5th Edition

Entrepreneurial Financial Management An Applied Approach

    346 Pages 19 B/W Illustrations
    by Routledge

    346 Pages 19 B/W Illustrations
    by Routledge

    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.

    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

    Biography

    Jeffrey R. Cornwall is the inaugural recipient of the Jack C. Massey Chair and professor of 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.