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Chapter 8

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beth carroll

on 22 March 2016

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Transcript of Chapter 8

A third source of seed money for a new venture is referred to as bootstrapping.

Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary.

Many entrepreneurs bootstrap out of necessity.
Income $1000
Rent $300
Car $200
Food $200
Utilities $150
Entertainment $100
Student Budget
What can a business do to immediately increase cash flow in order to meet their short term expenses? Think liquid assets…

Personal Funds

–The majority of founders contribute personal funds, along with sweat equity, to their ventures.

Sweat equity represents the value of the time and effort that a founder puts into a new venture.

Friends and Family

–Friends and family are the second source of funds for many new ventures.
Sources of Personal Financing
Negotiate an interest only line of credit with your bank

Interest paid on a loan is an expense

Paying principle on a loan is not
considered an expense and doesn't show up on your P&L:
It does not affect your profitability, but it does affect your cash flow.
Always Have access to cash
Most businesses fail due to a lack of CAPITAL ($)
How to control Cash Flow in your business
Plan well! Timing is everything!

Control your expenses! Set a Budget.

Control your accounts receivable and payable

Stay as liquid as possible:
Don’t tie up all of your money in
non-liquid assets.

- Be frugal on initial start up costs, major improvements, equipment and machinery (Von’s)

- Keep your inventories lean with-out missing sales
What can a business do
to quickly improve cash flow?
How money flows in and out of your pocket
(or checking account)
Personal Cash Flow
Every item on your financial statement can be looked at as a percentage of Gross sales.

Every industry has a standard
to which you can compare
and budget your business:

ie: Retail Industry: Gross Sales = $100,000
Payroll 8-10%
Rent 7-10%
Advertising 2%-2.5%
Percentage of Sales
It’s easier to do good things
and help make a positive impact on the world with money
than it is without it
Making a profit does not mean
that you are Greedy!

Even Social Entrepreneurs
and Non-Profits
need to have more money coming in
than they have going out of their business

Without a profit
they will not be able
to continue their mission
to help make the world a better place.
What is a LOSS?
In a for Profit business:
revenue = Sales

What is revenue?
You made $25 Gross Income

GI $25/ NS $75 = 33.3% GM

Or R-C / R = GM%

R $75-C$50=$25/R$75=33.3%

Gross Margin =
Gross income/ divided by Net Sales
expressed as a percentage %

Gross Income is the difference between

what you paid for

and how much your customer paid you for

Gross margin of profit
Total Liabilities/Shareholder Equity

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt (loans).
Debt to Equity Ratio
Friends and Family
Credit Cards
Should be used sparingly if at all.
Peer-to-Peer Lending Networks
Examples include Prosper.com and Zopa.com.
Organizations that Lend Money to Specific Groups
Count Me In, is an organization that provides loans of $500 to $10,000 to women starting or growing a business.
Other Sources of Debt Financing
Paul Roales

helps start and fund small business

Pearl Street Venture Funds

Thursday: Guest speaker
Business Angels
Are individuals who invest their personal capital directly in start-ups.

The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the startup process.

The number of angel investors in the U.S. has increased dramatically over the past decade.
Business Angels
1 of 2
Net Worth = How much you own (Assets) - How much you owe (liabilities)
Target Net Worth = (Age – 27) X Annual Pre-Tax Income / 5

Net Worth
Are itemized forecasts of a company’s income, expenses, and capital needs and are also an important tool for financial planning and control.
Think very hard before spending money to determine if it will benefit your business financially.

Every dollar you choose to spend in your business should result in an increase in sales and profit.

Pay off your debts and begin to show a profit
and then you can afford to be generous.
Return on Investment
What might negatively affect a business's cash flow?
Jill: Income = $1000
Rent (35%)- $350
Car (20%) - $200
Food (22.5%) -$225
Utilities (12.5%) -$125
Fun (10%) - $100

(100%) = $1000
Jack: Income = $1000
Rent (30%) - $300
Car (15%) - $150
Food (20%) - $200
Utilities (10%) - $100
Fun (20%)- $200

(95%) = $950
Student Income statement
Expenses are greater than Revenue
A Loss means
Profit defined:

Revenue - Expenses
= positive Number

A successful business has to make a profit

Generating a large volume of sales doesn't always mean a business is profitable
Importance of Financial Statements
To assess whether its financial objectives are being met, firms rely heavily on analysis of financial statements.

A financial statement is a written report that quantitatively describes a firm’s financial health.

The income statement, the balance sheet, and the statement of cash flow are the financial statements entrepreneurs use most commonly.
The Process of Financial Management
Historically, commercial banks have not been viewed as a practical sources of financing for start-up firms.
This sentiment is not a knock against banks; it is just that banks are risk adverse, and financing start-ups is a risky business.
Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.
Commercial Banks
Initial Public Offering

An initial public offering (IPO) is a company’s first sale of stock to the public. When a company goes public, its stock is traded on one of the major stock exchanges.

An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.
1 of 3
Venture Capital (continued)

Venture capitalists invest money in start-ups in “stages,” meaning that not all the money that is invested is disbursed at the same time.

Some venture capitalists also specialize in certain “stages” of funding.
Venture Capital
3 of 3
Venture Capital
Is money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential.
Venture-capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms.
The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources.
A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a three- to five-year period.
Charles River Ventures Final project
Venture Capital
1 of 3
Matching a New Venture’s Characteristics with the Appropriate Form of Financing or Funding
Preparing to Raise Debt or Equity Financing3 of 3
Preparing to Raise Debt or Equity Financing1 of 3
Why Most New Ventures Need Financing or Funding
Getting Financing or Funding
Bruce R. Barringer
R. Duane Ireland
Chapter 10
Are an estimate of a firm’s future income and expenses, based on past performance, its current circumstances, and its future plans.

New ventures typically base their forecasts on an estimate of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold and other expenses.
The Process of Financial Management
2 of 4
Jill: Income $1100
Rent (32%) $350
Car (18%) $200
Food (20%) $225
Utilities (11%) $125
Entertainment (9%) $100
(90%) $1000
Jack: Income $1000
Rent (30%) $300
Car (15%) $150
Food (20%) $200
Utilities (10%) $100
Entertainment (20%) $200
(95%) $950
Student Income statement
Cash Flow
How cash flows in and out of your business

Cash Flow is Key!

You can show a profit
on your P&L
and still have cash
flow problems – Why?
Is the ability to earn a profit.

Many start-ups are not profitable during their first one to three years while they are investing in resources, training employees and building their brands.

CASH FLOW - a company’s ability to meet its short-term financial obligations.

LIQUIDITY: how quickly assets can be converted into CASH (Which assets can you sell fast?)

Make sure your
gross margin percentage
is greater than
your expense percentage
How to make a PROFIT $
Financial Management = Controlling money

Financial management deals with two things:

1.) Earning money (revenue) and

2.) Managing a company’s finances (expenses) in a way that achieves the highest rate of return (profit)
Financial Management
The SBA Guaranteed Loan Program
Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program.
The loans are for small businesses that are not able to obtain credit elsewhere.

The 7(A) Loan Guaranty Program
The most notable SBA program available to small businesses.
SBA Guaranteed Loans
1 of 2
Business Angels (continued)
Business angels are valuable because of their willingness to make relatively small investments.

These investors generally invest between $10,000 and $500,000 in a single company.

Are looking for companies that have the potential to grow between 30% to 40% per year.

Business angels are difficult to find.
Business Angels
2 of 2

Are we making or losing money?

How much cash do we have on hand?

Do we have enough cash to meet our short-term obligations?

How do our expenses compare to those of our industry peers?
The financial management of a firm deals with questions such as the following on an ongoing basis:
Financial Management

Yearly Sales = $200 million

# of Stores = 220

Sales per store = $1 million

Stores Ave size – 2200 Sq Ft

Price per burger = $3.99

Yearly Sales = $490 million

# of stores = 246

Sales per store = $2 million

Stores Ave size – 3200 Sq Ft

Price per burger = $2.95
Which is more profitable?
The first step towards prudent financial management is keeping good records.
Importance of Keeping Good Records
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall
Financial Objectives of a Firm1 of 3
SBA Guaranteed Loans
Commercial Banks
Sources of Debt Financing
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall
Assessing a New Venture’s Financial Strength and Viability
Bruce R. Barringer
R. Duane Ireland
Chapter 8
Initial Public Offerings
Business Angels
Venture Capital
Sources of Equity Funding
Reasons that Motivate Firms to Go Public
Initial Public Offering
2 of 3
Raises a firm’s public profile, making it easier to attract high-quality customers and business partners.
Is a way to raise equity capital to fund current and future operations.
Reason 2
Reason 1
Two Most Common Alternatives
Preparing to Raise Debt of Equity Financing2 of 3
Is getting a loan.
Means exchanging partial ownership in a firm, usually in the form of stock, for funding.
Debt Financing
Equity Funding
Creative Sources
Debt Financing
Equity Capital
Personal Funds
Alternatives for Raising Money for a
New Venture
Hiring interns.
Sharing office space or
employees with other
Buying items cheaply but
prudently via options
such as eBay.
Avoiding unnecessary
Minimizing personal
Obtaining payments in
advance from
Leasing equipment
instead of buying.
Coordinate purchases
with other businesses.
Buying used instead of
new equipment.
Examples of Bootstrapping Methods
Have you ever had a cash flow problem?

What do you do about it?
You paid your supplier $50 for the sweater

Your customer bought it from you for $75

Net Profit $ = Gross Margin - Expenses
Net Profit $/ Sales $ = Net Profit %
What could happen
to a business when they don't have a positive cash flow?
What can a business do to prevent cash flow problems?
Full transcript