key Ratios
Liquidity Ratios - Tell whether or not a small business will be able to meet its maturing obligations as they come due.
1. Current Ratio - Measures solvency by showing the firm's ability to pay current liabilities out of current assets.
Current Ratio = Current Assets = $686,985 = 1.87: Current Liabilities $367,850
Ch, 11: Creating a Successful Financial Plan
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7. Twelve Key Ratios
Liquidity Ratios - Tell whether or not a small business will be able to meet its maturing obligations as they come due.
2. Quick Ratio - Shows the extent to which a firm’s most liquid assets cover its current liabilities.
Quick Ratio = Quick Assets = 686,985 – 455,455 = .63:1 Current Liabilities $367,850
Ch, 11: Creating a Successful Financial Plan
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8. Twelve Key Ratios
Leverage Ratios - Measure the financing provided by a firm’s owners against that supplied by its creditors; it is a gauge of the depth of the company’s debt.
Debt Ratio - Measures the percentage of total assets financed by creditors rather than owners.
Debt Ratio = Total Debt = $367, ,150 = .68: Total Assets $847,655
Ch, 11: Creating a Successful Financial Plan
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9. Twelve Key Ratios
Leverage Ratios - Measure the financing provided by a firm’s owners against that supplied by its creditors; it is a gauge of the depth of the company’s debt.
4. Debt to Net Worth Ratio - Compares what a business “owes” to “what it is worth.”
Debt to Net = Total Debt = $580,000 = 2.20:1 Worth Ratio Tangible Net Worth $264,155
Ch, 11: Creating a Successful Financial Plan
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10. Twelve Key Ratios
Leverage Ratios - Measure the financing provided by a firm’s owners against that supplied by its creditors; it is a gauge of the depth of the company’s debt.
5. Times Interest Earned - Measures the firm's ability to make the interest payments on its debt.
Times Interest = EBIT* = $60, ,850 = Earned Total Interest Expense $39,850
= $100,479 = 2.52:1
$39,850
*Earnings Before Interest and Taxes
Ch, 11: Creating a Successful Financial Plan

11. Twelve Key Ratios
Operating Ratios - Evaluate a firm’s overall performance and show how effectively it is putting its resources to work.
6. Average Inventory Turnover Ratio - Tells the average number of times a firm's inventory is “turned over” or sold out during the accounting period.
Average Inventory = Cost of Goods Sold = $1,290,117 = 2.05 times Turnover Ratio Average Inventory* $630, a year
*Average Inventory = Beginning Inventory + Ending Inventory
Ch, 11: Creating a Successful Financial Plan

12. Twelve Key Ratios
Operating Ratios - Evaluate a firm’s overall performance and show how effectively it is putting its resources to work.
7. Average Collection Period Ratio (days sales outstanding, DSO) - Tells the average number of days required to collect accounts receivable.
Two Steps:
Receivables Turnover = Credit Sales = $1,309,589 = 7.31 times Ratio Accounts Receivable $179, a year
Average Collection = Days in Accounting Period = = Period Ratio Receivables Turnover Ratio days
Ch, 11: Creating a Successful Financial Plan

13. Twelve Key Ratios
Operating Ratios - Evaluate a firm’s overall performance and show how effectively it is putting its resources to work.
8. Average Payable Period Ratio - Tells the average number of days required to pay accounts payable.
Two Steps:
Payables Turnover = Purchases = $939,827 = times Ratio Accounts Payable $152, a year
Average Payable = Days in Accounting Period = = days Period Ratio Payables Turnover Ratio
Ch, 11: Creating a Successful Financial Plan

14. Twelve Key Ratios
Operating Ratios - Evaluate a firm’s overall performance and show how effectively it is putting its resources to work.
9. Net Sales to Total Assets Ratio - Measures a firm’s ability to generate sales given its asset base.
Net Sales to = Net Sales = $1,870,841 = 2.21:1 Total Assets Total Assets $847,655
Ch, 11: Creating a Successful Financial Plan

15. Twelve Key Ratios
Profitability Ratios - Measure how efficiently a firm is operating; offer information about a firm’s “bottom line.”
10. Net Profit on Sales Ratio - Measures a firm’s profit per dollar of sales revenue.
Net Profit on = Net Income = $60, = 3.24% Sales Net Sales $1,870,841
Ch, 11: Creating a Successful Financial Plan

16. Twelve Key Ratios
Profitability Ratios - Measure how efficiently a firm is operating; offer information about a firm’s “bottom line.”
11. Net Profit to Assets (Return on Assets) Ratio – tells how much profit a company generates for each dollar of assets that it owns.
Net Profit to = Net Income = $60, = 7.15% Assets Total Assets $847,655
Ch, 11: Creating a Successful Financial Plan

17. Twelve Key Ratios
Profitability Ratios - Measure how efficiently a firm is operating; offer information about a firm’s “bottom line.”
12. Net Profit to Equity* Ratio - Measures an owner's rate of return on the investment (ROI) in the business.
Net Profit to = Net Income = $60, = % Equity Owner’s Equity* $267,655 * Also called Net Worth
Ch, 11: Creating a Successful Financial Plan

18. Breakeven Analysis
Breakeven point - the level of operation at which a business neither earns a profit nor incurs a loss.
A useful planning tool because it shows entrepreneurs minimum level of activity required to stay in business.
With one change in the breakeven calculation, an entrepreneur can also determine the sales volume required to reach a particular profit target.
Ch, 11: Creating a Successful Financial Plan

19. Calculating the Breakeven Point
Step 1. Determine the expenses the business can expect to incur.
Step 2. Categorize the expenses in step 1 into fixed expenses and variable expenses.
Step 3. Calculate the ratio of variable expenses to net sales. Then compute the contribution margin:
Variable Expenses
1 -
Contribution Margin =
Net Sales Estimate
Step 4. Compute the breakeven point:
Total Fixed Costs
Breakeven Point ($) =
Contribution Margin
Ch, 11: Creating a Successful Financial Plan

20. Ch. 6: Franchising and the Entrepreneur

21. Alternatives for Raising Money for a New Venture
Personal Funds
Equity Capital
Debt Financing
Creative Sources

22. Preparing for Personal Financing
Personal Funds
The vast majority of founders contribute personal funds, along with sweat equity, to their ventures.
Sweat equity represents the value of the time and effort that a founder puts into a new venture.
Friends and Family
Friends and family are the second source of funds for many new ventures.

23. Preparing to Raise Debt or Equity Financing

24. Preparing to Raise Debt of Equity Financing
Two Most Common Alternatives
Equity Funding
Debt Financing
Means exchanging partial ownership in a firm, usually in the form of stock, for funding.
Is getting a loan.

25. Strategic Partners Strategic Partners
Strategic partners are another source of capital for new ventures.
Many partnerships are formed to share the costs of product or service development, to gain access to particular resources, or to facilitate speed to market.
Older established firms benefit by partnering with young entrepreneurial firms by gaining access to their creative ideas and entrepreneurial spirit.