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
• Employee salaries and

commissions

• Rent/Lease payments
• Advertising/Web Site hosting
• Postage and shipping costs
• Supplies
• Legal/Accounting fees
• Telephone
• Public utilities
• Business/Health

insurance

• Taxes (including

payroll)

• Interest payments
• 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
• f 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

• B. Firm

invests in assets Current assets Fixed assets Financial markets Short-term debt Long term debt Equity shares

• A. Firm issues

securities

• E. Reinvested

cash flow

• C. Cash flow from

firm's assets

• F. Dividends and

debt payments

• D. Government

Other Stakeholders

• a. Firm issues security to raise cash
• b. Firm invests in assets
• c. Firm's operations generate cash

flow

• d. Cash is paid to government as taxes.

Other stakeholders may receive cash

• e. Reinvested cash flows are ploughed bac

into firm

• f. Cash is paid out to investors in the form
• f interest and dividends

Total Value of Firm's Assets Total Value of Firm to investors in the Financial Markets

Balance Sheet

Fixed Assets

• 1. Tangible fixed

assets

• 2. Intangible

fixed assets Long term debt Shareholders' equity

Total Value of Assets Total Value of Liabilities & Shareholders' Equity

Current Assets Current Liabilities

Raw Material Work in Proces s Finis hed Goods Cos t of Goods Sold

Cos t of materials available for us e Materials us ed Labor

• verheads

Total manufacturing cos ts incurred this period Cos t of goods manufactured Cos t of goods Sold Ending raw material inventory Ending work in proces s inventory Ending finis hed Goods inventory

Balance Sheet Income Statement

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
• Cas h flows
• Ris k analys is

It is the company’s expected future performance that determines whether you s hould 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)

1 2 3 4 5

• 40K

10 K 12 K 15 K 10 K 7K

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

• utflow (ICO)

ICO = CF1

• (1+IRR)1

CF2

• (1+IRR)2

CFn

• (1+IRR)n

+ + +

• -

IRR Solution

Rs 40,000 Rs 10,000 (1+IRR)1 Rs 12,000 (1+IRR)2 + = + Rs 15,000 (1+IRR)3 Rs 10,000 (1+IRR)4 + Rs 7,000 (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

NPV = CF1

• (1+k)1

CF2

• (1+k)2

CFn

• (1+k)n

+ + +

• ICO

NPV Solution

Rs 10,000 (1.13)1 Rs 12,000 (1.13)2 Rs 15,000 (1.13)3 Rs 10,000 (1.13)4 + Rs 7,000 (1.13)5

Management has determined that the appropriate discount rate (k) for this project is 13%

NPV =

• Rs 40,000

+ + +

NPV Acceptance Criterion

The management of has determined that the hurdle rate is 13% for projects of this type

Should this project be accepted?

No! The NPV is negative. This means that the project is reducing shareholder wealth. [Reject as NPV < 0]

Rs 38,575 – Rs 40,000 = Rs 1,425

Profitability Index (PI)

PI s the ratio of the present value

• f a project's future net cash

flows to the project's initial cash

• utflow

CF1

• (1+k)1

CF2

• (1+k)2

CFn

• (1+k)n

PI = ÷ ICO

+ + +

PI = 1 + [NPV/ICO] Method #2

Method #1

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]

Capital Budgeting (cont’d)

• Net Present Value (NPV) Method
• The premise that a rupee today is worth more than a

rupee in the future.

• The cost of capital is the rate used to adjust future cash

flows to determine their value in present period terms.

• This procedure is referred to as discounting the future

cash flows—cash value is determined by the present value of the cash flow.

• Internal Rate of Return (IRR method)
• Similar to the net present value method, but future cash

flows are discounted a rate that makes the net present value of the project equal to zero.

Working Capital

Working Capital Concepts

Gros s Working Capital The firm's inves tment in current as s ets Net Working Capital Current As s ets – Current Liabilities Working Capital Management The adminis tration of the firm's current as s ets and the financing needed to s upport current as s ets

Operating Cycle

Time Inventory Period Accounts receivable period Accounts payable period Cash cycle Cash Paid for inventory Cash receive d

Operating Cycle

Inventory Purchas ed

Inventory Sold

Working Capital Considerations

• Components
• Cas h, marketable s ecurities , receivables and

inventory

• Time
• Permanent
• Temporary
• What s hould be the level of inves tment in current

as s ts ?

• What mix of long term financing and s hort term

financing s hould the firm employ to s upport current as s ets ?

Cost Volume Profit Analysis

Cost Volume Profit Analysis (CVP) focuses on the following factors

• The prices of products or services
• The volume of products or services

produced and sold

• The per-unit variable costs
• The total fixed costs
• The mix of products or services produced

Break-Even Analysis

Contribution Margin Approach

• The difference between the selling price and the

variable cost per unit.

• It is the amount per unit that is contributed to

covering all other costs.

• 0 = (SP –VC)S – FC or FC = (SP – VC)S where:
• SP = Unit selling price
• VC = Variable cost per unit
• S = Sales in units
• FC = Total fixed costs

The Contribution Margin Income Statement

Sales – All variable costs = Contribution Margin Contribution Margin – All Fixed Costs = Net Income

Total Fixed Cos t Fixed Cos t Per Unit

Behaviour of Fixed Cost

Units Units Rs Rs

Total Variable Cos t Variable Cos t Per Unit

Behaviour of Variable Cost

Units Units Rs Rs

Break Even Analysis

Breakeven (units ) = Fixed Cos t Rs

– Contribution Margin Per Unit Breakeven (sales Rs) = Fixed Cost Rs

• Contribution Margin Ratio

Accounting Break-Even

100 200 300 400 500 600 700 800 900

900 2,250 4,500

Quantity of output (s ales volume)

Revenues = Rs 5/ unit Total cos ts = Rs 900 + Rs 3/unit

Net Income < 0 Net Income > 0 Sales and cos ts (Rs )