1. BUSINESS MODELS AND FINANCIAL ANALYSIS JANUARY 18, 2012 BURGES HALL, RM 411

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3. BUSINESS PLAN DEVELOPMENT The Business Plan is a key document that articulates what key features will drive your business opportunity. These can include: Mission Statement Key members of the Team Technology and intellectual positions Opportunities and market summary Business model: entry and growth strategy Competition Five-year goals and objectives Five-year financial plan Risks and rewards

4. BUSINESS MODELS Wikipedia: A business model describes the rationale of how an organization creates, delivers and captures economic, social or other forms of value. The process of business model design is part of the business strategy.

5. BUSINESS MODELS There are 9 basic business model building blocks (Osterwalder, Alexander &Pigneur, Yves. Business Model Generation: John Wiley & Sons, Inc. 2010) What are you going to make and sell or service?? 1) Value Propositions 2) Key Activities 3) Key Resources 4) Key Partners 5) Customer segments 6) Channels—sales and disribution 7) Customer Relationships 8) Cost Structure 9) Revenue Streams

6. BUSINESS MODELS, continued 1)Value Propositions a) What will you do to solve customer problems and satisfy customer (unmet) needs? b) What will you do to differentiate your product and/or service?

7. Impact of Differentiated Products 7 +12% Market share +34% Market share

8. BUSINESS MODELS, continued 2) Key Activities Examples Microsoft— software development Dell— supply chain management McKinsey— problem solving Newco— outsourcing decisions HOW WILL YOU CREATE A COMPETITIVE ADVANTAGE?

9. BUSINESS MODELS, continued 3) Key Resources a) Physical—manufacturing facilities, buildings, distribution networks b) Intellectual—brands, patents and copyrights, customer databases c) Human—people are particularly prominent in certain business models, such as pharma d) Financial—financial resources or guarantees such as lines of credit

10. BUSINESS MODELS, continued 4) Key Partners a) Strategic alliances between non-competitors b) Strategic partnerships between competitors c) Joint Ventures d) Buyer-supplier relationships e) Outsourcing manufacturing

11. BUSINESS MODELS, continued 5) Customer Segments—defines the different groups of people or organizations an enterprise aims to reach and serve a) Mass Market b) Niche Market c) Segmented: big/small; innovative/commodity d) Diversified

12. BUSINESS MODELS, continued 6) Channels—how a company communicates with and reaches its customer segments a) Awareness of our products and services b) Evaluation of the Value Propositions c) Purchase (of specific products?) d) Delivery of Value Proposition e) After Sales Support LIST DIFFERENT SALES CHANNELTYPES LIST DIFFERENT CHANNELS OF DISTRIBUTION

13. BUSINESS MODELS, continued 7) Customer Relationships—what type of relationship does each of our customer segments require (desire)? Some examples a) Personal assistance b) Dedicated personal assistance c) Self-service d) Automated services ( set up to offer book or movie recommendations)

14. BUSINESS MODELS, continued 8) Cost Structure—describes all costs incurred to operate a business model a) Cost-driven b) Value-driven c) Fixed costs d) Variable costs e) Economies of scale

15. BUSINESS MODELS, continued 9) Revenue Streams Examples include a) Asset sale b) Usage fee c) Subscription fee d) Lending/renting/leasing e) Licensing There are a broad range of Pricing Mechanisms including list prices, volume dependent, auctions, product feature dependent, yield management

16. BUSINESS MODELS Some Examples: 1)Bait and hook—razor blade strategy; cell phones and air time; computer printers and ink cartridges 2)Southwest airlines—low frills; fast on and off airplane 3)BASF: Verbund—consume everything that goes into plant—”no waste”

17. SWOT ANALYSIS Once a business model is developed, it can be tested using a SWOT analysis on each of the building blocks. a) Strengths—internal b) Weaknesses--harmful c) Opportunities—external d) Threats—harmful This analysis can reveal interesting paths to innovation and continuous improvement.

18. SWOT ANALYSIS, continued Value Proposition (VP)Assessment Assessing Strengths/Weaknesses 1)Our VP are well aligned with customer needs: scale 5-1 2)Our VP and customer needs are misaligned; scale -1 to -5 Assessing Opportunities 1) What other jobs could we do on behalf of customers?: scale of 1-5 Assessing Threats 1) Are substitute products and services available? Scale of 1-5 2) Are we in danger of losing any partners? Scale of 1-5

19. FINANCIAL ANALYSIS DEFINITION Profit and Loss Statement : A statement showing the revenues, expenses and income of a company. Also known as income statement. Balance Sheet : A quantitative summary of a company's financial condition including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns and the second part shows all the financing methods. Cash Flow Statement : A summary of where a company’s money came from and where it went. Net Present Value (NPV) : The difference between the present value of cash inflows and the present value of cash outflows.

20. PROFIT & LOSS STATEMENT NEWCO (000) 2010201120122013201420152016201720182019 Revenues Sales$40$500$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 Grants $100 Sub-total$40$600$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 COGS$16$206$401$609$1,234$1,800$2,432$3,082$3,594$4,067 Gross Margin$24$394$599$891$1,766$2,700$3,568$4,418$5,406$6,433 GM,%60.0%58.8%59.9%59.4%58.9%60.0%59.5%58.9%60.1%61.3% SARs$176$352$430$568$600$810$1,080$1,350$1,620$1,890 % SAR440%70%43%38%20%18% Operating Income-$152$42$169$323$1,166$1,890$2,488$3,068$3,786$4,543 Other Income Taxes$0 $40$113$408$662$871$1,074$1,325$1,590 Net Income-$152$42$129$210$758$1,229$1,617$1,994$2,461$2,953

21. PROFIT & LOSS STATEMENT NEWCO (000) 20102011201220132014 COMMENTS Revenues Sales$40$500$1,000$1,500$3,000 Net sales of products and services Grants $100 Federal/state grants Sub-total$40$600$1,000$1,500$3,000 COGS$16$206$401$609$1,234 Cost Of Goods Sold: includes raw materials and manfg costs Gross Margin$24$394$599$891$1,766 Operating profit; also called Gross Profit GM,%60.0%58.8%59.9%59.4%58.9% Ratio of gross margin and sales revenues SARs$176$352$430$568$600 Sales, Administration, Research expenses % SAR440%70%43%38%20% Ratio of SAR and sales revenues Operating Income-$152$42$169$323$1,166 Other Income Can include revenue from interest Taxes$0$15$59$113$408 Net Income-$152$27$110$210$758

22. BALANCE SHEET: QUESTIONS 1.How much cash do you have? 2.How much do customers owe you? 3.How much equity has been purchased?

23. Balance Sheet--#1 (3 rd year) ASSETSLIABILITIES Current Assets Current Liabilities Cash$130,000 Accounts payable$10,000 Accounts receivable $15,000 Short-term notes (less doubtful accounts) Current portion of long-term notes Inventory$25,000 Interest payable Temporary investment Taxes payable$5,000 Prepaid expenses Accrued payroll Total Current Assets$170,000 Total Current Liabilities$15,000 Fixed Assets Long-term Liabilities Start-up Costs$100,000 Mortgage Patent Costs$20,000 Other long-term liabilities$100,000 Buildings Total Long-Term Liabilities$100,000 (less accumulated depreciation) Equipment and computers$65,000 Total Liabilities$115,000 (less accumulated depreciation) Furniture and fixtures$10,000 SHAREHOLDERS' EQUITY (less accumulated depreciation) Capital stock$500,000 Total Net Fixed Assets$195,000 Retained earnings-$250,000 Total Shareholders' Equity$250,000 TOTAL ASSETS$365,000 TOTAL LIABILITIES & EQUITY$365,000 Balance Sheet CheckOK

24. Balance Sheet--#1 (3 rd Year) ASSETSLIABILITIES Current Assets Current Liabilities Cash$130,000 Accounts payable$10,000 Accounts receivable$15,000 Short-term notes (less doubtful accounts) Current portion of long-term notes Inventory$25,000 Interest payable Temporary investment Taxes payable$5,000 Prepaid expenses Accrued payroll Total Current Assets$170,000 Total Current Liabilities$15,000 Fixed Assets Long-term Liabilities Start-up Costs$100,000 Mortgage Patent Costs$20,000 Other long-term liabilities$100,000 Buildings Total Long-Term Liabilities$100,000 (less accumulated depreciation) Equipment and Computers$65,000 Total Liabilities$115,000 (less accumulated depreciation) Furniture and fixtures$10,000 SHAREHOLDERS' EQUITY (less accumulated depreciation) Capital stock$500,000 Total Net Fixed Assets$195,000 Retained earnings-$250,000 Total Shareholders' Equity$250,000 TOTAL ASSETS$365,000 TOTAL LIABILITIES & EQUITY$365,000 Balance Sheet CheckOK RATIOS Current Ratio11.33 Current Ratio = Current Assets/Current Liabilities Quick Ratio9.67 Quick Ratio = (Current Assets-Inventories)/ Current Liabilities Cash Ratio8.67 Cash Ratio = Cash/Current Liabilities Working Capital$155,000 Working Capital = Current Assets - Current Liabilities

25. CASH FLOW STATEMENT: QUESTIONS 1.In what year are you cash-flow positive? 2.How much cash do you generate in 2016? 3.How much more working capital do you need in 2013?

26. CASH FLOW STATEMENT NEWCO (000) 2010201120122013201420152016201720182019 Revenues$40$500$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 Grants Sub-total$40$500$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 COGS$13$165$321$487$987$1,440$1,946$2,466$2,875$3,254 Gross Margin$27$335$679$1,013$2,013$3,060$4,054$5,034$6,125$7,246 SARs$176$352$430$568$600$810$1,080$1,350$1,620$1,890 Operating Income-$149-$17$249$445$1,413$2,250$2,974$3,684$4,505$5,356 Other Income Taxes$0 $87$156$495$788$1,041$1,289$1,577$1,875 Net Income-$149-$17$162$289$918$1,463$1,933$2,395$2,928$3,481 Working Cap change-$1-$13-$14-$27-$56-$64-$98-$108-$132-$139 Cash from Operations-$150-$30$148$262$862$1,399$1,835$2,287$2,796$3,342 Capital-$35 Investment$200 Cash Flow$15-$30$148$262$862$1,399$1,835$2,287$2,796$3,342 Year-End Cash$15-$15$133$395$1,257$2,656$4,491$6,778$9,574$12,916

27. FINANCIAL ANALYSIS Net Present Value (NPV)  To calculate in Excel; “=NPV(Discount rate,%, Year 1,$:Year X,$)”  NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation/risk into account. The larger the NPV, the better.  Discount rate represents the business risk. The higher the rate, the greater the risk.

28. MODIFIED INCOME STATEMENT NEWCO Base Case (000) 2010201120122013201420152016201720182019 Revenues$40$500$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 Sub-total$40$500$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 Production, units1.012.725.639.078.9120.0162.2205.5250.0295.8 COGS$13$165$321$487$987$1,440$1,946$2,466$2,875$3,254 Gross Margin$27$335$679$1,013$2,013$3,060$4,054$5,034$6,125$7,246 GM,%67.5%67.1%67.9%67.5%67.1%68.0%67.6%67.1%68.1%69.0% SARs$176$352$430$568$600$810$1,080$1,350$1,620$1,890 % SAR440%70%43%38%20%18% Operating Income-$149-$17$249$445$1,413$2,250$2,974$3,684$4,505$5,356 Taxes @ 35%$0 $87$156$495$788$1,041$1,289$1,577$1,875 Net Income-$149-$17$162$289$919$1,463$1,933$2,395$2,928$3,482 Working Cap change$1$13$14$27$56$64$98$108$132$139 Cash from Operations-$150-$29$148$263$863$1,398$1,835$2,287$2,796$3,343 Capital$35 Cash Flow-$185-$29$148$263$863$1,398$1,835$2,287$2,796$3,343 Cumulative Cash-$185-$214-$66$197$1,059$2,458$4,293$6,580$9,376$12,719 Discount RateNPV 35%$1,195'10-'19

29. MODIFIED INCOME STATEMENT NEWCO Higher Sales (000) 2010201120122013201420152016201720182019 Revenues$40$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500$12,000 Sub-total$40$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500$12,000 Production, units1.025.338.577.9118.4160.0202.7246.6291.7338.0 COGS$13$329$481$974$1,480$1,920$2,432$2,959$3,354$3,718 Gross Margin$27$671$1,019$2,026$3,020$4,080$5,068$6,041$7,146$8,282 GM,%67.5%67.1%67.9%67.5%67.1%68.0%67.6%67.1%68.1%69.0% SARs$176$452$530$568$900$1,080$1,350$1,620$1,890$2,160 % SAR440%45%35%19%20%18% Operating Income-$149$219$489$1,458$2,120$3,000$3,718$4,421$5,256$6,122 Taxes @ 35%$0 $171$510$742$1,050$1,301$1,547$1,840$2,143 Net Income-$149$219$318$948$1,378$1,950$2,416$2,874$3,416$3,979 Working Cap change$1$26$14$67$56$104$99$148$132$178 Cash from Operations-$150$193$304$880$1,322$1,846$2,318$2,726$3,285$3,801 Capital$35 Cash Flow-$185$193$304$880$1,322$1,846$2,318$2,726$3,285$3,801 Cumulative Cash-$185$7$312$1,192$2,514$4,360$6,678$9,403$12,688$16,489 Discount RateNPV 35%$1,897'10-'19

30. MODIFIED INCOME STATEMENT NEWCO Higher Unit Costs (000) 2010201120122013201420152016201720182019 Revenues$40$500$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 Sub-total$40$500$1,000$1,500$3,000$4,500$6,000$7,500$9,000$10,500 Production, units1.012.725.639.078.9120.0162.2205.5250.0295.8 COGS$16$206$401$609$1,234$1,800$2,432$3,082$3,594$4,067 Gross Margin$24$294$599$891$1,766$2,700$3,568$4,418$5,406$6,433 GM,%59.4%58.9%59.9%59.4%58.9%60.0%59.5%58.9%60.1%61.3% SARs$176$352$430$568$600$810$1,080$1,350$1,620$1,890 % SAR440%70%43%38%20%18% Operating Income-$152-$58$169$323$1,166$1,890$2,488$3,068$3,786$4,543 Taxes @ 35%$0 $59$113$408$662$871$1,074$1,325$1,590 Net Income-$152-$58$110$210$758$1,229$1,617$1,994$2,461$2,953 Working Cap change$1$16$18$33$70$80$122$134$165$174 Cash from Operations-$154-$73$92$177$689$1,148$1,495$1,860$2,296$2,779 Capital$35 Cash Flow-$189-$73$92$177$689$1,148$1,495$1,860$2,296$2,779 Cumulative Cash-$189-$262-$170$7$696$1,844$3,339$5,198$7,494$10,273 Discount RateNPV 35%$898'10-'19

31. MODIFIED INCOME STATEMENT/PROCESS IMPROVEMENT 1.Which is the better Case and why?

32. MODIFIED INCOME STATEMENT Process Improvement Project Base Case(000)2X Capital Investment/30% Reduction in COGS 2010201120122013201420102011201220132014 Revenues$40$500$1,000$1,500$3,000$40$500$1,000$1,500$3,000 Sub-total$40$500$1,000$1,500$3,000$40$500$1,000$1,500$3,000 Production, units1.012.525.037.575.01.012.525.037.575.0 COGS$13$163$325$488$975$10$125$250$375$750 Gross Margin$27$338$675$1,013$2,025$30$375$750$1,125$2,250 GM,%67.5% 75.0% SARs$176$352$430$568$600$176$352$430$568$600 % SAR440%70%43%38%20%440%70%43%38%20% Operating Income-$149-$15$245$445$1,425-$146$23$320$557$1,650 Taxes @ 35%$0 $86$156$499$0 $112$195$578 Net Income-$149-$15$159$289$926-$146$23$208$362$1,073 Working Cap change$1$12$15$26$55$1$10$11$20$43 Cash from Operations-$150-$27$145$263$871-$147$13$197$342$1,030 Capital$35 $70 Cash Flow-$185-$27$145$263$871-$217$13$197$342$1,030 Cumulative Cash-$185-$212-$67$196$1,067-$217-$203-$7$335$1,365 Discount RateNPV ValuationDiscount RateNPV 35%$180'10-'14 35%$259'10-'14

33. FINANCIAL ANALYSIS SUMMARY  Analyzing the financial situation of a company is a complicated process. One needs to use more than one tool to develop an accurate picture of the true financial situation of a business. The use of a P&L Statement, a Balance Sheet and a Cash-Flow Statement are essential.  Net Present Value (NPV) is a powerful financial tool and should be used to help analyze different business cases.