Entrepreneurial Financial Management: An Applied Approach, 5th Edition (Paperback) book cover

Entrepreneurial Financial Management

An Applied Approach, 5th Edition

By Jeffrey R. Cornwall, David O. Vang, Jean M. Hartman

Routledge

228 pages | 19 B/W Illus.

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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

About the Authors

Jeffrey R. Cornwall is the inaugural recipient of the Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tennessee. He has a DBA and an MBA from the University of Kentucky.

David O. Vang is a professor of finance in the Opus College of Business at the University of St. Thomas in St. Paul, Minnesota.

Jean M. Hartman holds a BA in business administration and accounting from Southwest Minnesota State University and an MBA from the University of St. Thomas. She is a certified public accountant.

Subject Categories

BISAC Subject Codes/Headings:
BUS000000
BUSINESS & ECONOMICS / General
BUS025000
BUSINESS & ECONOMICS / Entrepreneurship
BUS027000
BUSINESS & ECONOMICS / Finance