ENTREPRENEURIAL FINANCE
Measuring Financial Performance
1

Generally Accepted Accounting Principles
(GAAP):
guidelines that set out the manner and form for presenting
accounting information

Accrual Accounting:
the practice of recording economic activity when recognized rather
than waiting until realized
2

Depreciation:
reduction in value of a fixed asset over its expected life intended to
reflect the usage of wearing out of the asset

Accumulated Depreciation:
sum of all previous depreciation amounts charged to fixed assets
3

Balance Sheet:
financial statement that provides a snapshot of a venture’s
financial position as of a specific date

Balance Sheet Equation:
Total Assets = Total Liabilities + Owners’ Equity

Assets:
financial, physical and intangible items owned or controlled by
the business
4

Listing Order of Assets:
assets are listed in declining order of liquidity, or how quickly the
asset can be converted into cash

Liabilities:
short-term liabilities are listed first followed by long-term debts
owed by the venture

Owners’ Equity:
equity capital contributed by the owners of the venture is shown
after listing all liabilities
5

Current Assets:
cash & other assets that are expected to be converted into cash
in less than one year

Fixed Assets:
assets with expected lives of greater than one year
6

Cash:
amount of coin, currency, and checking account balances

Receivables:
credit sales made to customers

Inventories:
raw materials, work-in-process, and finished products which the
venture hopes to sell
7

Payables:
short-term liabilities owed to suppliers for purchases made on
credit

Accrued Wages:
liabilities owned to employees for previously completed work

Bank Loan:
interest-bearing loan of one year or less from a commercial bank
8

Long-Term Debts:
loans that have maturities of longer than one year
9

Income Statement:
financial statement that reports the revenues generated and
expenses incurred over an accounting period

Sales or Revenues:
funds earned from selling a product or providing a service

Gross Earnings:
net sales (after deducting returns and allowances) minus the
cost of production
10

Operating Income or Earnings Before
Interest and Taxes (EBIT):
indicates a firm’s profit after operating expenses, excluding
financing costs, have been deducted from net sales

Net Income (or Profit):
bottom line measure after all operating expenses, financing
costs, and taxes have been deducted from net sales
11

Cost of Production Schedule
important for preparing the income statement

Cost of Goods Sold Schedule
important for preparing the income statement

Inventories Schedule
important for preparing the balance sheet
12

Statement of Cash Flows:
shows how cash, reflected in accrual accounting, flowed into and
out of a firm during a specific period of operation


Net Cash Build exists when the sum of
cash flows from operations and investing
is positive
Net Cash Burn when the sum of cash flow
is negative
13
Initial Stage
Founder capital
Friend's borrowing - for 3 years
Interest Rate for the loan
Equipment Purchase
Building Rental Expense
PSA Initial Material Inventory
Owner's Credit Card Payable To Cover Inventory Purchase
In USD
40,000
10,000
10% per year
20,000
1,000 per month
10,000 financed by Owner's Credit Card
10,000
Assumptions for the period of July - December
Selling Price
Selling Unit
Usage life of Equipment
Sales Credit - AR
Accrued Wages
100 per unit
1,200
10 years
50,000
3,000
120 months
14
PSA CORPORATION
INITIAL BALANCE SHEET
AS OF JUNE 30
ASSETS
Current Assets
Cash and Marketable Securities
Receivable
Inventories
Total Current Assets
Fixed Assets
Gross Equipment
Building
Less: Accumulated Depreciation
Net Equipment
Other Long Term Assets
Total Assets
LIABILITIES AND EQUITY
30,000
0
10,000
40,000
Current Liabilities
Payables
Accrued Wages
Bank Loans
Other Current Liabilities
Total Current Liabilities
20,000 Long Term Debts
0 Capital Lease
0 Total Long Term Liabilities
20,000
0 Owner's Equity
60,000 Total Liabilities and Equity
10,000
10,000
10,000
10,000
40,000
60,000
15
Inventories Schedule
July
Aug
Sept
Oct
Nov
Dec
Beginning Finished Goods
Production
Materials
Direct Labor
Addition
0
13,000
19,500
32,500
35,750
39,000
10,000
3,000
13,000
10,000
3,000
13,000
15,000
4,500
19,500
15,000
4,500
19,500
15,000
4,500
19,500
15,000
4,500
19,500
Total (Beginning + Addition)
-/- Cost of Goods Sold
13,000
0
26,000
6,500
39,000
6,500
52,000
16,250
55,250
16,250
58,500
32,500
Ending Finished Goods
13,000
19,500
32,500
35,750
39,000
26,000
16
Cost of Production Schedule
Cost Per Unit
Production (Units)
Production Costs
Electronic Parts
Plastic Materials
Connectors, etc
Direct Labor
Total Costs
Cost / Unit
July
Aug
Sept
Oct
Nov
Dec
200
200
300
300
300
300
Total
1,600
40
5
5
15
8,000
1,000
1,000
3,000
8,000
1,000
1,000
3,000
12,000
1,500
1,500
4,500
12,000
1,500
1,500
4,500
12,000
1,500
1,500
4,500
12,000
1,500
1,500
4,500
64,000
8,000
8,000
24,000
65
13,000
13,000
19,500
19,500
19,500
19,500 104,000
17
PSA Corporation
Cost of Goods Sold Report
Cost Per Scanner (In
USD)
Electronic Components
Plastic Materials
Connectors, Screws, etc
Direct Labor
Total Units
40
5
5
15
Total costs (In
USD)
1,200
1,200
1,200
1,200
48,000
6,000
6,000
18,000
Total Costs
78,000
Cost of Goods Sold Schedule
July
Aug
Sept
Oct
Nov
Dec
Sales (Units)
0
100
100
250
250
500
Total
1,200
Cost @ $65 / Unit
0
6,500
6,500
16,250
16,250
32,500
78,000
18
For The Six Month Period Ending December 31
In USD
Description
Net Sales
Cost Of Goods Sold
Gross Earning
Operating Expenses
Marketing Expenses
Administration Expenses
Building Rental
Depreciation Expense
Total Operating Expenses
Earning Before Interest and Taxes (EBIT)
Other Income / Expenses
Interest
Earning Before Taxes
Taxes (25%)
Net Income
Explanations
USD
120,000 Sales of 1200 units @ USD 100
78,000 See COGS Schedule
42,000
12,500
18,000
6,000
1,000
Expense for 6 month period
Expense for 6 month period (ie, USD 3000 per month)
USD 1000 per month and for 6 month period
Accumulated depreciation for equipment depreciated for 10 years
37,500
4,500
500 Interest Expense for 6 months period (10% of USD 10,000)
4,000
1,000
3,000
19
Schedule of Accounts Payable
June
Beginning Accounts Payable
Material Purchased
Accounts Paybable
Accounts Payable Repayment
Ending Accounts Paybable
0
10,000
10,000
0
10,000
July
10,000
Aug
10,000
Sept
10,000
Oct
15,000
Nov
15,000
Dec
15,000
10,000
20,000
10,000
10,000
10,000
20,000
10,000
10,000
15,000
25,000
10,000
15,000
15,000
30,000
15,000
15,000
15,000
30,000
15,000
15,000
15,000
30,000
15,000
15,000
20
PSA CORPORATION
BALANCE SHEET
AS OF JUNE 30
ASSETS
Current Assets
Cash and Marketable Securities
Receivable
Inventories
Total Current Assets
Fixed Assets
Gross Equipment
Building
Less: Accumulated Depreciation
Net Equipment
Other Long Term Assets
Total Assets
LIABILITIES AND EQUITY
1,000
50,000
26,000
77,000
Current Liabilities
Payables
Accrued Wages
Bank Loans
Other Current Liabilities
Total Current Liabilities
20,000 Long Term Debts
0 Capital Lease
1,000 Total Long Term Liabilities
19,000
Owner's Equity
0 Retained Earnings
Total Equity
96,000 Total Liabilities and Equity
15,000
3,000
25,000
43,000
10,000
10,000
40,000
3,000
43,000
96,000
21

Sources
 Cash inflow – occurs when we “sell” something
 Decrease in asset account
▪ Accounts receivable, inventory, and net fixed assets
 Increase in liability or equity account
▪ Accounts payable, other current liabilities, and common stock

Uses
 Cash outflow – occurs when we “buy” something
 Increase in asset account
▪ Current Assets and other current assets
 Decrease in liability or equity account
▪ Notes payable and long-term debt
22
PSA CORPORATION
BALANCE SHEET COMPARISON
AS OF JUNE 30
ASSETS
Proforma
Current Assets
Cash and Marketable Securities
Receivable
Inventories
Total Current Assets
Fixed Assets
Gross Equipment
Building
Less: Accumulated Depreciation
Net Equipment
Other Long Term Assets
Total Assets
Jul - Dec
30,000
0
10,000
40,000
LIABILITIES AND EQUITY
Proforma
Diff
1,000
50,000
26,000
77,000
20,000
0
0
20,000
20,000
0
-1,000
19,000
0
0
60,000
96,000
Current Liabilities
-29,000 Payables
50,000 Accrued Wages
16,000 Bank Loans
37,000 Other Current Liabilities
Total Current Liabilities
0 Long Term Debts
0 Capital Lease
-1,000 Total Long Term Liabilities
-1,000
Owner's Equity
36,000 Total Liabilities and Equity
10,000
Jul - Dec
Diff
10,000
15,000
3,000
0
25,000
43,000
5,000
3,000
0
25,000
33,000
10,000
10,000
0
10,000
10,000
40,000
43,000
3,000
60,000
96,000
36,000
23
STATEMENT OF CASHFLOW
FOR PSA CORPORATION
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31
Net Income
+/+ :
Depreciation
Increase in Payables
Increase in Wages
3,000
1,000
5,000
3,000
-/Increase in Receivables
Increase in Inventories
Net Cash Flow From Operations
Cash Flow From Investing Activities
-/Increase in Gross Equipment
Cash Flow From Financing Activities
+/+
Increase in Other Short Term Liabilities
Net Change Excluding Cash Account
-50,000
-16,000
-54,000
0
25,000
-29,000
Beginning Cash and Marketable Securities
30,000
Ending Cash and Marketable Securities
1,000
24

Variable Expenses:
costs or expenses that vary directly with revenues

Fixed Expenses:
costs that are expected to remain constant over a range of
revenues for a specific time period

EBITDA:
earnings before interest, taxes, and depreciation & amortization
25

EBDAT:
earnings before depreciation, amortization, & taxes

EBDAT Breakeven:
amount of revenues (survival) needed to cover cash operating
expenses

Cash Flow Breakeven:
cash flow at zero for a specific period (EBDAT = 0)
26

Basic Equation:
EBDAT = Revenues (R) - Variable Costs (VC) – Cash Fixed Costs
(CFC)

Where:
CFC includes both fixed operating (e.g., general and
administrative, and possibly marketing expenses) and fixed
financing (interest) costs

When EBDAT is Zero:
R = VC + CFC
27





Starting Point:
Ratio of variable costs (VC) to revenues (R)
is a constant (VC/R) and is called the
Variable Cost Revenue Ratio (VCRR)
Survival Revenues (SR) = VC + CFC
Rewriting, CFC = SR – VC
By substitution, CFC = SR[1 – (VCRR)]
Solving for SR, SR = [CFC/(1 – VCRR)]
28
PSA CORPORATION'S FIRST THREE YEARS OF INCOME
Number of Units Sold
Year 1
5,000
Year 2
15,000
Year 3
25,000
Revenues
-/- Cost of Goods Sold
Gross Profit
500,000
325,000
175,000
1,500,000
975,000
525,000
2,500,000
1,625,000
875,000
Operating Expenses
Administrative Expenses
Marketing Expenses
Total Operating Expenses
200,000
180,000
380,000
200,000
180,000
380,000
200,000
180,000
380,000
-205,000
25,000
-230,000
20,000
-250,000
145,000
25,000
120,000
20,000
100,000
30,000
495,000
25,000
470,000
20,000
450,000
135,000
-250,000
70,000
315,000
EBITDA
Depreciation
EBIT
Interest Expense
Earning Before Taxes
Taxes
Net Income
Assumptions
Selling Price
COGS
Tax Rates
100 USD per unit
65% of Total Sales
30% of Earning Before Taxes
29
PSA CORPORATION'S FIRST THREE YEARS OF INCOME
Business As Usual
Number of Units Sold
Revenues
-/- Cost of Goods Sold
Gross Profit
-/Administrative Expenses
Marketing Expenses
Interest Expense
EBDAT
% to Revenue
Assumptions
Selling Price
COGS
Tax Rates
SURVIVAL REVENUE (SR)
Cash Fixed Costs (CFC)
Variable Cost Revenue Ratio
Survival Revenue
Unit sales for this
Year 1
5,000
Year 2
15,000
Year 3
25,000
BEP
11,429
500,000
325,000
175,000
1,500,000
975,000
525,000
200,000
180,000
20,000
200,000
180,000
20,000
200,000
180,000
20,000
200,000
180,000
20,000
-225,000
-45.0%
125,000
8.3%
475,000
19.0%
0.0%
2,500,000 1,142,857
1,625,000
742,857
875,000
400,000
0
100 USD per unit
65% of Total Sales
30% of Earning Before Taxes
400,000
65%
= CFC / (1 - VCRR)
= 400,000 / (1 - 65%)
1,142,857
11,429 Selling Units
30
31
PSA CORPORATION'S FIRST THREE YEARS OF INCOME STATEMENT
Reduce VCRR to be 60%
Number of Units Sold
Revenues
-/- Cost of Goods Sold
Gross Profit
-/Administrative Expenses
Marketing Expenses
Interest Expense
EBDAT
% to Revenue
Assumptions
Selling Price
COGS
Tax Rates
SURVIVAL REVENUE (SR)
Cash Fixed Costs (CFC)
Variable Cost Revenue Ratio
Survival Revenue
Unit sales for this
Year 1
5,000
Year 2
15,000
Year 3
25,000
BEP
10,000
500,000
300,000
200,000
1,500,000
900,000
600,000
200,000
180,000
20,000
200,000
180,000
20,000
200,000
180,000
20,000
200,000
180,000
20,000
-200,000
-40.0%
200,000
13.3%
600,000
24.0%
0
2,500,000 1,000,000
1,500,000
600,000
1,000,000
400,000
0.0%
100 USD per unit
60% of Total Sales
30% of Earning Before Taxes
400,000
60%
= CFC / (1 - VCRR)
= 400,000 / (1 - 60%)
1,000,000
10,000 Selling Units
32
33
PSA CORPORATION'S FIRST THREE YEARS OF INCOME STATEMENT
Reduce CFC by USD 30,000
Number of Units Sold
Revenues
-/- Cost of Goods Sold
Gross Profit
-/Administrative Expenses
Marketing Expenses
Interest Expense
EBDAT
% to Revenue
Assumptions
Selling Price
COGS
Tax Rates
SURVIVAL REVENUE (SR)
Cash Fixed Costs (CFC)
Variable Cost Revenue Ratio
Survival Revenue
Unit sales for this
Year 1
5,000
Year 2
15,000
Year 3
25,000
BEP
10,571
500,000
325,000
175,000
1,500,000
975,000
525,000
200,000
180,000
20,000
200,000
180,000
20,000
200,000
180,000
20,000
170,000
180,000
20,000
-225,000
-45.0%
125,000
8.3%
475,000
19.0%
0.0%
2,500,000 1,057,143
1,625,000
687,143
875,000
370,000
0
100 USD per unit
65% of Total Sales
30% of Earning Before Taxes
370,000
65%
= CFC / (1 - VCRR)
= 370,000 / (1 - 65%)
1,057,143
10,571 Selling Units
34
PSA CORPORATION'S FIRST THREE YEARS OF INCOME STATEMENT
Increase Selling Price by 15%
Number of Units Sold
Revenues
-/- Cost of Goods Sold
Gross Profit
-/Administrative Expenses
Marketing Expenses
Interest Expense
EBDAT
% to Revenue
Assumptions
Selling Price
COGS
Tax Rates
SURVIVAL REVENUE (SR)
Cash Fixed Costs (CFC)
Variable Cost Revenue Ratio
Survival Revenue
Unit sales for this
Year 1
5,000
Year 2
15,000
Year 3
25,000
BEP
9,938
575,000
373,750
201,250
1,725,000
1,121,250
603,750
200,000
180,000
20,000
200,000
180,000
20,000
200,000
180,000
20,000
200,000
180,000
20,000
-198,750
-34.6%
203,750
11.8%
606,250
21.1%
0
2,875,000 1,142,857
1,868,750
742,857
1,006,250
400,000
0.0%
115 USD per unit
65% of Total Sales
30% of Earning Before Taxes
400,000
65%
= CFC / (1 - VCRR)
= 400,000 / (1 - 65%)
1,142,857
9,938 Selling Units
35
PSA CORPORATION'S FIRST THREE YEARS OF INCOME STATEMENT
COMPARISON - EBDAT
Number of Units Sold
Revenues
-/- Cost of Goods Sold
Gross Profit
-/Administrative Expenses
Marketing Expenses
Interest Expense
EBDAT
% to Revenue
Scenario 1 - Scenario 2 - Scenario 3 BAU
VCRR 60% CFC $30K SP Up 15%
11,429
10,000
10,571
9,938
1,142,857
742,857
400,000
1,000,000
600,000
400,000
1,057,143
687,143
370,000
1,142,857
742,857
400,000
200,000
180,000
20,000
0
0.0%
200,000
180,000
20,000
0
0.0%
170,000
180,000
20,000
0
0.0%
200,000
180,000
20,000
0
0.0%
36

NOPAT:
net operating profit after taxes or EBIT times one minus the
firm’s tax rate

NOPAT Breakeven Revenues (NR):
amount of revenues needed to cover a venture’s total operating
costs
37

Basic Equation:
NR = TOFC/(1 – VCRR)
Where:
TOFC is the total operating fixed costs which consist of cash
operating fixed costs (excluding interest expenses) plus noncash
fixed costs (e.g., depreciation)
38
PSA CORPORATION'S FIRST THREE YEARS OF INCOME STATEMENT
Number of Units Sold
Year 1
5,000
Year 2
15,000
Revenues
-/- Cost of Goods Sold
Gross Profit
500,000
325,000
175,000
1,500,000
975,000
525,000
Operating Expenses
Administrative Expenses
Marketing Expenses
Total Operating Expenses
200,000
180,000
380,000
200,000
180,000
380,000
200,000
180,000
380,000
200,000
180,000
380,000
-205,000
25,000
-230,000
145,000
25,000
120,000
495,000
25,000
470,000
25,000
25,000
0
-230,000
120,000
36,000
470,000
141,000
0
0
-230,000
84,000
329,000
0
EBITDA
Depreciation
EBIT
Interest Expense
Earning Before Taxes
Taxes
NOPAT
Assumptions
Selling Price
COGS
Tax Rates
NOPAT Breakeven Revenue (NR)
Total Fixed Costs (TOFC)
Variable Cost Revenue Ratio
NOPAT Breakeven Revenue (NR)
Unit sales for this
Year 3
25,000
BEP
11,571
2,500,000 1,157,143
1,625,000
752,143
875,000
405,000
100 USD per unit
65% of Total Sales
30% of Earning Before Taxes
405,000
65%
= TOFC / (1 - VCRR)
= 405,000 / (1 - 65%)
1,157,143
11,571 Selling Units
39
40