BA 346

Working as an EntrepreneurWeek 8

Guest Speaker

Kenneth Pogson, AKA “Cat Daddy”

Money for Entrepreneurs

Planning funding sources Financial planning for entrepreneurs Cost structure Alternate funding strategies

Money for Entrepeneurs

The majority of startups fail in their first 5 years Mainly for financial issues?

Finance is the most misunderstood topic in entrepreneurship

How the entrepreneurial financing model works Multiple rounds of financing Different sources Plan ahead so future investors are not

scared away

Money

Money, cash, and cash equivalents Understand the basics of managing

cash flow Strategies for preventing and

coping with cash flow problems Developing a cash budget

U.S. Dallas Federal Reserve“Money is a medium of exchange

accepted by the community, meaning it’s what people buy things with and sell things for. Money provides a standard for measuring value, so that the worth of different goods and services can be compared. And lastly, money is a store of value that can be saved for later purchases.”

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What is moneyWhat is money

Two purposes of moneyTwo purposes of money:To make exchangesTo keep track of wealth

Remember, a profit on your accounting spreadsheet or in your account book is notnot money in your hand

Money is a medium of exchangemedium of exchange, store of valuestore of value, and measure of measure of wealthwealth

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Purposes of Money

CashCash: cash is money immediately available to be spent Cash equivalentsCash equivalents: assets that may be

quickly converted to cash CurrencyCurrency: bills and coins printed by

governments to represent money Demand depositsDemand deposits: money held in

checking and savings accounts Commercial paperCommercial paper: notes issued by

credit-worthy corporations

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Cash and Cash EquivalentsCash and Cash Equivalents

MoneyMoney: cash, cash equivalents, profits, and banking

Differences are importantDifferences are important Represents the lifeblood of the

business, and knowing how to use it can make the difference between boom and bankruptcy

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Importance of MoneyImportance of Money

Planning funding sources

Where does it come from? Personal savings Friends & family Borrowing

Personal bank loan Credit cards – good or bad idea? SBA loans

Angel Investors and Venture Capitalists What’s the difference? What are they looking for?

How much will you need? How explicit are the arrangements?

Financial planning for entrepreneurs

Project realistic figures 3-5 years out Ask experts List assumptions explicitly Frequent revisions

Assumptions Projections

How much of this is guesswork?

Cost structure

What goes into costs? Job vs Process

Alternate funding strategies

Strategy depends on what you want to accomplish Startup Buying a business Running the business Expanding

May require special skills or knowledge Good CFO Commercial mortgage broker Lawyer

Startup

Ask landlord to lend or invest Contract financing (prepayment for

service)

Buying a business

Seller financing Payments Earnout

Stay in partnership with the seller Use assets in the business as collateral Contract to sell assets in the business Contract to license intellectual property or

manufacturing rights Assume liabilities with the business

Pre-negotiate with lenders for more favorable terms

Running the business

Bartering for what you need Take the discount for rapid payment Partnering to use someone else’s

credit Sublease unneeded space, expand

later

Expanding

Growth Concepts Growth Rates: Internal vs Sustainable Return on Assets Return on Equity Reinvestment Rate

Increase sales Get credit before you need it Pre-arrange with vendors for better

invoice terms Sell receivables

Partnering with Other Organizations

Finding funds, skills, resources, etc. Why partner with corporations &

non-profits WIIFM? How to partner with corps & non-

profits How it works Finding potential partners How to set up the arrangement

Almost 2/3 of all small businesses experience money problems 20% of small business managers

reported that cash flow is a continuing continuing problemproblem

Three primary causes of cash flow cash flow problemsproblems: Difficulty collecting money due Seasonal variation in sales Unexpected decreases in sales

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Money In / Money OutMoney In / Money Out

Building a Cash Budget (example)

Building a Cash Budget (example)

Building a Cash Budget (example cont’d)

72k + 10k + 20k

180k – 102k

78k + 22k

Amount owed X(12% ÷ 12 mos)

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Cash Shortage IssuesCash Shortage Issues

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The Cash-to-Cash CycleThe Cash-to-Cash Cycle

The cash-to-cash cyclecash-to-cash cycle of a pushcart vendor is only a few hours; construction projects may take years to complete

Many small businesses experience difficulty because: The mismatch in time between receiving receiving

and spending cashand spending cash Mismatch in time between size of payments size of payments

received and size of payments to be madereceived and size of payments to be made

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Cash Cycle Depends on Type of Business

Cash can come from only three three sourcessources: Cash can be obtained by sellingselling

products and services Cash can be obtained from

investmentsinvestments the business has made Cash through financingfinancing

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Managing Cash FlowManaging Cash Flow

Forecasting sales receiptsForecasting sales receipts: sales forecast is the cash receipts forecast

Businesses whose customers make heavy use of their credit cardscredit cards can face serious cash drainscash drains

Many businesses have either relatively few large sales events or highly seasonal sales that complicate forecasting

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Forecasting

If you provide credit to your customers, you will always wait wait some period of timesome period of time for some of your moneyYou will also have some customers

who never never payYou never know exactly when you will

collect cashcollect cash Reasonable estimateReasonable estimate of their amount

and timing can be made

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Forecasting cash disbursementsForecasting cash disbursements: Estimates of expensesKnowledge of your business’s

payment patternsPredict how much and when cash

should be paid outNeed to know how much money we

will have on the first day of the year to put together a cash budget for the first quarter

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Cash-flow forecast will help you predict the amount of money that will be coming into and flowing out of your business

Take these steps to ensure your new business will maintain its positive cash flow Know what to expect Predict and plan for the slow times Make projections for the future

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Managing Your Cash Flow

Best prevention is attention and attention and understanding understanding your business’s operations Maintain an accurate forecast of cash needs

Techniques to increase cash flowsincrease cash flows Taking deposits and progress payments Offering discounts for prompt payments Asking for your money Taking on noncore paying projects Factoring receivables

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Preventing Cash Flow ProblemsPreventing Cash Flow Problems

Two factorsTwo factors of cash outflows that must be controlled:

The amount of cash being paid out The timing of cash being paid out

WasteWaste also affects cash outflow

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Techniques to decrease cash Techniques to decrease cash outflowsoutflows:

Trade discountsNon-cash employee incentivesUse of temporary agenciesConsignmentBarterControl of the timing of paying out

cashTiming of purchasesNegotiation of terms with suppliers

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Strategies to improve cash Strategies to improve cash outflowsoutflows

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Controlling Cash ShortagesControlling Cash Shortages

Workshop

Cash Budget