Description
Book Description
This fifth edition of a classic and comprehensive resource presents an applied, realistic view of entrepreneurial finance for today’s entrepreneurs, completely updated to address the latest trends and technologies.
The book provides an integrated set of concepts and applications, drawing from entrepreneurship, finance and accounting, that will prepare aspiring entrepreneurs for the world they will most likely face as they start their new businesses. The contents are designed to follow the life cycle of a new business venture. Topics are presented in logical order, as entrepreneurs will likely face them as they begin the process of business start-up and move into growing the business.
Both undergraduate and graduate students will appreciate the clear presentation of complex issues, and this book is an essential resource for budding entrepreneurs as well.
A comprehensive spreadsheet financial template is included with the book, and an all-new case study provides questions that will help students learn the template as they proceed through the book. This tool allows for the application of many of the concepts to actual businesses and can be a valuable supplement to the process of developing a full business plan. The spreadsheet financial template is available for unlimited free downloads at Professor Cornwall’s blog site: www.drjeffcornwall.com.
Table of Contents
List of Figures
List of Tables
List of Exhibits
1 Introduction
THE IMPORTANCE OF KNOWING THE NUMBERS
MEASURING SUCCESS
WHAT IS ENTREPRENEURIAL FINANCIAL MANAGEMENT?
WHAT MAKES ENTREPRENEURIAL FINANCE SIMILAR TO TRADITIONAL FINANCE?
WHAT MAKES ENTREPRENEURIAL FINANCE DIFFERENT FROM TRADITIONAL FINANCE?
LACK OF HISTORICAL DATA TO MEASURE RISK
TRADITIONAL FINANCIAL CONCEPTS OF RISK AND RETURN
HOW THE LACK OF HISTORICAL DATA AND LIQUIDITY COMPLICATES THE PRACTICE OF FINANCE IN EARLY-STAGE FIRMS
USING STAKEHOLDER ANALYSIS TO GUIDE ETHICAL DECISION MAKING
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITY FOR APPLICATION
REFERENCES
PART I BUILDING A FINANCIAL FORECAST
2 Setting Financial Goals
WEALTH VERSUS INCOME
INTEGRATING NONFINANCIAL GOALS INTO THE BUSINESS
THE IMPORTANCE OF SELF-ASSESSMENT
THE SELF-ASSESSMENT PROCESS
THE BUSINESS MODEL AND BUSINESS PLAN
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITY FOR APPLICATION
REFERENCES
APPENDIX 2.1. INDIVIDUAL ENTREPRENEURIAL SELF-ASSESSMENT
APPENDIX 2.2. PARTNERSHIP AND SHAREHOLDER ASSESSMENT
3 Understanding Financial Statements
THE ACCOUNTING EQUATION
AN EXAMPLE
BASIC FINANCIAL STATEMENTS
INCOME STATEMENT
BALANCE SHEET
Assets
Liabilities
Owners’ Equity
STATEMENT OF CASH FLOWS
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
4 Revenue Forecasting
COMMON FORECASTING MISTAKES
1. THE LINEAR FORECAST MISTAKE
2. THE HOCKEY STICK FORECAST MISTAKE
3. THE 20/80 VERSUS 80/20 MISTAKE
THE LINK BETWEEN THE MARKETING PLAN AND REVENUE FORECASTS
1. INDUSTRY AND MARKET TRENDS
2. MARKET RESEARCH
3. COMPETITIVE ANALYSIS
CREATING SCENARIOS
THE LINK BETWEEN THE REVENUE FORECAST AND THE CASH FLOW FORECAST
THE IMPACT OF BUSINESS TYPE ON REVENUES
MANUFACTURING FIRMS
SERVICE FIRMS
Billing by the Hour
Billing by the Job
RECURRING REVENUE FIRMS
COMMISSION-BASED SELLING FIRMS
CYCLICAL OR SEASONAL SALES FIRMS
International Sales Firms
QUANTITATIVE FORECASTING TECHNIQUES
THE IMPORTANCE OF REVENUE FORECASTING
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
5 Expense Forecasting
DEFINING COSTS
COST BEHAVIOR
VARIABLE COSTS
FIXED COSTS
MIXED COSTS
BREAKEVEN ANALYSIS
EXPENSE FORECASTING: THE IMPACT OF BUSINESs TYPE ON EXPENSES
MANUFACTURING FIRMS
SERVICE FIRMS
RECURRING REVENUE FIRMS
COMMISSION-BASED SALES FIRMS
CYCLICAL OR SEASONAL FIRMS
INTERNET BASED FIRMS
REDUCING EXPENSES THROUGH BOOTSTRAPPING
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCE
6 Integrated Financial Model
THE ENTREPRENEUR’S ASPIRATIONS RECONSIDERED
CONTRIBUTION FORMAT INCOME STATEMEN
EARNINGS BEFORE INTEREST AND TAXES
INVENTORY OF ASSUMPTIONS
SOCIAL VENTURES
DETERMINING THE AMOUNT OF FUNDS NEEDED
USING THE FORECASTING TEMPLATE TO DETERMINE THE AMOUNT OF FUNDS NEEDED
CASH RUNWAY OR TIME OUT OF CASH
ASSESSMENT OF RISK SENSITIVITY
INTEGRATING FINANCIAL FORECASTS INTO BUSINESS PLAN OR FUNDING DOCUMENT
SUMMARY
APPENDIX 6.1. INSTRUCTIONS FOR USING THE INTEGRATED FINANCIAL STATEMENTS TEMPLATE
PRODUCT MODEL [FOR A BUSINESS THAT SELLS INVENTORY]
SERVICE MODEL [FOR A BUSINESS THAT SELLS SERVICES]
SOCIAL VENTURE MODEL [FOR A NONPROFIT BUSINESS]
PART II MANAGING THE FINANCIAL RESOURCES OF A VENTURE
7 Monitoring Financial Performance
TRACKING ASSUMPTIONS
ESTABLISHING MILESTONES
USING NUMBERS TO MANAGE
FINANCIAL STATEMENT ANALYSIS
RATIO ANALYSIS
LIQUIDITY RATIOS
ACTIVITY RATIOS
PROFITABILITY RATIOS
SOLVENCY AND COVERAGE RATIOS
WORKING WITH ACCOUNTANTS
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
8 Day-to-Day Cash Flow Management and Forecasting
WHY IS CASH FLOW DIFFERENT FROM NET INCOME?
WHY Is AN ACCRUAL-BASED INCOME STATEMENT IMPORTANT?
How Is CASH FLOW MEASURED?
INTERPRETING A STATEMENT OF CASH FLOWS: DIRECT METHOD
STATEMENT OF CASH FLOWS： INDIRECT METHOD
INVESTORS’ AND CREDITORS’ USE OF THE CASH FLOW STATEMENT
EFFECTIVE CASH MANAGEMENT
THE EMOTIONAL SIDE OF CASH FLOW MANAGEMENT
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
PART III SOURCES OF FINANCING
9 Financing Over the Life of a Venture
COMMON MISCONCEPTIONS ABOUT ENTREPRENEURIAL FINANCING
THE DIVERSE NATURE OF BUSINESS FINANCING
THE NATURE OF THE BUSINESS MODEL
ASPIRATIONS OF THE ENTREPRENEUR
THE STAGE OF DEVELOPMENT OF THE BUSINESS VENTURE
FITTING THE PIECES OF THE FINANCING PUZZLE TOGETHER
FINANCING SMALL BUSINESSES WITH MODEST GROWTH POTENTIAL
FINANCING HIGH-GROWTH, HIGH-POTENTIAL VENTURES
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
10 Start-Up Financing from the Entrepreneur, Friends, and Family
SELF-FINANCING
ADVANTAGES AND DISADVANTAGES OF SELF-FINANCING
FRIENDS AND FAMILY FINANCING
DETERMINE TRUE MOTIVATIONS
USE A FORMAL BUSINESS PLAN
PROVIDE ACCURATE, OBJECTIVE, AND FULL INFORMATION ABOUT THE BUSINESS
KEEP BOUNDARIES
TAX PLANNING
STRUCTURE OF FUNDS INVESTED
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
11 Bootstrapping
WHY BOOTSTRAP?
BOOTSTRAPPING ADMINISTRATIVE OVERHEAD
SPACE
FURNISHINGS AND OFFICE EQUIPMENT
ADMINISTRATIVE SALARIES
BOOTSTRAPPING EMPLOYEE EXPENSES
INDEPENDENT CONTRACTORS
FRACTIONAL AND TEMPORARY EMPLOYEES
STUDENT INTERNS
EQUITY COMPENSATION
NONMONETARY BENEFITS
BOOTSTRAPPING OPERATING EXPENSES
BOOTSTRAP MARKETING
THE BASIC BOOTSTRAP MARKETING TOOLS
Word of Mouth
Business Cards
Blogs
Websites
Banners and Signs
Email Marketing
Publicity
THE ETHICS OF BOOTSTRAPPING
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
12 External Sources of Funds: Equity
ACCREDITED INVESTORS
ANGEL INVESTORS
STRATEGIC PARTNERS
PRIVATE PLACEMENT
PRIVATE EQUITY
CROWDFUNDING
SBIC
THE DOWNSIDE OF EQUITY FINANCING
WORKING WITH OUTSIDE INVESTORS
BUSINESS MODEL AND BUSINESS PLAN
CONFIDENTIALITY AGREEMENT
LETTER OF INTENT
MODIFICATIONS OF SHAREHOLDER AGREEMENTS
COMMUNICATION WITH SHAREHOLDERS
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
13 External Sources of Funds: Debt
SHORT-TERM DEBT
TRADE CREDIT
INSTITUTIONAL CREDITORS
Banks
Asset-Based Lenders
Factors
LONG-TERM DEBT
BANKS
LEASING COMPANIES
REAL ESTATE LENDERS
GOVERNMENT FUNDING THROUGH SBA
WORKING WITH BANKERS
INITIAL CONTACT WITH BANKERS
PREPARATION OF KEY LOAN DOCUMENTS
Loan Proposal
Loan Document
Personal Guarantees
ONGOING COMMUNICATION AFTER THE LOAN IS MADE
OTHER SOURCES OF DEBT FINANCING FOR ENTREPRENEURS
THE DOWNSIDE OF DEBT
DEVELOPING A FINANCING PLAN
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
14 Financing the High-Growth Business
INTEGRATING PROFITABILITY INTO THE BUSINESS PLAN
STAGES OF THE FIRM
STAGES OF BUSINESS FUNDING
THE DARK SIDE OF VENTURE CAPITAL FINANCING
INITIAL CONTACT WITH A VENTURE CAPITALIST
INITIAL PUBLIC OFFERING
ADVANTAGES OF AN IPO
DISADVANTAGES OF AN IPO
THE PROCESS OF THE IPO
PRIVATE EQUITY
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
PART IV PLANNING FOR THE ENTREPRENEUR’S TRANSITION
15 Business Valuation
GENERAL CONCEPTS THAT GUIDE THE DETERMINATION OF VALUE
FAIR MARKET VALUE
GOING-CONCERN VALUE
HIGHEST AND BEST USE
FUTURE BENEFITS
SUBSTITUTE AND ALTERNATIVES
DISCOUNTED CASH FLOW ANALYSIS
OBJECTIVITY
BASIC INFORMATION REQUIRED FOR A VALUATION
DISCOUNTED CASH FLOW
EFFECT ON THE BALANCE SHEET OF THE NEW OWNERS (GOODWILL)
DEFINITION OF FREE CASH FLOW
ESTIMATING FREE CASH FLOW FOR A PARTICULAR YEAR
ESTIMATING FREE CASH FLOW OVER A SIX-YEAR PERIOD
SUMMARY OF THE DISCOUNTED CASH FLOW APPROACH
MARKET COMPARISON TECHNIQUES
SUMMARY OF THE MARKET COMPARISON APPROACH
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
16 Exit Planning
A MODEL OF EXIT PLANNING
Self-Assessment Revisited and Setting a Time Frame
Manage Financial Statements
Strengthen Systems and Processes
Develop a Business Plan for the Sale of the Business
EXIT OPTIONS
Ownership Transfer
Partial or Transitional Transfer
Bankruptcy or Planned Termination of Operations
THE PROCESS OF SELLING A BUSINESS
THE ETHICAL SIDE OF THE ENTREPRENEUR’S TRANSITION
POST-EXIT ISSUES
SUMMARY
DISCUSSION QUESTIONS
OPPORTUNITIES FOR APPLICATION
REFERENCES
