Startup Financial Planning
Minder Chen, Ph.D.
Martin V. Smith School of Business
and Economics
CSU Channel Islands
[email protected]
© Minder Chen, 1996-2017
Entrepreneurship - 1
How Not to Fail
1. Make something people want.
2. Stay focused.
3. Measure your growth.
–
You make what you measure.
4. Know if you’re default alive.
5. Keep expenses low.
6. Fundraising gets harder.
Jessica Livingston’s Pretty Complete List on How Not to Fail
© Minder Chen, 1996-2017
https://blog.ycombinator.com/how-not-to-fail/
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Stay Alive Financially
• “default alive” or “default dead.”: Default alive means if your
expenses stay the same and your revenue continues to
grow at the rate it’s been growing, you get to breakeven
before you run out of money. Default dead means you don’t.
– http://paulgraham.com/aord.html
– Trevor Blackwell has made a handy calculator
• the fatal pinch. The fatal pinch is default dead +
slow growth + not enough time to fix it.
– http://paulgraham.com/pinch.html
© Minder Chen, 1996-2017
Entrepreneurship - 3
Startup Growth Calculator
© Minder Chen, 1996-2017
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The Knack: How Street-Smart Entrepreneurs Learn to Handle Whatever Comes Up
• Numbers run a business. If you don't know how to read them, you're flying blind.—
Start tracking them by hand as soon as you launch your business.
• A sale isn't a sale until you collect.—A receivable is like a loan. Make sure your
customers are credit-worthy.
• When your short-term liabilities exceed your short-term assets, you're
bankrupt.—Keep track of how much you're going to collect and spend in the next
twelve months.
• Forget about shortcuts. Run a business as if it's forever.—In the long run, your
shortcuts will prove to be detours on the road to achieving your goals.
• Cash is hard to get and easy to spend.—Make it before you spend it.
• You have no friends in business, only associates.—You can laugh and cry with
your employees, but neither you nor they should forget that it's a business
relationship.
• Gross margin is the most important number on the income statement.—Don't
make the mistake of focusing on the top line.
• Identify your true competitors, and treat them with respect.—Their opinion of you
will play a critical role in determining your reputation.
• Culture drives a company.—The boss's most important job is to define & enforce it.
• The life plan has to come before the business plan.—You need to figure out
where you want to go before deciding how to get there.
© Minder Chen, 1996-2017
(link)
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Financial Projections Necessary for a
Business Plan
Revenue Drives Everything in a Venture
Projection of Revenue – 5 Years
Projected P&L (Pro-forma Income Statement) – 5 Years
 Monthly for the First 2 Years then Annually Years 3, 4 & 5
Projection of Cash Flow – 5 Years
Projection Balance Sheet (Pro-forma Balance Sheet)– 5 Years
Goalposts
 Startup Costs
 Time to First Dollar Received
 Time to First Profit (after Breakeven)
 First Round and Anticipated Second Round Financing
 Potential Valuation for Exit
For this class: create monthly projections for 2-years
The Accounting Equation.
Assets = Liabilities + Equity
Resources
Source of Financing
Assets - Liabilities = Equity
© Minder Chen, 1996-2017
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Assets = Liabilities + Equity
© Minder Chen, 1996-2017
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Account Equation Guide
https://www.youtube.com/watch?v=ii91oi0OpXM
http://www.accountingcoach.com/accounting-equation/explanation/1
© Minder Chen, 1996-2017
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Accounting Cycle
https://www.youtube.com/watch?v=ii91oi0OpXM
http://www.thehomeofknowledge.com/what-is-accounting-cycle/
© Minder Chen, 1996-2017
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http://www.basicaccountinghelp.com/accounting_journal_entries.html
© Minder Chen, 1996-2017
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Chart of Accounts Example
http://www.slideshare.net/MushfiqMukit1/accounting-principle-2-by-mushfiqul-haque-mukit
© Minder Chen, 1996-2017
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Debit
Credit
Asset
Liability
Owner’s
Drawing
Equity (Owner Equity, Retained Earning)
Expense
Revenue
© Minder Chen, 1996-2017
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Assets
High
Assets
Current Assets
Cash
Accounts receivable
Inventory
Prepaid expenses
Short-term investments
2017
11,874
Total current assets
Liquidity
Low
2018
Fixed (Long-Term) Assets
Long-term investments
PP&E: Property, plant, and equipment
(Less accumulated depreciation)
Intangible assets (IPs, brand reputation)
(Less Amortization of Intangibles)
11,874
-
1,208
15,340
(2,200)
Total fixed assets
14,348
-
Other Assets
Deferred income tax
Other
Total Other Assets -
© Minder Chen, 1996-2017
Entrepreneurship - 14
-
Liability and Owner’s Equity
Short
Liabilities and Owner's Equity
Current Liabilities
Accounts payable
Short-term loans (Notes Payable)
Income taxes payable
Accrued salaries and wages
Unearned revenue
Current portion of long-term debt
Time to Pay Long-Term Liabilities
8,060
3,145
Total current liabilities
Long-term debt
Deferred income tax
Other
Long
3,450
Total long-term liabilities
Owner's Equity
Owner's investment
Retained earnings
Other
3,450
-
7,178
4,389
Total owner's equity
Total Liabilities and Owner's Equity
© Minder Chen, 1996-2017
11,205
11,567
26,222
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-
•
•
•
•
•
Working capital decision: CA & CL
C/S: Common Stocks (at IPO and SEO)
SEO: Seasonal Equity Offering
Stock issues before IPO Owner Equity
Corporate Bonds: e.g., Apple issues 30-year
bonds for 4% interest rate.
• Bond Rating:
– BBB investment grade bonds
– Below BBB: Junk bonds High risk and high return
© Minder Chen, 1996-2017
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Financial Ratios
• Current ration = CA / CL
• Quick Ratio = (CA-Inventory) / CL
• Cash Ratio = Cash / CL
© Minder Chen, 1996-2017
Entrepreneurship - 17
Debits/Credits Rules
Basic
Equation
Owner’s Equity
Assets = Liabilities +
Expanded
Basic
Equation
Balance Sheet
Asset
= Liability
Income Statement
+ Equity
Revenue
- Expense
=
Debit
Credit
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
http://www.slideshare.net/MushfiqMukit1/accounting-principle-2-by-mushfiqul-haque-mukit
© Minder Chen, 1996-2017
Entrepreneurship - 18
Resources
• Learn Accounting in 1 HOUR First Lesson: Debits
and Credits
– https://www.youtube.com/watch?v=ii91oi0OpXM
– DC ALE LER
© Minder Chen, 1996-2017
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(video)
© Minder Chen, 1996-2017
https://i.ytimg.com/vi/fBTJCxBrbCk/maxresdefault.jpg
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Balance Sheet and Income Statement Mapping
http://www.dummies.com/business/accounting/connecting-the-income-statement-and-balance-sheet/
© Minder Chen, 1996-2017
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© Minder Chen, 1996-2017
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Relationships of the Three Key Financial Statements
© Minder Chen, 1996-2017
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Relationships among Financial Statements
p://arne-co.com/financial-statement-analysis/
© Minder Chen, 1996-2017
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© Minder Chen, 1996-2017
http://www.investopedia.com/walkthrough/corporate-finance/2/financial-statements/cash-flow.aspx
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Partner 1
Partner 2
Partner 3
…
Activity 1
Activity 2
Activity 3
…
Resource 1
Resource 2
Resource 3
…
Cost 1
Cost 2
Cost 3
…
© Minder Chen, 1996-2017
Proposition 1
Proposition 2
Proposition 3
…
Relationship
1
Relationship
2
Relationship
3
…
Segment 1
Segment 2
Segment 3
…
Channel 1
Channel 2
Channel 3
…
Stream 1
Stream 2
Stream 3
…
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Partner 1
Partner 2
Partner 3
…
Activity 1
Activity 2
Activity 3
…
Resource 1
Resource 2
Resource 3
…
Cost 1
Cost 2
Cost 3
…
© Minder Chen, 1996-2017
Proposition 1
Proposition 2
Proposition 3
…
Relationship
1
Relationship
2
Relationship
3
…
Segment 1
Segment 2
Segment 3
…
Channel 1
Channel 2
Channel 3
…
Stream 1
Stream 2
Stream 3
…
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Partner 1
Partner 2
Partner 3
…
Activity 1
Activity 2
Activity 3
…
Resource 1
Resource 2
Resource 3
…
Cost 1
Cost 2
Cost 3
…
© Minder Chen, 1996-2017
Proposition 1
Proposition 2
Proposition 3
…
Relationship
1
Relationship
2
Relationship
3
…
Segment 1
Segment 2
Segment 3
…
Channel 1
Channel 2
Channel 3
…
Stream 1
Stream 2
Stream 3
…
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Partner 1
Partner 2
Partner 3
…
Activity 1
Activity 2
Activity 3
…
Resource 1
Resource 2
Resource 3
…
Cost 1
Cost 2
Cost 3
…
© Minder Chen, 1996-2017
Proposition 1
Proposition 2
Proposition 3
…
Relationship
1
Relationship
2
Relationship
3
…
Segment 1
Segment 2
Segment 3
…
Channel 1
Channel 2
Channel 3
…
Stream 1
Stream 2
Stream 3
…
Entrepreneurship - 29
From BMC to Financial Statements
Business Model Canvas to Financial Plan
• Balance Sheet
© Minder Chen, 1996-2017
http://www.slideshare.net/esaife/business-model-canvas-to-financial-plan
Entrepreneurship - 30
BMC for Lemonade Inc.
Profit =Revenues - Costs
© Minder Chen, 1996-2017
Entrepreneurship - 31
Capital Expenditures
• CAPEX: Capital expenditures
(investment) are funds used by a
company to acquire or
upgrade physical assets such as
property, industrial buildings or
equipment. If an expense is a capital
expenditure, it needs to
be capitalized. This requires the
company to spread the cost of the
expenditure (the fixed cost) over the
useful life of the asset.
–
http://www.investopedia.com/terms/c/capitalexp
enditure.asp (video)
• Operational Costs
© Minder Chen, 1996-2017
Entrepreneurship - 32
Operational Costs
An operating expense (OpEx) is
an expense a business incurs
through its normal business
operations. It include rent,
production or inventory costs,
marketing, payroll, insurance and
funds allocated toward research and
development. One of the typical
responsibilities that management
must contend with is determining
how low operating expenses can be
reduced without significantly
affecting a firm's ability to compete
with its competitors.
http://www.investopedia.com/terms/o/operating_expense.asp
© Minder Chen, 1996-2017
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© Minder Chen, 1996-2017
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Break-Even Analysis
© Minder Chen, 1996-2017
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Break-Even Analysis
• Price: $10 per cup
• Cost: $2 per cup
• Fixed Costs: $150,000
© Minder Chen, 1996-2017
Entrepreneurship - 36
Wisdoms from The Knack
• Numbers run a business. If you don't know how to read
them, you're flying blind.—Start tracking them as soon as you
launch your business.
• A sale isn't a sale until you collect.—A receivable is like a
loan. Make sure your customers are credit-worthy.
• Cash is hard to get and easy to spend.—Make it before you
spend it.
• When your short-term liabilities exceed your short-term
assets, you're bankrupt.—Keep track of how much you're
going to collect and spend in the next twelve months.
• Gross margin is the most important number on the income
statement.—Don't make the mistake of focusing on the top line.
 http://credu.bookzip.co.kr/resource/englishbook/pdf/ae30361.pdf
 http://www.cornerstoneresults.com/RefLib/KnlgeBk/e_gen_secrets_of_a_$110_million_man.pdf
 http://theknack.info/about.html
© Minder Chen, 1996-2017
Entrepreneurship - 37
Overview of the Financial Planning Process
1. Identify all of your sources of revenue
- Must document your revenue assumptions
- Cash required to start the business
- Cash required to operate the business
- Revenue by month from sales and other sources
2. Identify all of your costs
- Startup costs
- Monthly operating costs
- Fixed costs vs. variable costs
3. Breakeven analysis
- Displays total income vs. total expenses by month
- Identifies when you will need more cash
© Minder Chen, 1996-2017
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Financial Templates
© Minder Chen, 1996-2017
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Financial Templates
© Minder Chen, 1996-2017
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Financial Templates
© Minder Chen, 1996-2017
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Break Even Analysis
© Minder Chen, 1996-2017
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Cash Flow Forecast
© Minder Chen, 1996-2017
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Business Budget
© Minder Chen, 1996-2017
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Income Statement
© Minder Chen, 1996-2017
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Balance Sheet
Financial Templates
© Minder Chen, 1996-2017
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Financial Templates
© Minder Chen, 1996-2017
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