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Entrepreneurial Finance.pdf

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University of Waterloo
COMM 101
Laura Allan

Entrepreneurial Finance Tuesday, February 12, 2013 7:33 AM Learning Objectives • 7 Principles of Entrepreneurial Finance Understand how to Measure and Analyze Financial Information from a Start-up Entrepreneur’s 1. Real human, and financial capital must be ‘rented’ from owners. Perspective a. Real estate, money • What do you need to know?* b. The owners all want return and wants to be worth it to lend it to you ○ Principles of entrepreneurial finance 2. Risk and expected reward go hand in hand. ○ Financing vehicles used at different stages 3. While accounting is the language of business, cash is the currency. ○ Measures of financial performance – statements 4. New venture financing involves search, negotiation, and privacy. ○ Survival/cash breakeven 5. A venture’s financial objective is to increase value. ○ Cash budgeting 6. It is dangerous to assume that people act against their own self-interests. a. Only interested for potential growth and money -----------------------Midterm----------------------------------------------------------- ○ Evaluating financial performance – ratios 7. Venture character and reputation can be assets or liabilities. ○ Cash burn and build rates ○ Contribution analysis • How do you need to know it? Financing through the Venture Life Cycle • Why do you need to know it? Measuring Financial Performance • Why maintain a record of operations? ○ Provide feedback for internal decision-making ○ Provide information for creditors and investors to make decisions ○ Reflect the venture’s initial and developing assets and ownership ○ Record sales and costs and whether making a profit ○ Gain understanding of how cash is generated and depleted ○ Interpret financial situation and project when reach breakeven • Where recorded? • Balance Sheet (Statement of Financial Position) ○ Records ASSETS including cash ○ Records financing obtained by owners (OWNERS’ EQUITY) and lenders (LIABILITIES) ○ Provides a ‘snapshot’ of the venture’s financial position on a specific date ○ Built on premise that:  ASSETS = LIABILITIES + OWNERS’ EQUITY  ex: buy car for $15,000 with $5,000 of own money and $10,000 loan  sell the car for $12,000 shortly after Early Stage Ventures □ 12,000 = 12,000 10,000 + 2,000 - Development state • Income Statement - Startup stage @ 0 • Statement of Cash Flows ○ Revenue generation - Survival stage Balance Sheet ○ Revenues pay some but not all expenses - borrow or give up equity PSA Company as of June 30, 2012 (start date) ○ Make it or break it Seasoned firms - Rapid-growth stage ○ Inflows > outflows ○ Cash flow positive ○ value increases - Early maturity stage ○ Growth is going to slowdown, slow and steady ○ Now is the time to sell, go public, merge, etc Owner's equity = owner's money Long-term debts = loan Less: accumulated depreciation = depreciation of the equipment Total current assets = very liquid Owner's equity - assuming sole proprietorship If Venture is incorporated, Owners' (Shareholders' Equity looks more complicated: • Common stock (Paid in Capital) • Preferred stock (Paid in Capital) • Retained earnings ○ Earned Capital = Profit - Dividends Income Statement PSA Company For the period ended Dec 31, 2012 (btw one date to another) - 6months Cash VS Profit - Can a company that is profitable go bankrupt - Sales revenue - accounts receivable - Expenses - accounts payable - Depreciation/amortization - not cash - Owners' equity - cash to use for business? - Remember PRINCIPLE 3 of entrepreneurial finance ○ While accounting is language of business, cash is the currency Statement of Cash Flows PSA Company For period ended Dec 31, 2012 Net sales = 1200 units at $100 each, 500 on credit Earnings before interest and taxes = operating income Interest = $10000 at 10% for 1/2 year Balance Sheet Week 6 Page 1 For period ended Dec 31, 2012 Net sales = 1200 units at $100 each, 500 on credit Earnings before interest and taxes = operating income Interest = $10000 at 10% for 1/2 year Balance Sheet PSA Company As of Dec 31, 2012 - Impact on cash ○ Operating activities: ○ Start with Net Income • Survival/Cash Flow Breakeven ○ Add back Depreciation/Amortization ○ + Decrease / - Increase in Receivables • Some new ventures show profitability during the startup stage, but… • It is more common for a new venture to have losses – survival stage ○ + Decrease / - Increase in Inventory • need to know level of sales necessary to cover costs – break even ○ + Increase / - Decrease in Payables ○ + Increase / - Decrease in Accrued Liabilities • Therefore need to compare revenues to cash ope
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