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Lecture 6

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Laura Allan

th th Week 6 – February 11 – 15 Lecture Notes  What do you need to know?* 7 Principles of Entrepreneurial Finance 1. Real human, and financial capital must be ‘rented’ from owners. 2. Risk and expected reward go hand in hand: don’t risk something that won’t be rewarding 3. While accounting is the language of business, cash is the currency: Liquidity of assets and cash on balance is important!! 4. New venture financing involves search, negotiation, and privacy. 5. A venture’s financial objective is to increase value. 6. It is dangerous to assume that people act against their own self-interests: People only do what is good for them! 7. Venture character and reputation can be assets or liabilities. Financing vehicles used at different stages Development stage: Seed Financing Start-up Stage: Startup financing Survival stage: First-round financing Rapid-growth stage: Second-round financing, Mezzanine financing, Liquidity-stage financing Early-maturity stage: Obtaining bank loans, issuing bonds and issuing stock Measures of financial performance – statements Balance Sheet (Statement of Financial Position):  Provides a ‘snapshot’ of the venture’s financial position on a specific date  ASSETS = LIABILITIES + OWNERS’ EQUITY  Assets listed in order of liquidity (how fast they can be converted to cash) Current Assets: converted to cash within 12 months (funds used to pay bills)  Cash, marketable securities, accounts receivable, notes receivable, inventory Fixed Assets: long-term assets used in production (except for land, they usually wear out through amortization/depreciation)  buildings, land, equipment, furniture, machinery In-tangible Assets: long-term assets with no physical existence (patents, copyrights, trademarks, etc.)  Owners’ Equity: Records financing obtained by owners Retained earnings: amount left over from profitable operations (total profits – dividends)  Liabilities: Financing obtained by lenders Current Liabilities: must be paid within 12 months  Accounts payable, notes payable, accrued expenses (accumulated expenses such as wages & taxes which must be paid, but no bill was received by the firm), income taxes payable, current portion of long- term debt (repayment on debt due within the year) Long-term Liabilities: ex. Mortgage, company’s bonds sold to others, bank loans, etc. Income Statement:  Shows firms revenues and expenses  total profit/loss over a period of time  Revenue-Expenses= Net Profit/Loss  Revenue: dollar amount of firms sale (plus any other incomes  interest, dividends, rents) o Determined with Gross Sales (total amount of sales)- returns and allowances (merchandise returned because it was damaged/defected) = Net Sales  Expenses: cost of generating revenue o Cost of Goods Sold (COGS): total expense of buying/producing  Beginning Inventories + Inventory Purchases = Inventories available for sale ……. – ending inventories = COGS o Operating Expenses: expenses of running the business (administrative, advertising, etc.) Statement of Cash Flows:  To ensure company does not go bankrupt: remember, just because it is profitable, does not mean it won’t go bankrupt!! Impact on Cash  Operating Activities (rel
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