MKT 310 Entrepreneurship
Mishari Alnahedh
LECTURE 7: Entrepreneurial Finance
Source:
https://ocw.mit.edu/courses/sloan-school-of-management/15-390-new-enterprises-spring-2013
The Financial Plan
Mishari Alnahedh
 The financials determine whether your business plan is viable
 Key components
o Income Statement (Profit & Loss)
o Cashflow
o Balance Sheet
o Assumptions Summary
o Sensitivity Analysis – high, medium, low probability of key assumptions
o Selective market metrics – average revenue per customer, inventory turn,
etc.
The Financial Plan
Mishari Alnahedh
 In the written plan, discuss business model, not just $$ - try to
get reader to relate to the business by associating with
everyday reference points
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When and how much do you get paid?
What is the Average revenue per customer and average cost to
acquire a customer?
What is your cost structure? Fixed or variable?
Cash burn, time to breakeven, cash needed for breakeven
The Financial Plan
Mishari Alnahedh
Financing Milestones
The Financial Plan
Mishari Alnahedh
Financials Must Relate to Market Assumptions
 Sales Growth should track with Addressable Market
 Market share should make sense with competitors’ share
 Pricing should be relevant to market
 Costs should compare with market
 Economics should be compelling
The Financial Plan
Mishari Alnahedh
How to build a financial model
1. Build an Income Statement (Profit & Loss statement)
2. Cash Flow is what matters – generate your cash flow
statement.
3. Graphical summary
4. Make all major assumptions clear
The Financial Plan
Mishari Alnahedh
Income Statement Assumptions
 Revenue = Units X Price
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What is your sales unit (device, subscription, royalty, etc)
How are you determining price
 Cost of Revenue = Units X Cost to Produce

How much does it cost to produce a sales unit
- Materials, Labor or both
 Operating Expenses
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Salaries, Commissions & Benefits
Rent & Utilities
Marketing, Tradeshow, Advertising
Insurance
Travel & Entertainment
Research & Development
Recruiting
Shipping
Repairs & Maintenance
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Fees
Office Expense
Website
Breakeven Units
~ 19,200
EXAMPLE
2017
0
2018
1,440
2019
2,880
2020
7,680
2021
192,000
2022
3,200,000
0
NA
240
17%
480
17%
3,840
50%
96,000
50%
2,000,000
63%
1,200
0
0
548
2,893
892
993
4,258
1,571
572
1,586
1,528
690
8,989
2,998
690
126,409
2,829
1,200
4,333
6,822
3,686
12,677
129,928
Operating Income
Operating Margin %
(1,200)
NA
(4,093)
NA
(6,342)
NA
154
2%
83,323
43%
1,870,072
58%
Other Expenses
Other Income
Net Income
0
0
(1,200)
0
0
(4,093)
500
0
(6,842)
0
0
154
2,000
5,000
8,000
0
800
907
1,158
154
83,323
1,870,072
1,707
2,065
1,312
83,477
1,953,395
Revnue
Goss Margin
GM%
R&D
Sales & Marketing
G&A
..
Total Opex
Investments (+/-)
Change in Cash Flow
Cash (End of Period)
0
0
0
0
83,323 1,870,072
0
0
The Financial Plan
Mishari Alnahedh
Breakeven Analysis
 “Breakeven” is defined when total sales = total costs
 Is that what really matters?
 CASH FLOW breakeven is what really matters!
2017
Units Sold
Price per unit (KD)
COGS per unit (KD)
Sales cost per Unit (KD)
Total cost per unit (KD)
Breakeven Units
~ 19,200
2018
2019
2020
2021
2022
4,800
300
9,600
300
19,200
400
480,000
400
8,000,000
400
250
603
853
250
301
551
200
222
422
200
19
219
150
16
166
The Financial Plan
Mishari Alnahedh
Red Flags
 Financial model doesn’t support Business Plan assertions

Revenue & cost models lack details

Contradicts total servable market assumptions

Time to profitability unrealistic

Assumptions, gross & operating margins in outer years not in line with industry
standards
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Seasonality not reflected
 Salaries are out of line
 Capital expenditures are understated
 Payables, receivables and inventory turnover statistics are unrealistic
 Financing needs not linked to milestones
The Financial Plan
Mishari Alnahedh
Valuation Dance
 Entrepreneur concerns
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Loss of control of the company
Future capital needs and Dilution
Stock forfeiture if terminated
Adequacy of financing
Investors you can deal with
 Investor concerns
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Accuracy of valuation
Ability to achieve liquidity/exit
Level of risk
Ability to participate in later rounds
Control over management and strategic direction
The Financial Plan
Mishari Alnahedh
Valuation Dance - Ownership