BU121 Lecture 7: Entrepreneurial Finance

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9 Feb 2017
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Entrepreneurial finance:
- Cash breakeven
- Contribution analysis
- Sales forecasting
- Cash budgeting
- Cash burn
- New venture financing
- New venture valuation
- Strategies for growth or exit
Startup financial metrics:
- For all start ups:
o Sales forecast, headcount, expenses, and breakeven cash flow
- Unique metrics:
o Gross margin, inventory turns, occupancy, and qualified leads
- Creation and capture of value:
o Customer acquisition costs vs lifetime customer value
o Revenues per salesperson and time to revenue
o Contribution margin
o Monthly burn rate
- Can you capture the value you’ve created
- Can you sell enough to breakeven and achieve financial performance
Forecasting demand and sales revenue:
- No formula where projects are based on research and logic = educated guess you can
defend
- Market potential does not equal sales forecast:
o Forecast depends on plan called scalability
- Top down forecasting:
o Market potential not just number of households
o Still doesn’t equal sales forecast so consider the geographic market operating in
and seasonality or read to buy
- Bottom up forecasting:
o What can you do given capacity and marketing plan
- Sensitivity analysis and contingency plan:
o Assumptions:
Breakeven
Largest, smallest, or average competitor
Similar product launch
Capacity
o Milestones is the points that increase valuation of business and need for capital so
contingency plan
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Cash budgeting:
- Tool to forecast and manage cash flows
- Deficiency:
o Finance deficiency + minimum
o Ending balance = minimum required
- Excess > minimum:
o Surplus available to repay borrowing
o Ending balance = minimum required if do
o Ending balance = total excess if don’t
- Excess < minimum:
o Finance to = minimum required
o End balance = minimum required
How much cash do you need?:
- The cash budget determines the net cash inflows and outflows assuming no startup
capital
- The total cumulative financing required until you are cash flow positive + startup costs
and a safety margin is your ask:
o Safety margin or contingency factor often based on sales and collection cycle
Cash burn rates and liquidity:
- Cash burn rate:
Beginning Cash Balance
+ Receipts
Total Cash Available
- Disbursements
Cash Excess / (Deficiency)
Minimum Cash Balance Desired
Financing Req’d / Surplus or
Repayment
Ending Cash Balance
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