Entrepreneurial Financial Management : An Applied Approach

by Cornwall, Jeffrey R.; Vang, David; Hartman, Jean

• ISBN13: 9780130094117
• ISBN10: 0130094110
• Edition: 1st
• Format: Hardcover
• Copyright: 2004-01-01
• Publisher: Pearson College Div

Summary

Entrepreneurial Financial Management: An Applied Approach is the first book on the market to approach this subject area from an integrated, comprehensive perspective. It offers an applied, realistic view of entrepreneurial finance for today's entrepreneurs. It provides an integrated set of concepts and applications, drawing from entrepreneurship, finance, and accounting, that will prepare aspiring entrepreneurs for the world they will face as they start their new businesses. Although venture capital and public offerings are covered, they are placed in their proper perspective. As Entrepreneurial Financial Management: An Applied Approach is based on practical experience and informed by theory, it could soon become a standard for the emerging area of entrepreneurial finance within entrepreneurship education. KEY FEATURES New Venture Life Cycle Model: The structure of the book follows the life cycle of a new business venture. Topics are presented in the order that an entrepreneur would likely face them as in the process of business start-up and growing the business. Bootstrapping: Chapter 8, "Internal Sources of Funds: Bootstrapping Techniques," provides detailed information and techniques for bootstrapping new businesses. Most entrepreneurs learn that they must find creative methods for getting more bang for their buck, as they rarely have access to unlimited funds. Computer Spreadsheet Financial Template: A comprehensive computer spreadsheet financial template is included on the book's Web site. This tool allows for the application of many of the concepts to actual businesses. The tool can supplement the process of developing a full business plan. "In Their Own Words..." Boxes: These boxes give a comprehensive view of funding sources with discussions on how an entrepreneur works with each type of funding source. They include interviews with many of the funding sources available. Self-Assessment: A self-assessment is included to assist student entrepreneurs in integrating their personal aspirations into their financial and business plans. Opportunities for Application: Most chapters have a list of ideas and assignments that encourage the reader to apply the concepts from the chapter through experiential and active learning. Students and professors who use the book can visit the Web site for resources at www.prenhall.com/cornwall.

Table of Contents

Introduction	1	(12)
Importance of Knowing the Numbers	1	(1)
Measuring Success	2	(1)
What Is Entrepreneurial Financial Management?	3	(1)
What Makes Entrepreneurial Finance Similar to Traditional Finance?	4	(1)
What Makes Entrepreneurial Finance Different from Traditional Finance?	5	(4)
Lack of Historical Data to Measure Risk	6	(1)
Traditional Financial Concepts of Risk and Return	6	(3)
Lack of Historical Data and Liquidity Complicate the Practice of Finance in Early-Stage Firms	9	(1)
Ethics and Entrepreneurial Finance	9	(3)
Summary	12	(1)
Discussion Questions	12	(1)
Opportunity for Application	12	(1)
References	12	(1)
PART I: BUILDING A FINANCIAL FORECAST	13	(96)
Setting Financial Goals	13	(13)
Wealth verses Income	13	(3)
Integrating Nonfinancial Goals	16	(1)
Importance of Self-Assessment	17	(2)
The Self-Assessment Process	19	(1)
The Business Plan	20	(2)
Summary	22	(1)
Discussion Questions	22	(1)
Opportunity for Application	22	(1)
References	22	(1)
Appendix: University of St. Thomas Enterpreneurial Self-Assessment	23	(3)
Understanding Financial Statements	26	(22)
The Accounting Equation	26	(1)
An Example	27	(12)
Basic Financial Statements	39	(2)
Income Statement	39	(1)
Balance Sheet	40	(1)
Assets	41	(2)
Liabilities	43	(1)
Owners' Equity	44	(1)
Limitations of Business Financial Statements	45	(1)
Summary	45	(1)
Discussion Questions	45	(1)
Opportunities for Application	46	(2)
Revenue Forecasting	48	(19)
Common Forecasting Mistakes	48	(2)
The Link Between the Marketing Plan and Revenue Forecasts	50	(2)
Creating Scenarios	52	(1)
The Link Between the Revenue Forecast and the Cash Flow Forecast	53	(1)
The Impact of Business Type on Revenues	54	(6)
Manufacturing Firms	54	(1)
Service Firms	55	(2)
Recurring Revenue Firms	57	(2)
Commission-Based Selling Firms	59	(1)
Cyclical or Seasonal Sales Firms	60	(1)
Quantitative Forecasting Techniques	60	(1)
Importance of Revenue Forecasting	61	(3)
Summary	64	(1)
Discussion Questions	64	(1)
Opportunities for Application	65	(2)
Expense Forecasting	67	(14)
Defining Costs	67	(1)
Cost Behavior	68	(4)
Variable Costs	68	(1)
Fixed Costs	69	(2)
Mixed Costs	71	(1)
Breakeven Analysis	72	(1)
Expense Forecasting---The Impact of Business Type on Expenses	73	(5)
Manufacturing Firms	73	(1)
Service Firms	74	(1)
Recurring Revenue Firms	75	(1)
Commission-Based Sales Firms	76	(1)
Cyclical or Seasonal Firms	77	(1)
Reducing Expenses Through Bootstrapping	78	(1)
Summary	79	(1)
Discussion Questions	79	(1)
Opportunities for Application	79	(2)
Integrated Financial Model	81	(28)
The Entrepreneur's Aspirations Reconsidered	81	(1)
Contribution Format Income Statement	82	(1)
Earnings Before Interest and Taxes (EBIT)	82	(1)
Inventory of Assumptions	83	(1)
Determining the Amount of Funds Needed	84	(1)
Using the Forecasting Template to Determine the Amount of Funds Needed	85	(1)
Time Out of Cash	86	(1)
Assessment of Risk/Sensitivity	86	(1)
Integrating into Business Plan/Funding Document	87	(4)
Summary	91	(1)
Appendix: Integrated Financial Statements Template Instructions	91	(18)
PART II: MANAGING THE FINANCIAL RESOURCES OF A VENTURE	109	(144)
Monitoring Financial Performance	109	(17)
Tracking Assumptions	110	(1)
Establishing Milestones	111	(1)
Getting the Numbers Needed to Manage	112	(1)
Using Numbers to Manage	113	(9)
Financial Statement Analysis	113	(2)
Ratio Analysis	115	(7)
Working with Accountants	122	(2)
Summary	124	(1)
Discussion Questions	124	(1)
Opportunities for Application	124	(1)
References	125	(1)
Internal Sources of Funds: Bootstrapping Techniques	126	(20)
Why Bootstrap?	127	(1)
Bootstrap Marketing	128	(1)
The Basic Bootstrap Marketing Tools	129	(5)
The Power of the Business Card	130	(1)
Brochures	131	(2)
Banners, Signs, and Trade Show Displays	133	(1)
Newsletters	133	(1)
Other Basic Marketing Tools	134	(1)
Bootstrap Target Marketing Techniques	134	(2)
Direct Mailing/E-Mailing	134	(1)
Other Bootstrap Target Marketing Tools	135	(1)
Bootstrap Advertising	136	(2)
Yellow Pages	136	(1)
Newspaper and Magazine Ads	137	(1)
Radio	137	(1)
Television	137	(1)
Publicity	138	(1)
Human Resource Management	138	(2)
Independent Contractors	138	(1)
Employee Leasing and Temporary Employees	139	(1)
Student Interns	139	(1)
Equity Compensation	139	(1)
Nonmonetary Benefits	139	(1)
Administrative Overhead	140	(2)
Space	140	(1)
Furnishings and Office Equipment	141	(1)
Administrative Salaries	142	(1)
Production, Operations, and Inventory Bootstrapping	142	(1)
The Ethics of Bootstrapping	143	(1)
Summary	144	(1)
Discussion Questions	144	(1)
Opportunities for Application	145	(1)
References	145	(1)
Day-to-Day Cash Flow Management and Forecasting	146	(15)
Why Is Cash Flow Different from Net Income?	146	(1)
How Is Cash Flow Measured?	147	(3)
Interpreting a Statement of Cash Flows	150	(2)
Statement of Cash Flows---Indirect Method	152	(2)
Investors' and Creditors' Use of the Cash Flow Statement	154	(1)
Effective Cash Management	155	(3)
The Emotional Side of Cash Flow Management	158	(1)
Summary	159	(1)
Discussion Questions	160	(1)
Opportunities for Application	160	(1)
Reference	160	(1)
External Sources of Funds: Debt	161	(18)
Short-Term Debt	161	(7)
Trade Credit	162	(1)
Institutional Creditors	163	(1)
Banks	164	(2)
Asset-Based Lenders	166	(1)
Factors	166	(2)
Long-Term Debt	168	(2)
Banks	169	(1)
Leasing Companies	169	(1)
Real Estate Lenders	169	(1)
Forms of Debt Overlooked by Entrepreneurs	170	(1)
Government Funding Through SBA	170	(2)
Working with Bankers	172	(5)
Initial Contact with Bankers	174	(1)
Preparation of Key Loan Documents	175	(1)
Ongoing Communication After Loan Is Made	176	(1)
The Downside of Debt	177	(1)
Summary	177	(1)
Discussion Questions	178	(1)
Opportunities for Application	178	(1)
Reference	178	(1)
External Sources of Funds: Equity	179	(15)
Funding from the Entrepreneur	180	(1)
Family and Friends	180	(1)
Strategic Partners	181	(1)
Angel Investors	182	(3)
Private Placement	185	(1)
SBICs	186	(1)
The Downside of Equity Financing	187	(1)
Working with Outside Investors	188	(2)
Business Plan	189	(1)
Confidentiality Agreement	189	(1)
Letter of Intent	190	(1)
Modifications of Shareholder Agreements	190	(1)
Developing a Financing Plan	190	(2)
Summary	192	(1)
Discussion Questions	192	(1)
Opportunities for Application	193	(1)
References	193	(1)
Financing the High-Growth Business	194	(16)
Integrating Profitability Expectations in the Business Plan	194	(2)
Stages of the Firm	196	(2)
Stages of Business Funding	198	(1)
The Dark Side of Venture Capital Financing	199	(1)
Initial Contact with a Venture Capitalist	200	(3)
Initial Public Offering (IPO)	203	(1)
Advantages of an IPO	203	(1)
Disadvantages of an IPO	203	(1)
The Process of the IPO	204	(4)
Step 1: Selecting an Investment Banking Firm	204	(2)
Step 2: The Decision to Underwrite or Not Underwrite	206	(1)
Step 3: Getting the Paperwork in Order and Certifying the Price of the Offering	206	(2)
Step 4: The Road Show	208	(1)
Step 5: Determine the Size of the Book	208	(1)
Step 6: The First Day of Trading	208	(1)
Summary	208	(1)
Discussion Questions	209	(1)
Opportunities for Application	209	(1)
References	209	(1)
PART III: PLANNING FOR THE ENTREPRENEUR'S TRANSITION 210
Business Valuation	210	(26)
General Concepts That Guide the Determination of Value	210	(5)
Fair Market Value	210	(2)
Going-Concern Value	212	(1)
Highest and Best Use	212	(1)
Future Benefits	212	(1)
Substitutes and Alternatives	213	(1)
Discounted Cash Flow Analysis	213	(1)
Objectivity	214	(1)
Basic Information Required for a Valuation	215	(2)
Discounted Cash Flow	217	(4)
Estimating a Firm's Cash Flow and Determining Its Value	221	(1)
Definition of Cash Flow	222	(1)
Estimating the Cash Flow for a Particular Year	222	(1)
An Example of Estimating Cash Flow Over a Six-Year Period	223	(6)
Summary of the Discounted Cash Flow Approach	229	(1)
Market Comparison Techniques and Their Drawbacks	229	(4)
Summary of the Market Comparison Approach	233	(1)
Discussion Questions	234	(1)
Opportunities for Application	234	(1)
References	235	(1)
Exit Planning	236	(17)
Self-Assessment Revisited	236	(2)
The Ethical Side of the Entrepreneur's Transition	238	(1)
A Model of Exit Planning	239	(3)
Manage Financial Statements	239	(2)
Conduct an External Audit	241	(1)
Develop a Business Plan for the Sale of the Business	241	(1)
Exit Options	242	(5)
Ownership Transfer	242	(2)
Partial or Transitional Transfer	244	(2)
Bankruptcy and Termination of Operations	246	(1)
The Process of Selling a Business	247	(2)
Post Exit Issues	249	(1)
Summary	250	(1)
Discussion Questions	250	(1)
Opportunities for Application	250	(1)
References	251	(2)
Index	253

Excerpts

Courses in entrepreneurial finance are expanding rapidly across the country. The traditional approach to presenting entrepreneurial finance has often tended to place too much attention on venture capital and initial public offerings. Less than 1 percent of new ventures should even consider these financing vehicles. Entrepreneurial finance is not just about raising money and creating financial statements. Entrepreneurial finance should be an integral part of the basic management of any new venture. Entrepreneurial Financial Management: An Applied Approachis written from an integrated, comprehensive perspective. The fundamental goal of this book is to present an applied, realistic view of entrepreneurial finance for today's entrepreneurs. This 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. Although venture capital and public offerings are covered in this book, they have been put in their proper perspective.Entrepreneurial Financial Managementis based on practical experience but is also informed by theory. The book is designed for applied and experientially based teaching strategies in entrepreneurial financial management. Each chapter has been written with the goal of facilitating application of its contents to real-life businesses. KEY FEATURES The structure of the book is designed to follow the life cycle of a new business venture. Topics are presented in the order that an entrepreneur would likely face them as they begin the process of business start-up and move into growing the business. Chapter 8 provides detailed information and techniques for bootstrapping new businesses. Most entrepreneurs learn that they must find creative methods for getting more "bang for their buck," as they rarely have access to unlimited funds. A comprehensive view of funding sources with discussion of how an entrepreneur works with each is presented in Chapters 10-12. Interviews with many of the funding sources are presented in "In Their Own Words . . ." boxes throughout these chapters. Numerous examples are presented throughout the text. A comprehensive computer spreadsheet financial template is available from the Companion Website. This tool allows many of the concepts to be applied to actual businesses. The tool can be a supplement to the process of developing a full business plan. Professors and students can access these resources from www.prenhall.com/cornwall . A self-assessment is included to assist student entrepreneurs in integrating their own personal aspirations into their financial and business plans. Opportunities for Application are included at the end of most chapters.