BU 121 Lecture 8: Entrepreneurial Finance (Pre-Midterm)

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10 Feb 2016
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● CashvsProfit
● ContributionAnalysis
○ CashBreakeven
● NewVentureFinancing
● CashBudgeting
● CashBurn
● NewVentureValuation
● StrategiesforGrowth/Exit
CriticalSuccessFactors
● Achievingfinancialperformance
● Meetingcustomerneeds
● Providingqualityproductsandvalue
● Encouraginginnovationandcreativity
● Gainingemployeecommitment
● Creatingadistinctcompetitiveadvantage
LearningObjectives
Afterstudyingthistopicyoushouldunderstand:
● theprinciplesthatapplytofinancingforanentrepreneurialventure
● thedifferencebetweencashandprofitandwhythatmatters
● howandwhentodeterminebreakevenforabusiness,andhowtouseit
● whatdrivesbreakevenandwhyandhowyouwouldtradeoffriskforreturn
● thekindsofdecisionsthatcanbemadeusingcontributionanalysisandhowtouse
ittomakedecisions
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7PrinciplesofEntrepreneurialFinance
● Real,human,andfinancialcapitalmustbe‘rented’fromowners.Whereveryou
getyourresources,returnsareexpected
● Riskandexpectedrewardgohandinhand.
○ Expectationsforreturnsareveryhighfornewventures
● Whileaccountingisthelanguageofbusiness,cashisthecurrency.
○ Whenareyougoingtobecomecashflowpositive?
● Newventurefinancinginvolvessearch,negotiation,andprivacy(private
exchange).
○ Stockmarketisveryliquidascomparedtoanewventure
● Aventure’sfinancialobjectiveistoincreasevalue.
What’sthebusinessworth?Freecashflow 
● Itisdangeroustoassumethatpeopleactagainsttheirownselfinterests.
● Venturecharacterandreputationcanbeassetsorliabilities.
CashvsProfit
● Principle3ofentrepreneurialfinance:
○ Whileaccountingisthelanguageofbusiness,cashisthecurrency.
● Canacompanythatisprofitablegobankrupt?
● SalesRevenue–AccountsReceivable
○ Revenue=theyboughtyourproductbuthaven’tnecessarilypaidforityet
● Expenses–AccountsPayable
● Depreciation/Amortization–notcash(theassetisspreadthroughoutit's
amortizationlife)
● Owners’Equity–cashtouseforbusiness?
○ Yourownmoney.Thatyouusedtobuildyourbusiness
Survival/CashFlowBreakeven
● Somenewventuresshowprofitabilityduringthestartupstage,but…
● Itismorecommonforanewventuretohavelosses–survivalstage
● needtoknowlevelofsales(survivalrevenue
)necessarytocovercostsandbreak
even
Moneyneededtobreakevenandsurvive
● Andneedtodothisonacashbasis…
Atsurvival/cashflowbreakeven  
○ EBDAT(earningsbeforedepreciation/amortizationandtaxes)=0
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● HowdoyoufindEBDAT?
● EBDAT=EBIT+depreciationinterest
● Atsurvival/cashflowbreakevenEBDAT=0
● Wecanseethatthecompanyachievedbreakeveninyear2butwhen
?,andwhat
levelofsales(survivalrevenue
)wasneededtobreakeven?
Twotypesofexpenses/costs:
● Variable(VC)Onwhatbases,doesitVARY?
○ Costsofdirectlyprovidingaproductordeliveringaservice–therefore
total$amountvarieswithsales
○ Forexample–costofgoodssold
○ Butisconstantasa%ofsalesrevenue
■ Thetotalvaries,butthepercentagestaysthesame
● $325,000÷500,000=65%ofrevenue(eachyear)
● Fixed(CFC)theydon’tvary
● Expectedtoremainconstantoverarangeofrevenuesforaspecifictimeperiod
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