financial modeling for entrepreneurs by anthony suidan, stratsolver corporation
TRANSCRIPT
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Financial Modeling for Entrepreneurs
By Anthony Suidan, Stratsolver Corporation
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Topics
1. Relevant Accounting Basics2. Financial Modeling3. Key Performance Indicators4. Perfecting Your Request for Financing5. Your Own Financial Model6. Little Andy’s Lemonade Stand
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1. Relevant Accounting Basics
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Internally Consistent | Stress the Importance of Cash and Cash Flow
Conventional Financial Statements
Balance Sheet
Assets Current Assets
CashAccounts ReceivableInventory
Long-term Assets
Net Property, Plant & EquipmentTotal Assets
Liabilities Current Liabilities
Accounts PayableShort-term Credit
Long-term Liabilities
Taxes PayableLong-term Credit
Ownership Equity
Stock Retained EarningsTotal Liabilities & Ownership Equity
Statement of Cash Flows
Operating Activities Net Income Accounts Receivable Inventory Accounts Payable Income Tax PayableCash P (U) Operating Activities
Investing Activities Property, Plant & EquipmentCash P (U) Investing Activities
Financing Activities Short-term Credit Long-term Credit Issuance of Shares DividendsCash P (U) Financing Activities
Net Change in Cash
Cash, Beginning of PeriodCash, End of Period
Income Statement
Revenue Revenue A Revenue B Revenue NCost of Goods Sold Expense A Expense B Expense NGross Profit
Sales, General and Administrative Overhead A Overhead B Overhead NEBITDA DepreciationEBIT Interest ExpenseEBT Income TaxNet Income
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Cash is King
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Financial Accounting
In a company which is a going concern Financial accounting is based on an accounting system
The general ledger (G/L) is a database with codes (e.g. companies, departments and accounts)
Money in and out now and later = debits and credits Scenarios are in terms of budget, actual and forecast
Book recommendation How to Read a Financial Report by John A. Tracy (now on 8th edition)
Financial accounting results in the three conventional financial statements Why are financial statements described as “conventional”?
Financial Modeling The entrepreneur wishes to simulate the financial accounting of his/her business
without a financial accounting system
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Managerial/Cost Accounting
Financial Accounting versus Managerial/Cost Accounting
Activity Based Costing (“ABC”); Operations Finance
Management accounting system If you can’t measure it you can’t manage it No conventions; Outside accounting system; Data integrity of non-G/L data; “People
respect what you inspect”; Inherent disconnect with G/L; Drives G/L
Business-specific operating reports Key Performance Indicators (KPI)
Financial Modeling The entrepreneur wishes to simulate and the managerial accounting of his/her
business without a management accounting system
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2. Financial Modeling
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Financial/Operational Business Simulation
Features Dynamic, spreadsheet-based Custom operating reports and conventional financial statements
Benefits What-if scenarios Business performance sensitivities Align performance with strategy Investor and stakeholder conversations Business valuations
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A Business Scenario Simulator
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3. Key Performance Indicators
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Key Performance Indicators (KPI)
Business performance dashboard
Many ways to measure the same general metric Return on investment: ROI, ROCE, ROTA, RONA, ROOA, ROE, IRR,
MIRR, NPV, EPS, P/E, Payback, Discounted Payback and more (define R)
Find the metrics which work for your business model
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4. Perfecting Your Request for Financing
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Available Financing Options
Many different financing options are available to help entrepreneurs get their business up and running
Bank Financing Agreement with bank to borrow funds and repay loan over time
Venture Capital (Angel Investor) Agreement with wealthy individual(s) to give up ownership in
exchange for money Think Dragon’s Den
% of the company for $$$
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Perfecting Your Request for Financing
Show that you have “skin in the game” Financiers want to know that you’ve put some of your own money into
the business
Provide significant detail on what your business needs the money for Also discuss how/when you expect to be able to pay back the lender
Ask for enough funds to cover your capital expenditures under your worst scenario Include a working capital requirement Working capital is money that is “tied up” Working Capital = Current Assets – Current Liabilities
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5. Your Own Financial Model
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Financial Model Checklist
Internal cross-checks (retained earnings, checksums)
Dynamic yet robust
Full set of financial statements Income Statement Balance Sheet Statement of Cash Flows
Customized to your business
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6. Little Andy’s Lemonade Stand
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Financial Model Template
Little Andy Your little brother: Astute seven-year-old entrepreneur Business proposition: Lemonade stand open 90 days per year (summers) Rented space on Mr. Wilson’s corner lot, expected to be a good location Small loan and LOC from Mrs. Sachs, neighbor, local credit union manager Dad provides loan collateral and startup investment Guaranteed revenue base on three-year contract to local baseball league Will hire Joey and Igor, school friends to staff the stand; other kids later Will manage the business Has done financial modeling and a full set of interrelated financials
Offering to sell you the business for $2,000, which he says is a great deal
Little Andy’s Lemonade Stand
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Conclusions
How can the Lemonade Stand model be improved? What have you learned?
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What We Covered
1. Relevant Accounting Basics2. Financial Modeling3. Key Performance Indicators4. Perfecting Your Request for Financing5. Your Own Financial Model6. Little Andy’s Lemonade Stand