Entrepreneurship

Lecture 10
Financial Management & Getting Funding
 Lecture 10 Outline
Financial Management
What is Financial Management

Financial Objectives of a Firm

The Process of Financial Management

Financial Statements

Ratio Analysis

Forecast
Getting Financing or Funding
Why Most Firms Need Funding?

Sources of Funding

Preparing Elevator Pitch

 PART 1
Financial Management
 Financial Management
Financial management deals with two things:
raising money and managing a companys
finances in a way that achieves the highest rate of
return.

How a new venture tracks its financial progress through

preparing, analyzing, and maintaining past financial
statements.

How a new venture forecasts future income and expenses by

preparing pro forma (or projected) financial statements.
 Financial Management
Financial Management

The financial management of a firm deals with questions such as the

following on an ongoing basis:
How are we doing? 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 efficiently are we utilizing our assets?
How does our growth and net profits compare to those of our industry
peers?
Where will the funds we need for capital improvements come from?
Are there ways we can partner with other firms to share risk and reduce
the amount of cash we need?
Overall, are we in good shape financially?
 Financial Management
Financial Objectives of a Firm

A companys A companys
ability to make ability to meet
a profit. its short-term
obligations.

Profitability Liquidity

Stability Efficiency

The overall health of How productively a

the financial firm utilizes its
structure of the firm, assets?
particularly as it
relates to debt to
equity ratio.
 Financial Management
Profitability
Is the ability to earn a profit.
Many start-ups are not profitable during their first one to three
years while they are training employees and building their
brands.
However, a firm must become profitable to remain viable and
provide a return to its owners.

Liquidity
Is a companys ability to meet its short-term financial
obligations.
Even if a firm is profitable, it is often a challenge to keep enough
money in the bank to meet its routine obligations in a timely
manner.
 Financial Management
Efficiency
Is how productively a firm utilizes its assets relative to its
revenue and its profits.
Southwest Airlines, for example, uses its assets very
productively. Its turnaround time, or the time its airplanes sit on
the ground while they are being unloaded and reloaded, is the
lowest in the airline industry.

Stability
Is the strength and vigor of the firms overall financial
posture.
For a firm to be stable, it must not only earn a profit and remain
liquid but also keep its debt in check.
 Financial Management
The Process of Financial Management
 Financial Management
The Importance of Good Record Keeping

The first step towards prudent

financial management is
keeping good records.
 Financial Management
Financial Statements:

Historical Financial Statements

Reflect past performance and are usually prepared on a
quarterly and annual basis.
Publicly traded firms are required by the JSE to prepare
financial statements and make them available to the public.

Pro Forms Financial Statements

Are projections for future periods based on forecasts
and are typically completed for two to three years in
the future.
 Financial Management
Main Financial Statements:

Income Statement shows the profit or loss from the operations

of a firm over a given period; usually derived by deducting your
expenses from your sales revenue.

Balance Sheet shows the firms assets, liabilities and owners

equity at a specific point in time.
The purpose of the Balance Sheet is to give users an idea of
the companys financial position, along with outlining what
the company owns and owes.
The main formula behind the balance sheet is: ASSETS =
LIABILITIES + SHAREHOLDERS EQUITY

Cash Flow Statement is a financial report showing a firms

income (cash) when it is received and expenses when they are
paid. The Cash Flow Statement explains the change during a
period in cash and cash equivalent.
 Financial Management
Ratio Analysis
The most practical way to interpret or make sense of a
firms historical financial statements is through ratio
analysis.

Comparing a Firms Financial Results to Industry Norms

Comparing a firms financial results to industry norms
helps a firm determine how it stakes up against its
competitors and if there are any financial red flags
requiring attention.
 Financial Management
Forecasts
The analysis of a firms historical financial statements are followed by
the preparation of forecasts. Forecasts are predictions of a firms
future sales, expenses, income, and capital expenditures.
A firms forecasts provide the basis for its pro forma financial
statements.
A well-developed set of pro forma financial statements helps a
firm create accurate budgets, build financial plans, and
manage its finances in a proactive rather than a reactive
manner.
Sales Forecast
A sales forecast is projection of a firms sales for a specified period
(such as a year). It is the first forecast developed and is the basis for
most of the other forecasts.
A sales forecast for a new firm is based on a good-faith
estimate of sales and on industry averages or the experiences
of similar start-ups.
A sales forecast for an existing firm is based on (1) its record
of past sales, (2) its current production capacity and product
demand, and (3) any factors that will affect its future product
capacity and product demand.
 Financial Management
Forecasts
Historical Income Statements

8-16
Historical Balance Sheets
1 of 2

8-17
Historical Balance Sheets
2 of 2

Liabilities and Shareholders Equity

8-18
Historical Statement of Cash Flows

8-19
Historical Ratio Analysis

8-20
 Forecasts
3 of 4
Historical and Forecasted Annual Sales for New Venture Fitness Drinks

8-21
 PART 2
Getting Financing or Funding
 Getting Financing or Funding
Why Most New Ventures Need Funding

There are three reasons most new ventures need to raise money during
their early life.
 Getting Financing or Funding
Sources of Funding
Personal Funds Loans (Commercial
Family & Friends Banks and other
Bootstrapping financial institutions)

Personal Debt
Financing Financing

Equity Creative
Financing Sources
Exchanging partial
ownership in a firm Leasing Equipment
(stocks) Venture Accessing grants
Capitalist, Business
Strategic Partnership
Angel, IPO
 Getting Financing or Funding
Business Angel
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.
Business angels are valuable because of their willingness to make
relatively small investments.

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.
Venture capital firms fund very few entrepreneurial firms in
comparison to business angels. They look for the home-run
and so reject many of the proposals they consider.
 Getting Financing or Funding
Initial Public Offering
An initial public offering (IPO) is a companys 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.
WHY IPO?
Reason 1 Reason 2
Raises equity capital to fund Raises a firms public profile,
. current and future operations making it easier to attract high-
quality customers and business
partners.
Reason 3 Reason 4
Is a liquidity event that Creates a form of currency that
provides a means for a can be used to grow the company
companys investors to recoup via acquisitions.
their investments.
 Getting Financing or Funding
Preparing an Elevator Pitch
An elevator speech is a brief, carefully
constructed statement that outlines the
merits of a business opportunity.

There are many occasions when a

carefully constructed elevator speech
might come in handy.

Most elevator speeches are 45 seconds

to 2 minutes long.

.
 Getting Financing or Funding
Preparing an Elevator Pitch
 Next Class
Building a New Venture Team

Managing, Growing, Harvesting an Entrepreneurial Firm