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Entrepreneurial Finance.doc

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Roopa Reddy

Entrepreneurial Finance Monday, February 11, 2013 1:01 PM Seven Principles of Entrepreneurial Finance 1. Real, human, and financial capital must be 'rented' from owners 2. Risk and expected reward go hand in hand 3. While accounting is language of business, cash is currency 4. New venture (private and illiquid- investors can't easily sell/buy) financing involves search, negotiation and privacy 5. Venture's financial objective is to increase value 6. Dangerous to assume that people act against their own self-interests 7. Venture character and reputation can be assets or liabilities Financing through Venture Life Cycle Development Stage • Not yet bringing in revenue, so hard to obtain financing Startup Stage • Ready to launch, making a little bit of money, but still not easy to bring in financing Survival Stage • Revenues pay some but not all expenses, borrow or give up equity • Trying to get into growth stage Rapid-Growth Stage • Cash inflows > outflows • Cash flow is positive, value increases (at the fastest/greatest rate of increase) • Starting to sustain yourself- industry growth, economies of scale (costs go down) Early-Maturity Stage • Growth slows, most vale realized • Consider exit strategies Types of Financing in Different Phases Measuring Financial Performance • Maintaining record of operations to: • Provide feedback for internal decision making • Provide information for creditors/investors to make decisions (external) • Reflect venture's initial and developing assets and ownership Record sales and costs and whether making profit • • Gain understanding of how cash is generated/depleted • Interpret financial situation and project when reach breakeven • Balance sheet (statement of Financial Position- private companies use ASPE- accounting standards for private enterprise, use GAAPS) • Records ASSETS including cash • Records financing obtained by owners (OWNERS EQUITY) and lenders (LIABILITIES) • Provides 'snapshot' of venture's financial position on specific date (as of [date]) • ASSETS = LIABILITIES + OWNERS EQUITY (basic accounting equation) • If venture is incorporated, owner's equity becomes Shareholder's Equity- Common/Preferred Stock, Retained Earnings (Profit - Dividends) • Income Statement • For the period ended (date) • Sales - COGS= Gross Earnings - Operating Expenses - Interests - Taxes = Net Income • Cash (on balance sheet) and profit are not the same thing! • Statement of Cash Flows • Looking at cash flow within operations • Cash Flow from Operating Activities • Impacts: o Start with Net Income o Add back Depreciation/Amortization o + Decrease / - Increase in Receivables o + Decrease / - Increase in Inventory o + Increase / - Decrease in Payables o + Increase / - Decrease in Accrued Liabilities • Cash Flow from Investing Activities • Impacts: o + Decrease / - Increase in Gross Fixed Assets • Cash flow from financing activities • Impacts: o + Increase / - Decrease in Loans o + Increase / - Decrease in Stock o - Cash Dividends paid Cash vs. Profit • Company that is profitable can go bankrupt • Sales revenue- accounts receivable • Expenses- accounts payable • Depreciation/ Amortization - not cash! • Owners' equity- cash to use for business? • "while accounting is language of business, cash is the currency" Survival/ Cash Flow Breakeven Some new ventures show profitability during startup stage but… • More common for new venture to have losses [survival stage] • Need to know level of sales necessary to cover costs [break even] • Need to compare revenues to cash operating and financing costs • Care more about cash breakeven instead of profit breakeven (need cost structure to understand) • Two types of expenses/costs: • Variable: • Costs of directly providing product/delivering service- varies with sales Ex. cost of goods sold (income statement) • • Fixed • Expected to remain constant over range of revenues for specific time period • Over head
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