AVB II 2006 Jay A. Smith 1 Classes 8-9 Project Review & Finance for Venture Business.

AVB II 2006 Jay A. Smith

1

Classes 8-9Project Review &

Finance for Venture Business

AVB II 2006 Jay A. Smith2

Revised Class Schedule as of 1/12

　　　 Office Hour: 金 11:00-12:30 VBL ２階電話 285-8675

⑧⑨ 　 1/12( 金 ) 14:30-17:40 More Finance & Accounting/Business Plans & Assignment⑩⑪ 　 1/19( 金 ) 14:30-17:40 　 Capital, Financing & Bootstrapping/Business Plan Overview

⑫⑬ 1/26( 金 ) 14:30-17:40 Special Topics In Venture Business/Business Plan Workshop ⑭⑮ 2/2( 金 ) 14:30-17:40 　 Final Student Business Plan Presentations

[email protected]

www.venturesmith.us


Announcements 2006 Business Plan Competition Prize Student Plans/Marketing Review Articles Finance Review Assignment


Final Assignment ２月２日　 PowerPoint (15 minute +Q&A)

(E?) ２月５日　 Short (3-5p) Business Plan

(J/E?) Springboard format Demo/prototype for Presentation


AVB I team


Prior Assignment: Customer & Market Customer Profile and Market Positioning

What kinds of customers are you targeting How are you positioning the product to these customers? Initial target customer list?

Market research (how big an opportunity) Market size, Segment target size, Growth

Sales, promotion and channel strategy Current channels, competition issues/strategy How can we best and realistically reach the customer? Creating awareness, interest, trial, purchase, repurchase


Finance Strategy Supports BusinessBusiness,TechnologyEnvironments

Opportunity Social,GovernmentEnvironments

BusinessStrategy

MarketingStrategy

OperationsStrategy• Organization• Human Resource• Production• R&D

FinanceStrategy • Leverage• Make/buy• Lease/own

Do strategies support, fit each other, have flexibility, balance/manage risk?


Venture Companies Need Financing

Time

PotentialProfitReward

Money

Losses &Investments


Finance Provides Cash Cash is good – “the food of business”

Nearly everything a business does uses cash Salaries, building, equipment, supplies, taxes

Insufficient cash leads to bankruptcy (“you can’t eat an airplane”)

Too much cash is wasteful should be invested or returned

Cash = Sales or Income accounting is on an “accrual” basis


Sales & Marketing

Sales (Revenue): Money received for selling product or service Source of funds for business operations Basis for business existence

Marketing: how a company gets sales

COMPANY Customers

Product/Service

Money


Sources & Uses of Cash Sources of Cash

Sales revenue collections Outsider investments (financing via stock, loans) Sales of assets of the company

Uses of Cash Expenses (salaries, bills, supplies, taxes) Assets (plants, equipment, property, inventory)


Timing – Cash Flow Management Cash now is better than cash later

Collect from customer sooner Pay supplier later Conserve cash Now (It is always “now”)

Partnering, lease, borrow, trade, buy used, negotiate Making versus buying?

But don’t be too stingy on key success factors


Key Financial StatementsBalance Sheet貸借対照表 Picture of business

at one point in time End of Quarter End of Year

“Balance Sheet as of March 31.”

Income Statement損益計算書 Business operations during

a period of time Daily Weekly Monthly Quarterly 　三ヶ月間 / 年四

回 Yearly

“Income Statement for the Year Ending

March 31.”


MBA Hand Out – Income Statement Sales (Net Sales = Gross Sales – Returns) Expenses (product costs, indirect costs overhead)

Marketing R&D (S)G&A Depreciation (non-cash, usually small for VB)

Gross Profit Operating Profit/Income Net Profit/Income


　デルコンピュータの財務指標（単位　 100 万ドル）

1992 1993

総売上 Sales 2,013.9 2,873.2

売上原価 Cost of Sales 1,564.0 2,440.4

売上総利益 Gross Profit 449.5 432.8

営業費用 Operating Expenses:

　販売費・一般管理者 SG&A 268.0 422.9

　研究開発者 R&D 42.4 48.9

営業費用合計 Total Operating Expenses

310.3 471.8

営業損益 Operating Income (Loss)

139.1 (39.0)

純利益 Net Income (Loss) 101.6 (35.8)


Income Statement (P&L, Profit & Loss Statement)

SUPERIOR SOFT CORP. 2003

Total Sales $4,000,000 100%

Cost of SalesMaterials/ parts $100,000 3%Manufacturing $150,000 4%Commissions $400,000 10%Shipping $80,000 2%Total Cost of Sales $730,000 18%Gross Profit $3,270,000 82%

Operating CostsSalaries $800,000 20%R&D $500,000 13%Rents $100,000 3%Marketing $300,000 8%Other $100,000 3%Total Operating Costs $1,800,000 45%

Operating Profit $1,470,000 37%Non- Operating Costs $50,000 1%Pre- Tax Profit $1,420,000 36%Taxes 426,000 11%Net Income 994,000 25%


　デルコンピュータの財務指標（単位　 100 万ドル）

1991 1992 1993

総売上 889.9 2,013.9 2,873.2

売上原価 607.8 1,564.0 2,440.4

売上総利益 282.2 449.5 432.8

営業費用

　販売費・一般管理者 182.2 268.0 422.9

　研究開発者 33.1 42.4 48.9

営業費用合計 215.3 310.3 471.8

営業損益 66.9 139.1 -39.0

純利益 50.9 101.6 -35.8

売上構成比 100.0 100.0 100.0

営業費用 68.3 77.7 84.9

売上純利益 31.7 22.3 15.1

営業費用

マーケティングセールス 20.5 13.3 14.7

研究開発 3.7 2.1 1.7

営業費用合計 24.2 15.4 16.4

営業損益 7.5 6.9 -1.3

純利益 5.7 5.0 -1.3


Compare to Other CompaniesSUPERIOR SOFT CORP. 2003 Microsoft Industry

Total Sales $4,000,000 100%$10,000,000,000 $150,000,000,000

Cost of SalesMaterials/ parts $100,000 3%Manufacturing $150,000 4%Commissions $400,000 10%Shipping $80,000 2%Total Cost of Sales $730,000 18%Gross Profit $3,270,000 82% 90% 80%

Operating CostsSalaries $800,000 20%R&D $500,000 13% 10%Rents $100,000 3%Marketing $300,000 8% 15%Other $100,000 3%Total Operating Costs $1,800,000 45%

Operating Profit $1,470,000 37% 30%Non- Operating Costs $50,000 1%Pre- Tax Profit $1,420,000 36%Taxes 426,000 11%Net Income 994,000 25% 25% 20%


MBA Hand Out – Balance Sheet Assets

Current Cash & Securities Accounts Receivable Inventory

Long-Term Property Plant Equipment Long-term Securities

Liabilities - Current Accounts Payable Notes Payable Current Long-Term Debt

Liabilities – Long-Term Long-Term Debt Mortgages

Equity Paid-In Capital Retained Earnings


Balance Sheet

Assets Debt & Equity

Short TermAssets & Investments

Long TermAssets

Long-term InvestmentAssets

Short TermDebt

Long TermDebt

Equity

BALANCE SHEET EQUITY == MARKET VALUE OF THE COMPANY (VALUATION)

BALANCE SHEET EQUITY + Investments from outside + Retained Earnings (Cumulative earnings/losses)

ASSETS = DEBT + EQUITY

• EQUITY = ASSETS – DEBT• DEBT = ASSETS – EQUITY

“LEVERAGE” = DEBT / EQUITY

• Assets: things the company owns• Equity: ownership of the company (stock)• Debt: what the company owes (loans, bonds)


Park24 Comparative Balance Sheet

Current Assets

PP&E

Long-Term Assets

Intangible Assets

Total Assets

Investments

Current Liabilities

Long-Term Liabilities

Shareholder Equity

Retained Earnings

Common StockAdd’l Paid In Cap.Revaluation

AS OF DATE


Dupont Model

Net Income Sales Assets Net IncomeROE = x x =

Sales Assets Equity Equity

(ROS) (Turns)

ROA Leverage

Return on Equity = Return on Assets x Leverage (ROE) (ROA)

ROA = Net Income

Assets

DebtEquity

AssetsEquity

= 1 -


Finance Strategy Supports BusinessBusiness,TechnologyEnvironments

Opportunity Social,GovernmentEnvironments

BusinessStrategy

MarketingStrategy

OperationsStrategy• Organization• Human Resource• Production• R&D

FinanceStrategy • Leverage• Make/buy• Lease/own

Do strategies support, fit each other, have flexibility, balance/manage risk?

ROS ROA Leverage


Business Performance Ratios Allows to compare (like batting average)

to other “comparable” companies versus management expectations

Profit Margin (profit/net sales) Gross profit margin (sales – cost of sales) / sales Operating profit margin (operating income/ sales) Net profit margin [Return on Sales (ROS)] (net income/sales)

Asset Utilization (sales/assets) Inventory turnover (sales/inventory) Same-store sales (sales/same-store yr vs. yr.) Return on Assets (ROA)

Leverage (assets/debt, debt/equity) Return on Equity (ROE) = Net Income/Equity


Business Model + Business Strategy Strategy: Development, protection, adjustment of

business model over time

Plan for executing on Key Success Factors Goal: Sustainable Competitive Advantage

Profit Sales - Product Costs Units Overhead = x - Year Unit Year Year)(

Year 1, Year 2, Year 3…

Σ

Maximizing Net Present Value


Key Success Factors Key skills, functions, actions needed to maintain and

strengthen business model and strategy Subscriptions/Memberships

Get many members (acquisition effectiveness) Get members at low cost (acquisition efficiency) Keep members from leaving (retention rate) Increase spending per member (share of wallet)

Transaction-based Command above average pricing (value effectiveness) Lower product costs (production efficiency) Lower fixed overhead costs


iPhone & Apple

mac

iPod

Shuffle/nano/Intel chip


Apple Business Strategy 1995, 2005

1995: The Company designs, manufactures and markets microprocessor-based personal computers and related personal computing and communicating solutions for sale primarily to education, home, business and government customers. Substantially all of the Company's net sales to date have been derived from the sale of personal computers from its Apple Macintosh(registered trademark) line of computers and related software and peripherals. The Company operates in one principal industry segment across geographically diverse marketplaces.

2005: The Company is committed to bringing the best personal computing and music experience to students, educators, creative professionals, businesses, government agencies, and consumers through its innovative hardware, software, peripherals, services, and Internet offerings. The Company’s business strategy leverages its unique ability, through the design and development of its own operating system, hardware, and many software applications and technologies, to bring to its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design. The Company believes continual investment in research and development is critical to facilitate innovation of new and improved products and technologies. Besides updates to i

ts existing line of personal computers and related software, services, peripherals, and networking solutions, the Company continues to capitalize on the convergence of digital consumer electronics and the computer by creating innovations like the iPod and iTunes Music Store. The Company’s strategy also includes expanding its distribution network to effectively reach more of its targeted customers and provide them a high-quality sales and after-sales support experience.

Apple Annual Reports filed on form 10-K with SEC


Apple Product Mix Shift (2005 10k)

Sept. Fiscal Year


Venture Forecasting Issues Venture forecasts are inherently inaccurate

Little or no historical data or trends Expanding into new areas

Key: identify, model drivers accurately Renewal rates, advertising yield, production yield, What happens if basic assumptions change

Time


Money

Losses &Investments

Time


Money

Losses &Investments


Drucker on the Forecasting

Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.

未来について予言しようとするのは、夜の田舎道をライトなしで、後ろの窓を見て運転しようとするような事と同じである。


Pro-forma Statements Forecasts of Key Financial Statements

Income Statement, Balance Sheet Assumptions

Note pages provide very important information Discuss model assumptions, relationships

Run-rate Annualized business size at any given time 11 月 run-rate= 7,730 x 12 = 92,765


Forecast Income StatementSUPERIOR SOFT CORP. 2005

Price/ Unit 400Units Sold 10,000

Total Sales $4,000,000 100%

Cost of SalesMaterials Per/ unit 10 $100,000 3%Manufacturing Per/ unit 15 $150,000 4%Commissions Sales Price 10% $400,000 10%Shipping Per/ unit 8 $80,000 2%Total Cost of Sales $730,000 18%Gross Profit $3,270,000 82%

Operating CostsSalaries budget $800,000 20%R&D budget $500,000 13%Rents budget $100,000 3%Marketing budget $300,000 8%Other budget $100,000 3%Total Operating Costs $1,800,000 45%

Operating Profit $1,470,000 37%Non- Operating Costs $50,000 1%Pre- Tax Profit $1,420,000 36%Taxes Rate 30% 426,000 11%Net Income 994,000 25%


Sample Pro-Forma Cash Flow Forecast1月 2月 3月 4月 5月 6月 7月 8月 9月 10月 11月 12月 1年 2年 3年

Units Sold 10% 0 100 150 200 300 400 440 484 532 586 644 709 4,545 9,000 15,000Avg. Unit Price 10 10 10 10 10 12 12 12 12 12 12 12 11.7 12 12

Sales 0 1000 1500 2000 3000 4800 5280 5808 6389 7028 7730 8503 53,038 108,000 180,000Cost of Sales 60% 0 600 900 1200 1800 2880 3168 3485 3833 4217 4638 5102 31,823 64,800 108,000Gross Profit 0 400 600 800 1200 1920 2112 2323 2556 2811 3092 3401 21,215 43,200 72,000

SG&A 200 200 200 200 200 300 300 300 300 300 300 300 3,100 6,000 11,800R&D 500 600 400 400 300 300 300 300 300 300 300 400 4,400 8,300 16,000Marketing 10 50 50 600 600 600 800 800 600 600 400 400 5,510 11,010 21,970Depreciation 10 50 100 100 100 100 120 120 120 140 140 140 1,240 2,470 4,890Operating Profit (720) (500) (150) (500) 0 620 592 803 1236 1471 1952 2161 6,965 14,651 29,801

NonOper. Inc. 100 70 50 30 20 10 (20) 20 (50) 20 20 30 300 500 930Pretax Profit (620) (430) (100) (470) 20 630 572 823 1186 1491 1972 2191 7,265 15,151 30,731Taxes (lets assume no taxes) 0 0 0Net Income (620) (430) (100) (470) 20 630 572 823 1186 1491 1972 2191 7,265 15,151 30,731

Depreciation 10 50 100 100 100 100 120 120 120 140 140 140 1,240 2,470 4,890Capital Expend. 1000 1000 50 0 0 500 0 0 500 0 0 0 3,050 5,100 9,200

Cash Flow (1,610) (1,380) (50) (370) 120 230 692 943 806 1,631 2,112 2,331 5,455 12,521 26,421

Cumulative Cash (1,610) (2,990) (3,040) (3,410) (3,290) (3,060) (2,368) (1,425) (619) 1,012 3,124 5,455 5,455 17,976 44,398

total finance needed

Depreciation: accounting method to expense cost of an asset. “Non-cash” expense


Price Issues What does it cost to produce?

Cars, Soda, Computers Pharmaceuticals, Software

How much value does it have to customer? Does price fit with my positioning?

Irion furniture….


Price & Margin

Cost

Price to Channel

Price to customer

Price x Units=Sales

Margin x Units = Gross Profit


Model Driven Pro-Forma P&LMonth

Assumptions for Model ISP 1 2 3 4 5 6 7 8 9 10 11 12 Year 1

Past Members 0 333 650 951 1,403 1,833 2,241 2,796 3,323 3,823 4,299 4,751

3,000 acquisition cost New Members 333 333 333 500 500 500 667 667 667 667 667 667

5% attrition per month Lost Members 0 (17) (33) (48) (70) (92) (112) (140) (166) (191) (215) (238)

Total Members 333 650 951 1,403 1,833 2,241 2,796 3,323 3,823 4,299 4,751 5,180 5,180

Fee/Member 2,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000

Member Revenue 666,667 1,950,000 2,852,500 4,209,875 5,499,381 6,724,412 8,388,192 9,968,782 11,470,343 12,896,826 14,251,984 15,539,385 94,418,347

1,000,000 each 1,000 members Ad Revenue 0 0 0 0 1,000,000 1,000,000 2,000,000 2,000,000 3,000,000 3,000,000 4,000,000 4,000,000 20,000,000

Total Revenue 666,667 1,950,000 2,852,500 4,209,875 6,499,381 7,724,412 10,388,192 11,968,782 14,470,343 15,896,826 18,251,984 19,539,385 114,418,347

Support

1 per 100 members # of Staff 3 7 10 14 18 22 28 33 38 43 48 52 52

200,000 per staff Cost/Support 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000

Staff Salary 666,667 1,300,000 1,901,667 2,806,583 3,666,254 4,482,941 5,592,128 6,645,855 7,646,895 8,597,884 9,501,323 10,359,590 63,167,787

budget Marketing 1,000,000 1,000,000 1,000,000 1,500,000 1,500,000 1,500,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 19,500,000

budget R&D 800,000 800,000 800,000 800,000 800,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 12,400,000

budget SG&A 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 12,000,000

Operating Exp. 3,466,667 4,100,000 4,701,667 6,106,583 6,966,254 8,182,941 9,792,128 10,845,855 11,846,895 12,797,884 13,701,323 14,559,590 107,067,787

Operating Profit (2,800,000) (2,150,000) (1,849,167) (1,896,708) (466,873) (458,529) 596,064 1,122,927 2,623,448 3,098,942 4,550,661 4,979,795 7,350,560

Strategy Implication: Get More Members Sooner


Breakeven

Time


Money

Losses &Investments

Time


Money

Losses &Investments

Breakeven

How much does company need to sell to cover its costs

Revenue = Costs Profit/loss = 0


Variable & Fixed Costs Variable Costs:

Increases directly with each product sold (volume) Materials, parts, production, commission, shipping

Fixed Costs Does not change with volume (# of units) produced Management salaries, rent, R&D, buildings, equipment,

marketing Breakeven

# units sold x contribution per unit = fixed costs After breakeven, contribution becomes profit


Contribution = Revenue – Variable Costs

Cost

Price to Channel

Price to customer

Variable Cost


Breakeven ExamplesSoftware Software Computer Computer

Unit Price $400 $200 $400 $500

Cost of SalesMaterials $1 $1 $200 $200Manufacturing $10 $10 $100 $100Packaging $20 $20 $20 $20Commissions $20 $20 $10 $10Shipping $10 $10 $30 $30Total Cost of Sales $61 15% $61 31% $360 90% $360 72%

Contribution $339 85% $139 70% $40 10% $140 28%

Fixed CostsSalaries $1,000,000 $1,000,000 $1,000,000 $1,000,000R&D $500,000 $500,000 $100,000 $100,000Rents $100,000 $100,000 $100,000 $100,000Marketing $300,000 $300,000 $300,000 $300,000Other $100,000 $100,000 $100,000 $100,000Total Fixed Costs $2,000,000 $2,000,000 $1,600,000 $1,600,000

Total Fixed Costs $2,000,000 $2,000,000 $1,600,000 $1,600,000Contribution $339 $139 $40 $140Breakeven Units 5,900 14,388 40,000 11,429


Using Breakeven Sense of risk How many customers do I need?

Compare to market size Compare to market share

Is my pricing right? Are my costs too high?


Suggested Readings Books WWW

nikkei.co.jp Nihon Keizai Shimbun economist.com Economist Magazine (UK) bloomberg.co.jp kyodo.co.jp Dhbr.net

AVB II 2006 Jay A. Smith 1 Classes 8-9 Project Review & Finance for Venture Business.

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Transcript of AVB II 2006 Jay A. Smith 1 Classes 8-9 Project Review & Finance for Venture Business.