Entrepreneurial Financial Management

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.

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 F