Mississippi State University
MGT 3323
Entrepreneurship
Daniel T. Holt
Assistant Professor of
Management
“The people’s university”
-- Dr. Mark Keenum
Administrative Issues
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Industry, Competitor, & Customer Analysis
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Opportunity to revise & resubmit work—Due 2 Apr (beginning of class)
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Submit the revision along with the original that was graded—note: you must make changes for
these to be evaluated (i.e., you won’t get any penalty corrected by submitting unrevised work)
• Grade weighting 80% of the highest & 20% of the lowest
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Financial Feasibility Analyses due—Monday, 26 Mar (beginning of class)
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Today’s discussion topic
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If you would like to set up an additional time for me to meet with your group,
please let me know & coordinate a time
Extra credit will be included on grade spread sheet this week—my
apologies for the delay
Feasibility Analysis
• Includes…
• First phase (due 5 Mar—resubmissions due 2 Apr, not required)
• Analysis of the Industry
• Analysis of competitors & how you’re different
• Analysis of the target market (requires first hand data from customers—we’ll talk
about this today)
• Second phase (due 26 Mar)
• Financial feasibility
• Final phase (due 9 Apr)
• Revisions & improvements to first two phases
• And…
Suppliers
Distribution channels
Location analysis
Technology and service analysis
Planning Process
Financials & Funding
ENTREPRENEURS: DJ Stephan & Sean Conway
PITCH: Notehall, a service to buy and sell class notes
ASKING FOR: $90K for a 10% stake (Part 2)
Notehall--sold
$3.7 Million
Funding Stages
Funding Timing
•
Seed funding
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Early stage funding
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The company is producing and shipping and has growing inventories and
accounts receivable.
Later stage funding
•
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After a company has expended initial capital in development and market testing
and is now ready to begin full-scale operations and sales
Expansion stage funding
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Prior to a product being developed or to the start-up being organized (MSU’s
Entrepreneurship Center offers funds to firms in this stage of development)
Company is now breaking-even or profitable and requires funds for plant
expansion, full-scale marketing, and working capital
MBO/Acquisition funding
•
This situation occurs when managers wish to purchase an independent
company or a division or product line of their employer, thus creating a new
independent firm.
Source & Use of Funds
• Source & use of funds statement is…
• “a document that lays out specifically how much money a
firm needs (if the intention of the business plan is to raise
money), where the money will come from, and what the
money will be used for.”
• Common sources
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Bootstrapping
Investors
Venture Capitalist
Banks
Social lending organizations
BOOTSTRAPPING
• Four “F”s:
• Friends; Family; Founders; Fools
• Everything else beyond the pursuit
of formal debt & equity financing
• Personal savings or retirement
accounts
• Home equity loans & second
mortgages
• Credit cards
• Research and development grants
• Strategic alliances
• Bartering your product or service
• Advances from professional service
providers
• Advance payments from customers
Financial Feasibility
• Price
• “Ask” price of the product or service
• Direct costs (cost of goods sold)
• Costs to produce or provide the product or service
• Key categories
• Labor (consider matching tax rates); material
• Fixed or overhead costs (operating expenses less
depreciation)
• Costs to support the venture’s regular operations
Pricing
Contradictory
Target Customer
None
Premium
Target Customer
Those who what the
best and are able to
pay for it
Bargain
Target Customer
Those to whom low
prices are more
important than quality
Value
Target Customer
Those who are looking
for the best value for
what they spend.
Price
High
Low
Low
Perceived Quality
High
Profits
Income Statement
Sales
Sales = Number of units sold
x Price (per unit)
Breakeven Analysis
Compare necessary sales to breakeven
with output capacity (What would you
conclude if you must sell to 99% of your
market to breakeven?)
Revenue Models
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Product sales model
Subscription fee model
Advertising revenue model
Transaction fee revenue model
Income Statement
• Definition: Profit or loss
of a business over time
• Use: Project & monitor
profit & so operating
efficiency
• Includes
• Net sales
• Cost of good sold
• Operating expenses
Net Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses: salaries
(benefits, taxes); sales &
marketing; general
administration (supplies, IT,
insurance); facilities (rent,
maintenance, utilities);
depreciation (spreading
capital expense over use/
time); professional fees
Operating Profit
+/- Other Income/Expenses
Profit before tax
Tax
Profit after tax
Simple Income Statement
Consulting Company
Income Statement
January 31, 2006
Revenue
Operating Expenses
Payroll Expenses
Depreciation
TOTAL EXPENSES
NET INCOME
$39,000
14,850
22,500
1,450
38,800
$ 200
Balance Sheet
• Reports the financial
position of the business at
a specific point in time
(typically at the close of a
fiscal year)
• Assets (wealth)
• Current assets
• Fixed assets
• Liabilities (leveraged funds)
• Current liabilities
• Long-term liabilities
• Owner’s equity (invested
funds)
Assets (wealth)
• Current assets
• Cash—money on hand
• Accounts receivable—claims business has against customers for
unpaid balances
• Allowance for uncollectible accounts—those claims deemed
uncollectible
• Inventory—merchandise held for sale to customers
• Prepaid expenses—expenses already paid but that have not been
used (e.g., insurance premium)
• Fixed assets—land, buildings, equipment, and other assets
expected to remain with the firm for an extended period
• Accumulated depreciation—amount of lost value due to wear and tear
(often 5% per year for a new building—tax deductible)
Liabilities (leveraged funds)
• Current liabilities
• Accounts payable—liabilities incurred when goods and
supplies are purchased on credit
• Note payable—promissory note given as tangible
recognition of a supplier’s claim (i.e., a construction loan)
• Taxes payable—liabilities owed to the government
• Loan payable—current installment on a long-term debt
• Long-term liabilities
• Bank loan—long-term liability due to a loan from a lending
institution
Cash Flow
• Operating activities
• Net income (or loss),
depreciation, and changes in
current assets and current
liabilities other than cash
• Investing activities
• Purchase, sale, or investment in
fixed assets, such as real estate,
equipment, and buildings
• Finance activities
• Cash raised during the period by
borrowing money, making
payments on loans, or paying
dividends
Uses of Cash
• Operations
• Cash necessary to operate
• Capacity building
• Cash necessary to build the
platform
• Pay back
• Cash necessary to pay lenders,
investors, owners
Income Against Cash Flow
Consulting Company
Income Statement & Cash Flow Report
January 31, 2006
Revenue
Equity Received
Operating Expenses
Payroll Expenses
Depreciation
TOTAL EXPENSES
NET INCOME
Income
Statement
Cash Flow
Report
$39,000
0
14,850
22,500
1,450
38,800
$ 200
$
0
36,000
13,000
22,500
0
35,500
$ 500
Ratio Analysis
• Liquidity Ratios
• Does the firm have sufficient cash (or other liquid assets) to
cover its short term obligations?
• Profitability Ratios
• Overall Financial Stability
Liquidity ratios
• Working Capital
WorkingCapital  CurrentAssets  CurrentLiabilities
• Measures of solvency by showing the firm's ability to
pay current liabilities out of current assets
• Current Ratio
CurrentRat io 
CurrentAssets
CurrentLiabilities
• Quick Ratio
Cash  MarketableSecurities  Accounts Re ceivable
QuickRatio 
CurrentLiabilities
Profitability & Stability ratios
• Return on Assets
Re turnonAssets 
NetIncome
AverageTotalAssets
• Return on Sales
Re turnonSales 
NetIncome
NetSales
• Debt Ratio
DebtRatio 
TotalDebt
TotalAssets
Critical Mistakes
• “Let’s go smoke something”
• “These trees sure are pretty”
• “We can get orders in a month”
• Sales cycle
• Remember, most of the time no one knows you
• “We can whip this puppy out in 6 months”
• Development time-line for technology is typically longer
than expected
• Worse…its typically more expensive as well!
• “Look at how much they spend on marketing! We
won’t have to spend that much”
Wait there’s more…
• “Sure, operating expenses are high at the beginning,
but then they will go down.”
• Operating expenses typically don’t decline
• Salaries must be realistic
• Growth requires spending money
• “This equipment should last us for years.”
• Assets must be replaced
• “We’ll lean on our suppliers and not pay them for 90
days.”
• “Our customer will pay us in 30 days.”
Questions, Comments, or
Criticisms?
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