- Quantitative representation of your strategy
- Capex (Capital Expenditures)
- Necessary equipment
- Opex (Operating Budgets)
Questions to ask
- What must the entity have?
- Can the entity afford it?
- Is it worth it?
- Proforma (or projections) profit and loss, balance sheet and a cash budget
- Starts with Sales Forecast
- You should have 3 scenarios to project
- Supporting data strengthens projection
- Similar to Cash Flow Statement
- Except that Cash Budget has a Minimum desired cash periodically
- The problem with keeping too much cash in the vault is that is earns no interest
- Cash is an asset and it should perform
- Have a petty cash for available cash
- The ending cash of the previous month is the beginning cash of the next month
- To lessen deficit, choose cash-paying customers; buy raw materials on credit
- Prepaid cards = deferred revenue
- Churn: those who don’t pay their postpaid; bad debts
- Think of non-interest bearing options
Cost-Volume-Profit Analysis (CVP)
- When incurring cost or expense, you are actually buying, consuming a resource
- People Resource
- Physical Resource
- Process Resource (systems, processes)
- Financial Resource (interests, dividends)
- Efficiency in using a resource must mean lesser cost for the same amount of output
- Increase revenue
- Reduce cost
- In a factory setting
- Production volume must be higher than sales volume
- Variable Cost: behavior is based on Volume; avoidable
- Fixed Cost: unavoidable
- Semi-Variable or Mixed Cost: e.g., Utilities
- As startup, choose more of variable costs than fixed costs
How can cost increase profit
Full Cost = Unit Variable Cost + Unit Fixed Cost
At per unit, Variable is constant; Fixed goes down.
Economies of Scale
- The more units, the lower the fixed cost
- High volume will drive bigger profit margin
- The difference between sales and total variable costs
- or difference between selling price and unit variable cost
- Upsizing drinks gives higher contribution margin
- Find the volume that gives the biggest contribution margin
- When Total Contribution Margin = Fixed Cost
- The higher the BEP, the lower the margin of safety
- Lower your Break-Even point so that your profit margin is higher
- The space in your operation when you will start making profit
- Not all volume sales deserves a discount; calculate your Break-Even Point (Quantity / Volume)
Instead of offering at a discount / lower price, add value in your product.
(50,000 salary / .40 Break-Even Margin) = 125,000 Additional Sales to be met in order to accommodate the salary of the new person
Valuation Methods for Start-Up Companies
Prof. Richard Cruz
- Stock Market
- Exit Strategy or Liquidity Even – put timeline on it; Growth and Maturity Stage of the Funding Lifecycle
- When investors invest and the investment is cash for you to sell your shares
- Acquisition as Exit Strategy
- Align the strategy to be attractive to the target acquirer
- Options as a real driver of the valuation: you give options for the acquirer to grow their business when they acquire you
- How much money do you need for investment? Just the right amount to take you to the next milestone.
Example: Initially you need 2M to get to next milestone. Investor gave you 2M, how much shares will you give the investor?
- Post-money: 4M; 50% yours, 50% investor’s
- So to increase your share (and to lower the investor’s), either increase your pre-money and ask for small money or show a big valuation in the future
At least 50% annually rate of return is ok for investors.
Determine the valuation so that you will know the share of the investor in a 50% rate of return.
Show a 5-year financial forecast showing the return for the investor
The Berkus Method
The Risk Factor Summation Method
The Scorecard Valuation Method