Essentials of Innovation & Entrepreneurship (EIE) - I PDF

Essentials of Innovation & Entrepreneurship (EIE) - I Module [M9]: Startup Finance Foundation – Part I  EIE – Part I You are Here ☺ 3  EIE – Part I Recap 2 1 4 4 3  EIE – Part I Recap s t...

Essentials of Innovation & Entrepreneurship (EIE) - I Module [M9]: Startup Finance Foundation – Part I  EIE – Part I You are Here ☺ 3  EIE – Part I Recap 2 1 4 4 3  EIE – Part I Recap s t ue Co a l V  EIE – Part I Finance for Startups – Why Care? "The biggest mistake founders make is ignoring their finances, thinking they can focus on it later. By then, it’s often too late." Paul Graham (Founder, Y Combinator) "Accounting is the language of business. If you are going to succeed in business, you have to understand the numbers." Warren Buffett (CEO, Berkshire Hathaway) “Money isn’t everything, but it’s right up there with oxygen.” Zig Ziglar  EIE – Part I Top 20 Reasons Startups Fail #2: ”Ran out of Cash” Source: CB Insights  EIE – Part I Importance of Finance for Founders Understanding key finance terms and metrics, Founders can make: informed decisions, plan for growth, and manage resources effectively Financial statements like the Income statement, Balance sheet, and Cash Flow statement help founders Track Performance, Forecast future needs, and avoid cash shortages Without a solid grasp of the financials, even a great product or idea will FAIL  EIE – Part I The Art of Startup Finance: Introduction (Kauffman Foundation, 2m) Video  EIE – Part I Cost, Price and Value Cost: Money value of resources required to produce something Price: Money to be paid, in order to get a product / service Value: is the utility of a product or service "Price is what you pay; Value is what you get” – Warren Buffett  EIE – Part I Cost, Price & Revenue Profit Is ‘Profit’ always a positive number? (Selling) Price What is ‘Revenue’? Cost Is ‘Price’ everything for customers?  EIE – Part I Cost, Price, Value Net Value of the Product Value (product/service) goes beyond the price … Profit Can ‘Net Value’ be negative? Total Value How do you increase the value (product/service)? of the Product Cost  EIE – Part I Startup Finance - Looking Beyond Numbers Critical knowledge that will help you go beyond numbers: * Decide with data * Manage Profitably * Chart your startup’s Growth  EIE – Part I Startup Finance Pyramid (5 Elements of Startup Finance) (Kauffman Foundation, 3m) What do numbers mean for my business? Do I understand how numbers are associated with my business model? Does my financial knowledge extend beyond the basics? Video  EIE – Part I Fundamental Accounting Equation Resources a company can put to work for the business Current Assets: cash, financial instruments (stocks, bonds, etc), inventories of raw materials, finished goods, money owed by customers for goods/service purchased (accounts receivables) Fixed Assets: Property, Plant, Equipment What you ‘own’ (capital contributed by Assets – Liability = Owner’s Equity owners + company’s total retained earnings) Debts to suppliers, creditors Includes funds owed to suppliers (accounts payable), loans, income taxes  EIE – Part I Key Terms Revenue: ❖ Money a company earns from selling its products before any expenses are deducted COGS (Cost of Goods Sold): ❖ Direct cost of producing the products a company sells (incl materials, labor & manufacturing) Gross Profit: ❖ Sales revenue less cost of good sold Gross Profit Margin: ❖ (Sales revenue – COGS) expressed as a percentage of revenue (indicator of gross profitability)  EIE – Part I Key Terms Operating Expense ❖ Ongoing costs a business incurs to run its operations (rent, salaries, utilities, marketing, etc; these do not include the cost of producing goods/COGS) Operating Profit ❖ Gross profit minus Operating Expenses Operating Profit Margin ❖ Operating Profit expressed as a percentage of Revenue (indicator of the profitability of company’s operating activities) Net Income (aka Net Earnings or Net Profits) ❖ Operating Profit minus (Taxes, Interest & other charges)  EIE – Part I Key Terms  EIE – Part I Key Terms Balance Sheet ❖ financial statement that shows a company’s assets, liabilities, and equity at a specific time. It provides a snapshot of the company’s financial health Income Statement ❖ also known as the Profit and Loss Statement, it shows a company’s revenues, expenses, and profit (or loss) over a period of time, such as a month or a year Cash Flow Statement ❖ Tracks the movement of cash in/out of a business; how much cash is available for operations, investing, and financing  EIE – Part I Revenue Model Revenue Model: how the firm generates revenue Examples: * Product sales, Subscription, Advertising, Transaction fee, etc  Example: ‘Stufone’ Centre for Innovation and Entrepreneurship (CIE)  EIE – Part I Example: ‘Stufone’ Let us build your startup financial acumen with a financial model Imagine you are building a new phone for students Let us call it Stufone Let us perform some simple financial projections before you build the Stufone (see the accompanying xlsx finanicial model; you can change/model various assumptions)  EIE – Part I Stufone – Sales Plan Sales Plan Source Q1 Q2 Q3 Q4 Year 1 Year 1 Year 1 Year 1 Customers Stufone-1 Input 0 6 8 9 Stufone-2 Input 0 4 5 6 Stufone-3 Input 0 3 4 5 Total Units 13 17 20 Product Sale Price (per unit) Stufone-1 Input ₹10,000 ₹10,000 ₹10,000 ₹10,000 Stufone-2 Input ₹12,000 ₹12,000 ₹12,000 ₹12,000 Stufone-3 Input ₹15,000 ₹15,000 ₹15,000 ₹15,000  EIE – Part I Stufone – Revenue Projections Sales Plan Source Q1 Q2 Q3 Q4 Year 1 Year 1 Year 1 Year 1 Customers Stufone-1 Input 0 6 8 9 Stufone-2 Input 0 4 5 6 Stufone-3 Input 0 3 4 5 Total Units 13 17 20 Product Sale Price (per unit) Stufone-1 Input ₹10,000 ₹10,000 ₹10,000 ₹10,000 Stufone-2 Input ₹12,000 ₹12,000 ₹12,000 ₹12,000 Stufone-3 Input ₹15,000 ₹15,000 ₹15,000 ₹15,000 Product Revenue Stufone-1 ₹0 ₹60,000 ₹80,000 ₹90,000 Stufone-2 ₹0 ₹48,000 ₹60,000 ₹72,000 Stufone-3 ₹0 ₹45,000 ₹60,000 ₹75,000 Total Product Revenue ₹0 ₹1,53,000 ₹2,00,000 ₹2,37,000  EIE – Part I Stufone – Cost of Goods Sold Cost of Goods Sold Source Q1 Q2 Q3 Q4 Year 1 Year 1 Year 1 Year 1 Unit Sales Stufone-1 Sales Plan 6 8 9 Stufone-2 Sales Plan 4 5 6 Stufone-3 Sales Plan 3 4 5 Total Units - 13 17 20 Product COGS Source Q1 Q2 Q3 Q4 Year 1 Year 1 Year 1 Year 1 COGS per Unit Stufone-1 Input ₹3,000 ₹3,000 ₹3,000 ₹3,000 Stufone-2 Input ₹4,000 ₹4,000 ₹4,000 ₹4,000 Stufone-3 Input ₹5,000 ₹5,000 ₹5,000 ₹5,000 Variable Cost Stufone-1 ₹0 ₹18,000 ₹24,000 ₹27,000 Stufone-2 ₹0 ₹16,000 ₹20,000 ₹24,000 Stufone-3 ₹0 ₹15,000 ₹20,000 ₹25,000 Total Variable Cost ₹0 ₹49,000 ₹64,000 ₹76,000  EIE – Part I Stufone – Cost of Goods Sold Cost of Goods Sold Source Q1 Q2 Q3 Q4 Year 1 Year 1 Year 1 Year 1 Unit Sales Stufone-1 Sales Plan 6 8 9 Stufone-2 Sales Plan 4 5 6 Stufone-3 Sales Plan 3 4 5 Total Units - 13 17 20 Product COGS Source Q1 Q2 Q3 Q4 Year 1 Year 1 Year 1 Year 1 COGS per Unit Stufone-1 Input ₹3,000 ₹3,000 ₹3,000 ₹3,000 Stufone-2 Input ₹4,000 ₹4,000 ₹4,000 ₹4,000 Stufone-3 Input ₹5,000 ₹5,000 ₹5,000 ₹5,000 Variable Cost Stufone-1 ₹0 ₹18,000 ₹24,000 ₹27,000 Stufone-2 ₹0 ₹16,000 ₹20,000 ₹24,000 Stufone-3 ₹0 ₹15,000 ₹20,000 ₹25,000 Total Variable Cost ₹0 ₹49,000 ₹64,000 ₹76,000 Product COGS Mfg Salaries from above ₹1,15,500 ₹1,15,500 ₹1,15,500 ₹1,15,500 Variable Costs from above ₹0 ₹49,000 ₹64,000 ₹76,000 Facilities ₹15,000 ₹15,000 ₹15,000 ₹15,000 Total Product COGS ₹1,30,500 ₹1,79,500 ₹1,94,500 ₹2,06,500  EIE – Part I Stufone – Profit and Loss (by Quarter) Profit & Loss by Qtr Source Q1 Q2 Q3 Q4 Year 1 Year 1 Year 1 Year 1 Revenue Product Revenue Sales Plan $ - $ 1,53,000 $ 2,00,000 $ 2,37,000 Total Revenue $ - $ 1,53,000 $ 2,00,000 $ 2,37,000 COGS Product COGS COGS $ 1,30,500 $ 1,79,500 $ 1,94,500 $ 2,06,500 Total COGS $ 1,30,500 $ 1,79,500 $ 1,94,500 $ 2,06,500 Gross Margin Product GM $ (1,30,500) $ (26,500) $ 5,500 $ 30,500 Total GM $ (1,30,500) $ (26,500) $ 5,500 $ 30,500 Expenses R&D Expenses $ 3,03,500 $ 3,27,500 $ 3,76,000 $ 4,43,500 Sales & Marketing Expenses $ 3,29,500 $ 3,54,500 $ 4,58,000 $ 5,33,000 General & Administration Expenses $ 3,23,200 $ 3,28,800 $ 3,36,200 $ 3,42,400 Operating Exp. $ 9,56,200 $ 10,10,800 $ 11,70,200 $ 13,18,900 Operating Profit $ (10,86,700) $ (10,37,300) $ (11,64,700) $ (12,88,400) Margins Operating Profit % n/a -678% -582% -544% Total Gross Margin % n/a -17% 3% 13%  EIE – Part I Stufone – Profit and Loss (by Year) Income Statement (Profit and Loss) Source Year 1 Year 2 Year 3 Year 4 Revenue Product Revenue P&L By Qtr ₹5,90,000 ₹76,96,500 100% ₹2,21,20,000 100% ₹4,53,10,000 100% Total Revenue ₹5,90,000 ₹76,96,500 100% ₹2,21,20,000 100% ₹4,53,10,000 100% COGS Product COGS P&L By Qtr ₹7,11,000 ₹34,77,250 ₹94,29,150 ₹1,77,49,550 Total COGS ₹7,11,000 121% ₹34,77,250 45% ₹94,29,150 43% ₹1,77,49,550 39% Gross Margin Product GM -₹1,21,000 ₹42,19,250 ₹1,26,90,850 ₹2,75,60,450 Total GM -₹1,21,000 -21% ₹42,19,250 55% ₹1,26,90,850 57% ₹2,75,60,450 61% Expenses R&D P&L By Qtr ₹14,50,500 246% ₹33,68,950 44% ₹52,04,650 24% ₹77,32,800 17% Sales & Marketing P&L By Qtr ₹16,75,000 284% ₹33,28,525 43% ₹68,06,575 31% ₹1,24,05,325 27% General & Administration P&L By Qtr ₹13,30,600 226% ₹20,21,100 26% ₹32,61,050 15% ₹44,01,750 10% Operating Exp. ₹44,56,100 755% ₹87,18,575 113% ₹1,52,72,275 69% ₹2,45,39,875 54% Operating Profit -₹45,77,100 -776% -₹44,99,325 -58% -₹25,81,425 -12% ₹30,20,575 7%  EIE – Part I Conclusion Finance knowledge is not just for Finance professionals but for every Startup Founder Finance savviness helps * Plan new ventures * Grow your business * Manage startup operations  EIE – Part I Activity-Revenue Streams (Team) Pick the right revenue stream for your startup: ⚬ Subscription, Usage, One-time (transaction cost), etc Estimate yearly revenue stream(s) for your startup for first 3 years  EIE – Part I Activity - Revenue Streams To start with, list the underlying assumptions. Estimate/calculate below (use MS Excel if needed): A: Number of units / users per unit time (per wk/month/quarter/year/etc) B: Price per unit / user C: At the simplest level, Revenue is A*B per unit time (say month)! D: From C, you can calculate revenue per quarter From D, you can calculate revenue per year (for Year1) (If any assumptions change (# of users, units, price, etc) you can calculate rev similarly for Year2, Year3, etc)  EIE – Part I Activity (Team) - Cost Estimate yearly cost for your startup for first 3 years To start with, list the underlying assumptions Estimate/calculate below (use MS Excel if needed): A. Operational costs Physical infrastructure (Office rentals, lab, factory, etc), Human resources (salary for people involved in ‘Key Activities’) Expenses related to Information Technology (laptop, Cloud, etc.)  EIE – Part I Activity (Team)- Cost B. Product/Service cost Cost incurred in building the product (unit cost * # of units) or service Cost incurred in delivering the product/service (channel, distribution, etc) Marketing costs associated with above C. Total Cost = A + B Create the (forecasted) Profit & Loss (P&L or income) statement Given the assumptions made, can this be a profitable enterprise? If yes, how long does it take to break even/make a profit? What decisions will you take based on these insights?  EIE – Part I Activity-Update BMC Update the BMC with approx. figures for Revenue and Cost By now, you should have a good handle on ⚬ Value Proposition, Customer Segments ⚬ Customer Relationship & Channel ⚬ Revenue and Cost Note: Above are assumptions for now ⚬ They need to be validated (explore interviewing potential users/customers) Optional: Use the available Financial Template to capture Revenue and Cost