Financial Modeling for Entrepreneurs

By Anthony Suidan, Stratsolver Corporation

Topics

1. Relevant Accounting Basics2. Financial Modeling3. Key Performance Indicators4. Perfecting Your Request for Financing5. Your Own Financial Model6. Little Andy’s Lemonade Stand

1. Relevant Accounting Basics

Internally Consistent | Stress the Importance of Cash and Cash Flow

Conventional Financial Statements

Balance Sheet

Assets Current Assets

CashAccounts ReceivableInventory

Long-term Assets

Net Property, Plant & EquipmentTotal Assets

Liabilities Current Liabilities

Accounts PayableShort-term Credit

Long-term Liabilities

Taxes PayableLong-term Credit

Ownership Equity

Stock Retained EarningsTotal Liabilities & Ownership Equity

Statement of Cash Flows

Operating Activities Net Income Accounts Receivable Inventory Accounts Payable Income Tax PayableCash P (U) Operating Activities

Investing Activities Property, Plant & EquipmentCash P (U) Investing Activities

Financing Activities Short-term Credit Long-term Credit Issuance of Shares DividendsCash P (U) Financing Activities

Net Change in Cash

Cash, Beginning of PeriodCash, End of Period

Income Statement

Revenue Revenue A Revenue B Revenue NCost of Goods Sold Expense A Expense B Expense NGross Profit

Sales, General and Administrative Overhead A Overhead B Overhead NEBITDA DepreciationEBIT Interest ExpenseEBT Income TaxNet Income

Cash is King

Financial Accounting

In a company which is a going concern Financial accounting is based on an accounting system

The general ledger (G/L) is a database with codes (e.g. companies, departments and accounts)

Money in and out now and later = debits and credits Scenarios are in terms of budget, actual and forecast

Book recommendation How to Read a Financial Report by John A. Tracy (now on 8th edition)

Financial accounting results in the three conventional financial statements Why are financial statements described as “conventional”?

Financial Modeling The entrepreneur wishes to simulate the financial accounting of his/her business

without a financial accounting system

Managerial/Cost Accounting

Financial Accounting versus Managerial/Cost Accounting

Activity Based Costing (“ABC”); Operations Finance

Management accounting system If you can’t measure it you can’t manage it No conventions; Outside accounting system; Data integrity of non-G/L data; “People

respect what you inspect”; Inherent disconnect with G/L; Drives G/L

Business-specific operating reports Key Performance Indicators (KPI)

Financial Modeling The entrepreneur wishes to simulate and the managerial accounting of his/her

business without a management accounting system

2. Financial Modeling

Financial/Operational Business Simulation

Features Dynamic, spreadsheet-based Custom operating reports and conventional financial statements

Benefits What-if scenarios Business performance sensitivities Align performance with strategy Investor and stakeholder conversations Business valuations

A Business Scenario Simulator

3. Key Performance Indicators

Key Performance Indicators (KPI)

Business performance dashboard

Many ways to measure the same general metric Return on investment: ROI, ROCE, ROTA, RONA, ROOA, ROE, IRR,

MIRR, NPV, EPS, P/E, Payback, Discounted Payback and more (define R)

Find the metrics which work for your business model

4. Perfecting Your Request for Financing

Available Financing Options

Many different financing options are available to help entrepreneurs get their business up and running

Bank Financing Agreement with bank to borrow funds and repay loan over time

Venture Capital (Angel Investor) Agreement with wealthy individual(s) to give up ownership in

exchange for money Think Dragon’s Den

% of the company for $$$

Perfecting Your Request for Financing

Show that you have “skin in the game” Financiers want to know that you’ve put some of your own money into

the business

Provide significant detail on what your business needs the money for Also discuss how/when you expect to be able to pay back the lender

Ask for enough funds to cover your capital expenditures under your worst scenario Include a working capital requirement Working capital is money that is “tied up” Working Capital = Current Assets – Current Liabilities

5. Your Own Financial Model

Financial Model Checklist

Internal cross-checks (retained earnings, checksums)

Dynamic yet robust

Full set of financial statements Income Statement Balance Sheet Statement of Cash Flows

Customized to your business

6. Little Andy’s Lemonade Stand

Financial Model Template

Little Andy Your little brother: Astute seven-year-old entrepreneur Business proposition: Lemonade stand open 90 days per year (summers) Rented space on Mr. Wilson’s corner lot, expected to be a good location Small loan and LOC from Mrs. Sachs, neighbor, local credit union manager Dad provides loan collateral and startup investment Guaranteed revenue base on three-year contract to local baseball league Will hire Joey and Igor, school friends to staff the stand; other kids later Will manage the business Has done financial modeling and a full set of interrelated financials

Offering to sell you the business for $2,000, which he says is a great deal

Little Andy’s Lemonade Stand

Conclusions

How can the Lemonade Stand model be improved? What have you learned?

What We Covered

1. Relevant Accounting Basics2. Financial Modeling3. Key Performance Indicators4. Perfecting Your Request for Financing5. Your Own Financial Model6. Little Andy’s Lemonade Stand