Term
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Definition
(a) one-third of new employer firms endure < 2 years
(b) one-half endure < 4 years
(c) 60 percent endure < 6 years
(d) but, about one-third were “successful” at closing |
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Term
Risk and Expected Reward Go Hand in Hand
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Definition
•Time value is not the only cost when using others’ funds
•More risk => More expected reward
•How much more? Market-determined! |
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Term
A Venture’s Financial Objective is to Increase Value |
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Definition
| (Market) Value derives from the ability to generate cash to pay capital providers for their capital |
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Term
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Successful Venture Life Cycle |
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Definition
•Development Stage:
period involving the progression from an idea to a promising business opportunity (Seed Financing)
•Startup Stage:
period when the venture is organized, developed, and an initial revenue model is put in place (Start Up Financing)
•Survival Stage:
period when revenues start to grow and help pay some, but typically not all, of the expenses (First Round Financing)
•Rapid-Growth Stage:
period of very rapid revenue and cash flow growth (Second-Round Financing, Mezzanine Financing, & Liquidity Stage Financing)
•Maturity Stage:
period when the growth of revenue and cash flow continues but at a much slower rate than in the rapid-growth stage (Obtaining Bank Loans, Issuing Bonds, & Issuing Stock)
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Term
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Definition
•Investors increase company equity and expect a positive return on their investment: (Percentage of Company)
•Company owners
•Angel investors provide seed money and mentoring to start-up businesses
•Venture capitalist normally invests in companies with proven track record |
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Term
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Definition
•Lenders increase debt and include banks and any other lender
-Expected to be paid back with interest |
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Term
| Average Propensity To Consume |
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Definition
(Income spent on current needs/total income)
or
(Spending rate/Savings rate) |
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Term
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Definition
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Mutual funds are companies that are involved in collecting the funds of investors and using these funds to purchase large blocks of stocks, bonds, or other investment vehicles. (Money market funds, bonds and investment funds, growth and value funds, etc)
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Term
| Types of Financial Planners |
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Definition
Commision Based: Commision for every bond/stock sold
Fee Based: % value of your investment |
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Term
| Components of a Sound Business Model |
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Definition
lGenerate Revenues (You must have customers & sell them something)
lMake Profits (You must eventually have revenues that exceed the expenses of generating those revenues)
lProduce Free Cash Flows (You must generate cash inflows that exceed net working capital & capital expenditures) |
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Term
lVenture opportunity screening (VOS): |
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Definition
| assessment of an idea’s commercial potential to produce revenue growth, financial performance, and value |
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Term
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Definition
business venture owned by an individual who is personally liable for the venture’s liabilities |
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Term
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Definition
personal obligation to pay a venture’s liabilities not covered by the venture’s assets |
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Term
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Definition
business venture owned by two or more individuals who are jointly and personally liable for the venture’s liabilities |
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Term
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Definition
legal action treats all partners equally as a group |
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Term
lJoint and Several Liability: |
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Definition
allows subsets of partners to be the object of legal action related to the partnership |
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Term
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Definition
limits limited partner liabilities in a partnership to the amount of their equity capital contribution to the partnership |
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Term
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Definition
a legal entity that separates personal assets of the owners (shareholders) from the assets of the business |
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Term
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Definition
creditors can seize the corporation’s assets but have no recourse against the shareholders’ personal assets |
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Term
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Definition
legal document that establishes the corporation |
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Term
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Definition
provides limited liability for shareholders; plus, corporate income is taxed like personal income to the shareholders |
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Term
lLimited Liability Company (LLC): |
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Definition
a business organization owned by “members” (shareholders) with limited liability
-earnings can be taxed at the personal income tax rates of the members (Incentive) |
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Term
| Intellectual Property Protection |
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Definition
lPatents:
intellectual property rights granted for inventions that are useful, novel, and non-obvious
lTrade Secrets:
intellectual property rights in the form of inventions and information, not generally known to others, that convey economic advantages to the holders
lTrademarks:
intellectual property rights that allow firms to differentiate their products & services through the use of unique marks
lCopyrights:
intellectual property rights to writings in printed and electronically stored forms |
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Term
| Other Methods for Protecting Intellectual Property Rights |
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Definition
lConfidential Disclosure Agreements:
documents used to protect an idea or other forms of intellectual property when disclosure must be made to another individual or organization
lEmployment Contracts:
agreements between an employer and employee whereby the employer employs the employee in exchange for the employee agreeing to keep confidential information secret and to assign ideas and inventions to the employer |
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Term
| Mapping out financial future |
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Definition
Personal financial statements let you know where you stand financially
Financial Plans Road maps that show you the future |
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Term
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Definition
How much are you worth today?
A statement of
financial position
at a point in time |
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Term
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Definition
| Assets (What you own) = (Liabilities: What you owe) + (Net Worth: difference) |
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Term
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Definition
Things you own
•Liquid assets – cash or other assets that can be readily converted to cash with little or no loss in value
•Investments – stocks, bonds, mutual finds and real estate
•Real and personal property |
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Term
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Definition
Money you owe
•Current liabilities – debt due within 1 year
•Long term liabilities – debt due in 1 year or more |
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Term
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Definition
Financial worth
Actual wealth determined by subtracting liabilities from assets
•Equity = actual ownership in an asset |
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Term
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Definition
Solvent: Net worth is positive (Sufficient assets to cover financial obligations)
Insolvent: Net worth is negative |
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Term
| Income and Expense Statement |
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Definition
| Total income - total expenses = Cash surplus/cash deficit |
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Term
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Definition
(Cash surplus) / (Income after taxes)
-% after taxes being saved in a given time |
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Term
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Definition
Ability to pay back loan
(Total monthly loan statements) / (Monthly gross income) |
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Term
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Definition
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financial planning report that helps achieve short-term financial goals
Process: Estimate income, estimate expenses, finalize budget, deal with deficits
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Term
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Definition
lLiquidate savings/
investments
lBorrow to cover the deficit
lCut low priority expenses;
alter spending habits
lIncrease income |
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Term
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Definition
Time value of money: A dollar today is worth more than a dollar in the future (Interest, investment, etc)
-Compounding: Grow todays value to future value
FV = PV * Factor |
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Term
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Definition
| Working from future value back to present value |
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Term
| Balance Sheet/Net worth statement |
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Definition
Assets - Liabilities = Net worth
Measures financial health and progress
"What is left" |
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Term
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Definition
nMonetary Assets (or liquid assets or cash equivalents)
nTangible (or use) assets
nInvestment (or capital) assets |
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Term
| How to increase net worth |
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Definition
| Increase assets... Decrease Liabilities |
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Term
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Definition
-Tracks where your money came from and went
-Income
-Expenses (Fixed and variable)
Surplus (Net gain or net income)
Deficit (Net loss) |
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Term
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Definition
| A paper or electronic document used to record both planned and actual income and expenditures over a period of time. |
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Term
| Financial Statements and Budgets |
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Definition
Past: Cash flow statement (Income, expenses, net gain)
Present: Balance sheet (Assets, liabilities, net worth)
Future: Budget (Income, expenses, difference) |
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Term
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Definition
| Difference between amount budgeted and actual amount spent or received |
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Term
| 3 Financial misteps in financial planning |
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Definition
1. Fail to plan for occasional, non-monthly expenditures
●
2. Underestimate how much they spend each month
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3. Use credit cards to “balance” their budget |
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Term
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Definition
vSales (revenue) – Expenses = Profits (income)
–Revenue from product or service sales
–Costs of producing product/service (cost of goods sold)
–Operating expenses (marketing, selling, general and administrative expenses, and depreciation)
–Financing costs (interest paid)
–Tax payments |
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Term
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Definition
•Cost of Goods Sold
ØThe cost of producing or acquiring goods or services to be sold by a firm
•Gross Profit
ØSales less the cost of goods sold
•Operating Expenses
ØCosts related to marketing and selling a firm’s product or service, general and administrative expenses, and depreciation
•Operating Income
ØEarnings before interest and taxes are paid
•Financing Costs
ØThe amount of interest owed to lenders on borrowed money
•Net Income Available To Owners (Net Income)
ØIncome that may be distributed to the owners or reinvested in the company
•Depreciation Expense
ØCosts related to a fixed asset, such as a building or equipment, distributed over its useful life
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Term
| Income statement overview |
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Definition
| Sales/revenue - COGS = Gross Profit - Operating expenses = Operating income (Before interest and taxes) - Interest Expense (cost of borrowing money) = Earnings before taxes - Taxes = Net Income |
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Term
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Definition
ØA report showing a firm’s assets, liabilities, and owners’ equity at a specific point in time
ØTotal Assets = Debt + Owner’s equity |
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Term
| Balance Sheet Current Assets |
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Definition
ØAssets that can be converted to cash within the firm’s operating cycle
ØCash
vCurrency and negotiable instruments
ØAccounts receivable
vAmount of credit extended to customers that is currently outstanding
ØInventory
vRaw materials and products held in anticipation of sale |
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Term
| Balance Sheet: Fixed Assets |
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Definition
•Fixed Assets
ØRelatively permanent resources intended for use in the business (not for resale)
•Depreciable Assets
ØAssets whose value declines (depreciates) over time
•Gross Fixed Assets
ØOriginal cost of depreciable assets before any depreciation expense has been taken
•Accumulated Depreciation
ØTotal depreciation expense taken over the assets’ life
•Net Fixed Assets
ØGross fixed assets less accumulated depreciation
•Other Assets
ØAssets other than current assets and fixed assets, such as patents, copyrights, and goodwill that have an estimated value |
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Term
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Definition
•Debt
ØBusiness financing provided by a creditor
•Current Debt (Short-Term Liabilities)
vAccounts payable: trade credit payable to suppliers
vAccrued expenses: short-term liabilities incurred but not paid
vShort-term notes: Cash amounts borrowed that must be repaid within a short period of time
•Long-Term Debt
ØLoans and mortgages with maturities greater than one year
•Mortgage
ØA long-term loan from a creditor for which real estate is pledged as collateral |
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Term
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Definition
Owner's equity: Money owners invest in business
Retained Earnings:
Owner's equity = Owners investments + Cumulative Process - Cumulative dividens paid to owners (2nd two are retained earnings) |
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Term
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Definition
ØA financial report showing a firm’s income (cash) when it is received and expenses when they are paid.
vCash flows from normal operations (operating activities)
vCash flows related to the investment in or sale of assets (investment activities)
vCash flows related to financing the firm
(financing activities) |
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Term
| Accrual vs. Cash based accounting |
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Definition
•Accrual-Basis Accounting (When recognized not realized)
ØMatches revenues when they are earned against the expenses associated with those revenues.
vSales reflect both cash and credit (noncash) sales.
vInventory purchased on credit is a noncash expense.
vDepreciation is a noncash expense.
vIncome tax is accrued and not entirely expensed.
•Cash-Basis Accounting
ØReports transactions only when cash is received or a payment is made. |
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Term
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Definition
Increase in cash flow from finance: Firm issues new debt or equity (Issues new debt or stock)
Decrease in cash flow from finance: Interests and dividens paid to investors, Decrease in debt (Firm repays debt), decrease in equity (Repurchases outstanding stock) |
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Term
| Equity vs Liabilties vs debt |
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Definition
Equity: Amount invested
-shares, contributed capital from investors
Accumulated retained earnings: Net positive income and leave it in the business
-Or pay out dividends (money owed)
Debt: Principle (What borrowed) + interest
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Term
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Definition
financial statement that reports the revenues generated & expenses incurred over an accounting period
Gross Profit: Net sales (After returns and allowances) - Cost of goods/service sold
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Term
EBIT/Operating Income
Net Income/Profit |
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Definition
-Earnings before interest and taxes (Operating costs have been deducted)
-bottom line measure after all operating expenses, financing costs, & taxes have been deducted from net sales
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Term
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Definition
-shows how cash, reflected in accrual accounting, flowed into & out of a firm during a specific period of operation
-Increase accounts receivable: Use of cash
Decrease: Source (Customers pay us)
-Decrease Liabilities: Use of cash (payed off debt)
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Term
| Cash Flow- Circular pattern |
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Definition
| Cash->Purchases->Accounts Payable->Manufacture->Sales->Accounts Recievable->Back to Cash |
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Term
| Possible to make profit but not cash |
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Definition
| Need cash management for inventory, employees, bank, ourselves |
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Term
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Definition
-Get accounts receivable: Collection calls from customers
-Early payment discount
-Sell accounts receivable to bank (Not most viable option)
-Sell stock to gain additional equity
-sell equipment
-Reduce overhead (Dec outflow)… Increase accounts payable (Don’t pay vendors)
-Don’t pay ourselves
Bank for a short term loan
-Sell inventory for cash |
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Term
| Operating Breakeven Analysis |
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Definition
Break even total cost= (total fixed cost)/(1VC%)revenue contribution margin
-(Contribution Margin: What every $ of sales is covered for fixed cost)
-Reduce variable cost and/or fixed costs to get to break even faster
-No when we cross over and begin make revenue |
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Term
| Survival Revenues Breakeven Example |
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Definition
VCRR: COGS/Revenue
-Variable cost revenue ratio
-650k/1 million=0.65
CFC: Total fixed Costs
Add total fixed costs= $400,000
(1 - VCRR) = Percent used to cover total fixed costs
(1 - 0.65) = 0.35 or 35%
SR: Fixed costs/ (1 - VCRR)
$400,000/ (1 - 0.65) = $ 1,143,000 |
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Term
| To check break even EBDAT must be zero |
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Definition
EBDAT = Revenue - Variable Costs - Cash Fixed costs
EBDAT is zero
R = VC + CFC
Check:
Survival Revenues $1,143,000
Cost of Goods Sold (65%) -743,000
Gross Profit 400,000
Administrative Expenses -200,000
Marketing Expenses -180,000
Interest Expenses -20,000
EBDAT $0 |
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Term
| Breakeven drivers in revenue projections |
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Definition
-Higher contribution margins, lower level needed for breakeven (VCRR Declines )
-lower cash fixed costs result in lower levels of survival revenues needed to breakeven (Cash fixed costs decline)
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Term
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Definition
lCash Burn:
cash a venture expends on its operating and financing expenses and its investments in assets
lCash Burn Rate:
cash burn for a fixed period of time, typically a month -How quickly we go through start up capital..
-ALL expenses - (change in accured liabilities + Changes in payable)
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Term
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Definition
Cash Build = Net Sales - Change in recievables
Net Cash Burn = Cash Burn - Cash Build
*How long we run out of start up
*Net cash build produces free cash flow
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Term
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Definition
Cash -> Materials (work in progress) -> Finished goods -> Recievables (Credit sales) -> Back to cash
Faster through cycle.. More money |
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Term
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Definition
lConversion Period Ratio:
indicates the average time it takes in days to convert certain current assets and current liability accounts into cash
lOperating Cycle:
time it takes to purchase, produce, and sell the venture’s products plus the time needed to collect receivables if the sales are on credit
lCash Conversion Cycle:
sum of the inventory-to-sale conversion period and the sales-to-cash conversion period less the purchase-to-payment conversion period |
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Term
| Measuring conversion time |
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Definition
-Inventory to sales conversion period
(Avg Inventories) / (COGS / 365)
-Sales to Cash conversion period
(Avg recievables) / (Net sales/365)
-Purchase to payment conversion period
(Avg payables + Avg Accured Liabilties) / (COGS/365) |
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Term
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Definition
= Inventory-to-Sale Conversion Period
+ Sale-to-Cash Conversion Period
– Purchase-to-Payment Conversion
-Negative cash conversion cycle is ideal.. Vendors are funding the whole process
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Term
lTotal-Debt-to-Total-Asset Ratio: |
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Definition
Avg total debt / Avg Total Assets
-What percent of our assets are funded by debt
-Lower is more desireable |
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Term
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Definition
(Net sales - COGS) / Net sales
-% can be used on expenses and have free cash flow |
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Term
| Profitability and Equity Ratios |
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Definition
-Operating profit margin:
(EBIT)/Net sales
-Net Profit Margin
(Net Profit)/(Net sales)
-Sales to total asset ratio
(Net sales)/Avg total assets
-Return on Equity (ROE)
Net income/Avg owners equity |
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Term
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Definition
Control of current assets and liabilities on a daily flow basis
-(Order placed, inventory recieved, Sale, Cash payment for Inventory, Cash collection of recieveables)
-Cash conversion period: the time required to convert paid-for inventories and accounts receivable into cash (want to be as short as possible, amount of time we have to fund the business)
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Term
| Discounted Cash Flows (DCF) |
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Definition
ØComparing the present value of future cash flows with the cost of the initial investment.
vCash received today is more valuable than cash to be received in the future—the time value of money.
ØNet present value (NPV)
vThe current value of cash that will flow from a project over time less the initial investment outlay.
ØInternal rate of return (IRR)
vThe rate of return that a firm expects to earn on a project; return rate must exceed cost of capital. |
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