Outline: Chapter 1
Introduction
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Importance of knowing the numbers
Measuring success
What is entrepreneurial financial management?
What Makes Entrepreneurial Finance Similar to
Traditional Finance?
What Makes Entrepreneurial Finance Different
from Traditional Finance?
Ethics and entrepreneurial finance
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Financial Management:
The “Language” of Business
Used to set clear financial goals
 Used to make decisions
 Used to forecast
 Used to manage cash flow
 Used to seek financing
 Used to determine an exit process for
the business
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Measuring “Success”
Income for entrepreneur
 Wealth for entrepreneur
 Goals derived from personal values of the
entrepreneur
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Differences between Traditional and
Entrepreneurial Finance
Lack of historical data to measure risk
 Lack of historical data and liquidity
complicate the practice of finance in early
stage firms
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Perspective of Investors
Prefer less risk
 Diversified investors
concerned with
systematic risk
 Non-diversified
investors concerned
with total risk
 Prefer more return
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Prefer quick return
 Prefer liquidity
 Investors face many
different
opportunities
 No investors are
immune from these
expectations
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Finance Relationships
Total Risk = Diversifiable Risk + Nondiversifiable Risk
 Required Rate of Return = Rf + Beta(Rm - Rf)
 Rf = Risk-Free Rate of Return
 Rm = Return on Market Index like SP500
 Rm-Rf =Market Risk Premium
 Beta is a measure of Nondiversifiable Risk
 Beta < 1 means asset is less volatile than market (safe asset)
 Beta = 1 means asset is just as volatile as market (average
asset)
 Beta > 1 means asset is more volatile than market (risky
asset)
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Copyright 2013 Cornwall, Vang & Hartman
Figure 1.1
Building a Financial Forecast
Setting
Financial
Goals
Revenue
Forecasting
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Table 1.1
Example of Stakeholder Analysis
Stakeholder
Family
Ethical Principle
Application
Create balance between
work demands and family
time.
Establish a more moderate
financial growth goal to allow
for time with family.
Investors
Deal with all investors
openly and honestly.
Develop a financial reporting
system that provides full and
accurate historical information
as well as realistic forecasts.
Employees
Share financial success with
those that helped create it.
Profit sharing, stock option
plans, phantom stock, ESOP,
etc. while still meeting goals
of entrepreneur.
Table 1.1
Example of Stakeholder Analysis (continued)
Stakeholder Ethical Principle Application
Fair pricing
Establish revenue forecasts that are
Customers
realistic given this pricing principle.
Suppliers
Prompt payment for
money owed.
Establish cash forecasts that are
based on an assumption of prompt
payment of all invoices submitted
by suppliers/vendors.
Banker
Honest disclosure of
information
Assure timely and accurate financial
reporting and reasonable financial
forecasting.
Community
Reliable employment for Manage cash flow to allow for
the community.
stable employment even during
times of temporary slowdowns
Outline: Chapter 2
Setting Financial Goals
Wealth vs. income
 Integrating non-financial goals
 Importance of self-assessment
 The self-assessment process
 The model and business plan
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Figure 2.1
Model for Entrepreneurial Financial Management
Setting
Financial
Goals
Revenue
Forecasting
Expense
Forecasting
Monitoring
Performance
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Life Cycle of a Business Venture
Figure 2.2
Maturity
Pre-Launch
Start-up
Growth
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“Quick and Dirty” Valuation
EBITDA
+ extra bonuses or compensation to owners
= adjusted EBITDA
X earnings multiple
= Valuation
- Outstanding Loans
= Cash proceeds to owner
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Integrating Non-Financial Goals
Ethics and values
 Personal definition of “success” in business
 Family
 Community
 Personal interests
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Business Plan Outline
Executive Summary
 The Business Concept
 Value Proposition and Industry Analysis
 Marketing Plan
 Operating Plan
 Financial Plan
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Importance of Self-Assessment
Keeps your goals front and center
 Financial goals change
 Non-financial goals change
 Part of on-going exit planning
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Outline: Chapter 3
Understanding Financial Statements
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Accounting equation
 Assets = Liabilities + Owners’ Equity
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Basic financial statements
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Limitations of business financial statements
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Basic Financial Statements
Income Statement
 Balance Sheet
 Statement of Cash Flows
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Income Statement
Exhibit 3.1
The Company
Month ended April 30, 2012
Sales
$35,000
100.0%
Cost of Goods Sold
10,000
28.6%
Gross Profit
25,000
71.4%
10,000
28.6%
Utilities Expense
2,000
5.7%
Wages Expense
5,000
14.3%
Depreciation Expense
1,000
2.8%
Total Operating Expenses
18,000
51.4%
Earnings before interest and taxes (EBIT)
7,000
20.0%
Operating Expenses
Rent Expense
Interest Expense
Earnings before taxes
100
.3%
$ 6,900
19.7%
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Balance Sheet
Exhibit 3.2
The Company
April 30, 2012
ASSETS
Current Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Fixed Assets
Equipment
Less: Accumulated Depreciation
Net Fixed Assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Notes Payable
Accounts Payable
Wages Payable
Total Current Liabilities
STOCKHOLDERS’ EQUITY
Common Stock
Retained Earnings
Total Stockholders’ Equity
TOTAL LIAB. & STOCKHOLDERS’ EQUITY
$ 58,900
25,000
30,000
113,900
36,000
(1,000)
35,000
$148,900
$ 15,000
22,000
5,000
42,000
100,000
6,900
106,900
$148,900
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Limitations of Financial Statements
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Not all assets of a company are included (e.g.
employees or brand names)
Intellectual property not reflected as an asset
Assets are reflected at historical cost
Estimates must be used for depreciation, the
collectibility of accounts receivable, the salability
of inventory, and the amount of warranty
liability outstanding
Financial statements affected by the choice of
accounting methods (e.g. FIFO, LIFO or average
cost)
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 4
Revenue Forecasting
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Common Forecasting Mistakes
The Link Between the Marketing Plan and
Revenue Forecasts
Creating Scenarios
The Link Between the Revenue Forecast and
the Cash Flow Forecast
The Impact of Business Type on Revenues
Quantitative Forecasting Techniques
Importance of Revenue Forecasting
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Figure 4.1
Model for Entrepreneurial Financial Management
Setting
Financial
Goals
Revenue
Forecasting
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Common Forecasting Mistakes
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The linear forecast mistake
The hockey stick forecast mistake
The 20/80 vs. 80/20 mistake
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Marketing Plan and Forecasting
Marketing Plan
Backbone
Revenue
Forecasts
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Marketing Plan and
Revenue Forecasting
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Identifying industry and market trends
Market research
Competitive analysis
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Sample Competitive Grid
Figure 4.3
Joe’s Inc.
Jane’s Inc.
Sally &
Jim’s Shop
Dr. C’s
Place (New
Business)
Cleanliness
of Facilities
Hours of
Operation
Selection
Price
Generally clean
in public areas,
but back rooms
usually messy
Consistently
clean and orderly
throughout all
facilities
Public areas
somewhat messy
and disorganized
and back areas
very messy
Plan to be
spotless
throughout
8:00 – 6:00
Most commonly
purchased products
available
$5 - $20
8:00 – 8:00
All commonly
purchased available
and some specialty
items in stock
$12 - $30
9:00 – 4:00
Many common
items not in stock –
usually have to
special order
$3 - $15
7:00 – 9:00
All common items
plus specialty items
not found at
competitors’ stores
$5 - $35
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Basic Guidelines for
Revenue Forecasts
Market research to assure the quality of
the assumptions behind the revenue
forecasts
 Validate assumptions with more than
one source of data
 Plan based on more conservative
assumptions
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Creating scenarios
Make Three Forecasts
1. Best-case
2. Worst-case
3. Most likely case
Track Key Assumptions
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Revenue Forecast and
the Cash Flow Forecast
Determine if credit is to be extended to
customers
 Estimate the percentage of the sales that
will be on credit
 Determine how long it will take to
collect credit sales
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Importance of Revenue Forecasting
Bank financing
 Inventory assumptions
 Staffing decisions
 Space decisions
 Investors
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Outline: Chapter 5
Expense Forecasting
Defining costs
 Cost behavior
 Break-even analysis
 The impact of business type on
expenses
 Reducing expenses through
bootstrapping
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Figure 5.1
Model for Entrepreneurial Financial Management
Setting
Financial
Goals
Revenue
Forecasting
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Cost behavior
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Variable Costs
Fixed Costs
Mixed Costs
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Table 5.1
Variable Costs
Type of Expense
Sales commissions
Materials cost
Health insurance
Wages expense
Payroll tax expense
Activity Base
Sales
Units produced
Number of employees
Number of hours worked
Dollars of wages paid
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Figure 5.1
Variable Cost Behavior
$
Total Variable
Cost Line
Total Units Produced
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Fixed Costs
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Committed fixed costs
Discretionary fixed costs
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Figure 5.2
Fixed Cost Behavior
$
Total Fixed
Costs
Total Units Produced
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Example – Merchandising Company
Exhibit 5.1
Assumptions used
Sales
$100,000
100.0%
COGS
65,000
65.0 65% of sales
Gross profit
35,000
Sales salaries
15,000
35.0 35% of sales
# of salespeople x monthly
15.0 base
Sales commissions
1,500
1.5 1.5% of sales
Store rent
3,500
3.5 monthly rent
Total selling expenses
Office rent
Office salaries
Depreciation
Total gen. & admin.
EBIT
20,000
2,500
12,000
500
20.0
2.5 monthly rent
12.0 # people x monthly pay
.5 cost of equip./mos. of life
15,000
15.0
500
.5
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Breakeven Analysis
Breakeven
=
Quantity
Fixed Costs
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Price per unit - Variable cost per unit
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 6
Integrated Financial Model
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The entrepreneur’s aspirations reconsidered
Contribution format income statement
Earnings before interest and taxes
Inventory of assumptions
Social ventures
Determining the funds needed
Time out of cash
Assessment of risk/sensitivity
Integrating into business plan/funding
document
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Figure 6.1
Building a Financial Forecast
Setting
Financial
Goals
Revenue
Forecasting
Expense
Forecasting
Monitoring
Performance
Copyright 2013 Cornwall, Vang & Hartman
Time Out of Cash
Time Out of Cash =
Cash
Operating Cash Outflow per Month
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