avb ii 2006 jay a. smith 1 classes 8-9 project review & finance for venture business
TRANSCRIPT
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
www.venturesmith.us
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Announcements 2006 Business Plan Competition Prize Student Plans/Marketing Review Articles Finance Review Assignment
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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
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AVB I team
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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
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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?
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Venture Companies Need Financing
Time
PotentialProfitReward
Money
Losses &Investments
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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
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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
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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)
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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
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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.”
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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
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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)
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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%
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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
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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%
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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
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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)
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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
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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 -
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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
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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
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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
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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
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iPhone & Apple
mac
iPod
Shuffle/nano/Intel chip
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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
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Apple Product Mix Shift (2005 10k)
Sept. Fiscal Year
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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
PotentialProfitReward
Money
Losses &Investments
Time
PotentialProfitReward
Money
Losses &Investments
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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。
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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
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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%
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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
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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….
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Price & Margin
Cost
Price to Channel
Price to customer
Price x Units=Sales
Margin x Units = Gross Profit
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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
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Breakeven
Time
PotentialProfitReward
Money
Losses &Investments
Time
PotentialProfitReward
Money
Losses &Investments
Breakeven
How much does company need to sell to cover its costs
Revenue = Costs Profit/loss = 0
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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
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Contribution = Revenue – Variable Costs
Cost
Price to Channel
Price to customer
Variable Cost
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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
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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?
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Suggested Readings Books WWW
nikkei.co.jp Nihon Keizai Shimbun economist.com Economist Magazine (UK) bloomberg.co.jp kyodo.co.jp Dhbr.net