What Are My Startup Costs? Before you launch a new venture, you - PowerPoint PPT Presentation

What Are My Startup Costs? • Before you launch a new venture, you should take the time to estimate the total capital that will be needed • Startup costs are divided into two main categories: one-time startup costs; and • recurring monthly expenses • Depending on when you expect to receive payments for your goods and services, it may be wise to begin with several months of working capital • Be sure to only include those items that are essential to start the business

Monthly Costs • Owner(s) salaries • Telephone • Employee salaries and • Public utilities commissions • Business/Health • Rent/Lease payments insurance • Advertising/Web Site hosting • Taxes (including • Postage and shipping costs payroll) • Supplies • Interest payments • Legal/Accounting fees • Maintenance • Miscellaneous

Bootstrapping • Establishing a business on limited personal resources • Spend only as much time and capital • As is needed to credibly demonstrate to other resource providers that • The opportunity is commercially feasible • Free the capital from any readily available source

Incubators • Focus on the core task • Administrative and infrastructure facilities • Proximity to other entrepreneurs • Links with angel investors and venture capitalists • Association with local development agencies • Deshpande Centre for Technological Innovation • SINE, FITT & NDBI

Importance of Financial Information for Entrepreneurs • Significant Information for Financial Management • Techniques and approaches for evaluating the capital budget • Techniques and uses of projected financial statements • Techniques and approaches for designing a cash-flow schedule

Financial Statements

The Basic Equation Assets = Liabilities + Owners' Equity A = L + E

The Basic Equation When we add to one s ide, we add s ame amount to the other s ide A = L + E

The Activities of a Business Each business has 3 types of activities • Operating Activities • Investing Activities • Financing Activities

Major Financial Statements • Balance Sheet • Income Statement • Statement of Cash Flows

Understanding the Key Financial Statements • Balance Sheet • Represents the financial condition of a company at a certain date. • It details the items the company owns (assets) and the amount the company owes (liabilities). • It also shows the net worth of the company and its liquidity. • Assets = Liabilities + Owners’ Equity • An asset is something of value the business owns. • Current and fixed assets • Liabilities are the claims creditors have against the company. • Short- and long-term debt • Owners’ equity is the residual interest of the firm’s owners in the company.

Understanding the Key Financial Statements (cont’d) • Statement of Cash Flow • An analysis of the cash availability and cash needs of the business that shows the effects of a company’s operating, investing, and financing activities on its cash balance. • How much cash did the firm generate from operations? • How did the firm finance fixed capital expenditures? • How much new debt did the firm add? • Was cash from operations sufficient to finance fixed asset purchases? • The use of a cash budget may be the best approach for an entrepreneur starting up a venture.

Preparing Financial Statements • Budget • One of the most powerful tools the entrepreneur can use in planning financial operations. • Operating Budget • A statement of estimated income and expenses over a specified period of time. • Cash Budget • A statement of estimated cash receipts and expenditures over a specified period of time. • Capital Budget • The plan for expenditures on assets with returns expected to last beyond one year.

Elements of Balance Sheet • How much we have; • What we owe; and • What we're worth? • Assets (Plant and machinery/Instruments) • Liabilities (Loans/Creditors) • Equity (Capital issued)

Income [P & L] Statement • How much money we made in the period • Revenue less Expenses • Continuity of Retained Earnings • At the bottom of the IS we add the current period's income to the Retained Earnings at the beginning of the period (opening RE) to get Retained Earnings at the end of the period (closing RE)

Statement of Cash Flows • Where the cash came from and where the cash went • Shows how • each of the 3 business activities • affected cash during the period

Cash Flow Between the Firm and Financial Markets Total Value of Firm Total Value of to investors in the Firm's Assets Financial Markets A. Firm issues securities B. Firm Financial invests markets in assets E. Reinvested Short-term cash flow Current debt assets Long term F. Dividends and C. Cash flow from Fixed debt debt payments firm's assets assets Equity shares a. Firm issues security to raise cash d. Cash is paid to government as taxes. D. Government b. Firm invests in assets Other stakeholders may receive cash Other c. Firm's operations generate cash e. Reinvested cash flows are ploughed bac Stakeholders flow into firm f. Cash is paid out to investors in the form of interest and dividends

Balance Sheet Total Value of Total Value of Assets Liabilities & Shareholders' Current Equity Liabilities Current Assets Long term debt Fixed Assets 1. Tangible fixed assets Shareholders' 2. Intangible equity fixed assets

Balance Sheet Income Statement Finis hed Goods Raw Cos t of Work in Proces s Material Goods Sold Cos t of Materials us ed materials Labor available for overheads us e Total manufacturing Cos t of goods Cos t of goods cos ts incurred manufactured Sold this period Ending raw Ending work in Ending material proces s finis hed inventory inventory Goods inventory

Purpose of Financial Statement Analysis • To evaluate management performance in • Profitability • Efficiency • Ris k Management • To obtain ins ights s o as to project future management performance through • Pro-forma balance s heets • Income s tatements It is the company’s expected • Cas h flows future performance that determines whether you s hould • Ris k analys is lend money to it.

Use of Financial Statements • Main s ource of information for major inves tment decis ions • To lend money • To acquire owners hip s take • Provide information on • The res ources available to management • How thes e res ources were financed • What the firm accomplis hed with thes e res ources

Pro Forma Statements • Pro Forma Statements • Projections of a firm’s financial position over a future period (pro forma income statement) or on a future date (pro forma balance sheet). • Using beginning balance sheet balances, the projected changes depicted on the operating and cash-flow budgets are added to create the projected balance sheet totals.

Project Evaluation: Alternative Methods • Payback Period (PBP) • Internal Rate of Return (IRR) • Net Present Value (NPV) • Profitability Index (PI)

Payback Period (PBP) 0 1 2 3 4 5 - 10 12 15 10 7K 40K K K K K PBP is the time required for the cumulative expected cash flows from an investment projects to equal the initial cash outflow

Internal Rate of Return (IRR) IRR is the dis count rate that equates the pres ent value of the future net cas h flows from an inves tment project with the project's initial cas h outflow (ICO) - - CF1 CF2 CFn ------------ ------------ ------------ ICO = + + + - (1+IRR)1 (1+IRR)2 (1+IRR)n

IRR Solution Rs 12,000 Rs 15,000 Rs 40,000 Rs 10,000 = + + (1+IRR)2 (1+IRR)3 (1+IRR)1 Rs 10,000 Rs 7,000 + + (1+IRR)4 (1+IRR)5 Find the interest rate (IRR) that causes the discounted cash flows to equal Rs 40,000

IRRs Acceptance Criterion The management has determined that the hurdle rate is 13% for projects of this type Should this project be accepted? No! The firm will receive 11.57% for each rupee invested in this project at a cost of 13%. [IRR < Hurdle Rate]

Net Present Value (NPV) NPV is the present value of an investment project's net cash flows minus the project's initial cash outflow CF1 CF2 CFn --------- -------- --------- NPV = -ICO (1+k)1 (1+k)2 (1+k)n + + +

NPV Solution Rs 10,000 Rs 12,000 Rs 15,000 NPV = + + (1.13)1 (1.13)2 (1.13)3 Rs 10,000 Rs 7,000 + + - Rs 40,000 (1.13)4 (1.13)5 Management has determined that the appropriate discount rate (k) for this project is 13%

NPV Acceptance Criterion The management of has determined that the hurdle rate is 13% for projects of this type Should this project be accepted? Rs 38,575 – Rs 40,000 = Rs 1,425 No! The NPV is negative. This means that the project is reducing shareholder wealth. [Reject as NPV < 0]

Profitability Index (PI) PI s the ratio of the present value of a project's future net cash flows to the project's initial cash outflow Method #1 CF1 CF2 CFn + + + --------- -------- --------- ÷ ICO PI = (1+k)1 (1+k)2 (1+k)n Method #2 PI = 1 + [NPV/ICO]

PI Acceptance Criterion PI = Rs 38,575 / Rs 40,000 = 0.9643 Should this project be accepted? No! PI is less than 1.00. This means that the project is not profitable [Reject as PI < 1.00]