Finance for Entrepreneuers

Financing Your Venture

Objectives
§How do you determine how much cash you will need?
§How do you manage cash and working capital?
§What types of finance are available?
§Advantages: debt vs. equity
§How is the deal structured?
§How does the entrepreneur create value?

Basic Financial Concepts
Accounting is like a balance beam,
When we add to one side, We must add the same amount to the other side.
Definitions
Asset:
Something we own
Cash, inventory, building, land
Something that someone owes to us
Account receivable, loan receivable
Liability:
Something we owe to someone else
Account payable, loan payable
Revenue:
When we earn something
Sell inventory, charge interest, bill for time worked
Expense:
When we do something to earn revenue
Advertising, wages
Income:
Revenues less Expenses
Basic Financial Concepts
Equity:
The owners’ (shareholders’) investment
Share capital
Accumulated income, year after year
Retained Earnings
Assets = Liabilities + Owners’ Equity
A = L + E

Financial Statements
§Balance Sheet
§Income Statement
§Statement of Cash Flows

Financial Statements – Income Statement
How much money we made in the period
Revenue less Expenses
Continuity of Retained Earnings
At the bottom of the IS we add the current period’s income to the Retained Earnings at the beginning of the period (opening RE) to get Retained Earnings at the end of the period (closing RE)

Financial Statements – Balance Sheet
How much we have, what we owe, and what we’re worth
Assets
Liabilities
Equity

Financial Statements – Statement of Cash Flows
Where the cash came from and where the cash went
Shows how each of the 3 business activities affected cash during the period

The Activities of a Business
Each business has 3 types of activity
Operating Activities
Investing Activities
Financing Activities

The Activities of a Business - Operating Activities
The activities that the business was formed to carry out
Most items found on the Income Statement
Day to day sale of goods, advertising, wages
Excludes some unusual activities on the IS: e.g. Gain on Sale of Assets
Some activities not found on the Income Statement
Pay money we owe to a supplier
Collect money from a customer
Increase or reduce our inventory

The Activities of a Business – Investing Activities
Purchase or sale of fixed assets
Buy land or a building
Sell a car
Purchase production equipment

The Activities of a Business – Financing Activities
Getting enough money to run the business
Borrow money from the bank
Repay money to the bank
Pay interest to the bank
Issue new shares

The Activities of a Business
The 3 activities can be found in certain parts of the FS
Operating activities
Income Statement (after adjusting for non-operating items)
Balance Sheet (current assets & current liabilities)
Investing Activities
Balance Sheet (fixed assets)
Financing Activities
Balance Sheet (non-current liabilities & Equity)

Financial projections: simply future Financial Statements
Projected Balance Sheet
Projected Income Statement
Projected Statement of Cash Flows
Your business plan in the language of numbers

Financial Projections Overview
The projections must be consistent with and support the written part of the business plan
Any difference between the written plan and the projections means instant loss of credibility and NO MONEY from your potential investor!!!

Elements & Chronology of the Projections
§Explicitly stated assumptions
§Projected Income Statement
§Projected Statement of Cash Flows
§Projected Balance Sheet
§Analysis

How Much Money Do We Need?
Money for capital investment:
-Equipment
-Buildings
Permanent Working Capital
-To produce goods or services at lowest level of demand:
-Inventory (raw material, WIP, finished goods)
-Expenses (salaries, marketing programs, etc.)
Level of permanent WC grows as business grows
§Temporary Working Capital: to meet seasonal or peak periods

Managing Cash (Working Capital)
§Increasing accounts payable increases WC
§Increasing accounts receivable decreases WC
§Minimize inventory (raw, WIP, finished goods) as much as possible, to minimize permanent working capital.