LAURENCE A. BAIADA CENTER

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Incubating Ideas Entrepreneurs Companies
Session 3 - 2008
LAURENCE A. BAIADA CENTER FOR ENTREPRENEURSHIP
IN TECHNOLOGY 3225 Arch Street Philadelphia, PA
19104-2875 www.lebow.drexel.edu/baiadacenter
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Agenda

• Revenue models
• Preparing your financials
• Income statement
• Balance sheet
• Cash flow statement

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Revenue Models
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Issues

• Pricing strategy/Revenue model
• Prices/Forecasting revenue

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Pricing Strategy/Revenue Model

• Marketing objectives
• Target market
• Positioning
• Marketing mix
• Product
• Place
• Promotion
• PRICE

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Pricing Strategy/Revenue Model

• Market and demand
• Perceptions of price and value
• Competitors pricing strategies

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Pricing Strategies

• Cost-based pricing
• Target profit pricing
• Value pricing
• Competition-based pricing
• Market-skimming pricing
• Market-penetration pricing

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Revenue Models

• Units
• Product-based company
• Subscriptions/usage/recurring fees
• On-line companies, publishers
• Licenses and Royalties
• Pharmaceuticals, franchises, fashion
• Project-based
• Consultants

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Pricing

• Considerations
• Cover your costs
• Price to sell
• Willingness to pay
• Margin to reseller (distributor, retailer)
• Cash flow

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Pricing

• The lowest price you can charge is what your
  costs are
• The highest price you can charge is the maximum
  anyone is willing to pay
• You need to determine where you will fall

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Architectural Accessories

• What pricing strategy should we use?
• What revenue model should we use?

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Preparing your financials
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Why do you need financials?

• Investors use them
• Helps you plan and run your business
• Platform for setting goals and objectives

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What do you need?

• Income statement
• Balance sheet
• Cash flow statement

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Income Statement

• Also called
• Profit and Loss (PL)
• Operations Statement
• Shows profitability over a period of time
• Monthly
• Quarterly
• Annually
• Shows your companys performance in both revenue
  and expenses

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Key Sections

• Revenue
• Cost of goods, cost of sales, cost of revenues
• Gross profit, gross margin
• Expenses
• Selling, general, and administrative
• RD, engineering
• Interest
• Depreciation
• Net income
• EBITDA

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Sample 1
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Sample 2
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Architectural Accessories

• How granular do we want to get in our revenue
  tracking?
• Total number of units?
• Indoor vs. outdoor?
• Each individual category within indoor/outdoor?

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Architectural Accessories

• What might our cost elements be?

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Balance Sheet

• Snapshot at one point in time
• Shows companys financial condition

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Key Sections

• Assets
• Current
• Cash
• Accounts receivable
• Inventory
• Property, plant, and equipment
• Liabilities
• Current liabilities
• Accounts payable
• Accrued expenses
• Current portion of long-term debt
• Long term debt
• Owners equity

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Accounting Equation
Assets Liabilities
Owners Equity Things of value Debts and
Difference between a
firm owns Obligations
assets and liabilities
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Sample
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Architectural Accessories

• How much cash should we maintain?
• What will our terms of payment be?
• What inventory levels should we maintain?
• What will be our policy in accounts payable?
• Will we take on bank or other debt? What will be
  the terms of repayment?
• What hard assets will we need to purchase? How
  will they be depreciated?
• Will we pay dividends to stockholders?

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Cash Flow Statement

• Shows how cash changed from beginning of
  accounting period to the end of it
• Three categories
• Cash from (used for) operating activities
• Cash from (used for) investing activities
• Cash from (used for) financing activities

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Sample
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Architectural Accessories

• Are we going to receive significant inflows of
  cash from financing activities? When will they
  show up? How much will it be?
• When will we need to make investments in capital
  assets? How much will it be?

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Preparing Pro Formas

• Answer these questions
• What profit can the business earn?
• What sales level must be achieved?
• What assets must be owned?
• What liabilities will be incurred?

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Financial Aspects of Launching a Business

• Determine the amount of funds required to begin
  operations
• Estimate the amount of money needed to get
  through growth period
• Cover all start-up costs
• Maintain a reserve until profits begin

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Cautions

• Dont be overly optimistic
• Expenses will be greater than revenues at the
  beginning
• Losses can last months, sometimes years
• Make sure you can meet all your expenses,
  including personal ones, and be able to maintain
  inventories

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How do you do this?

• Projecting financials
• Top down
• Bottom up
• Bottom up method
• Set a profit goal
• Determine sales level required
• Compare against marketing plan to determine if it
  is realistic and achievable

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Theres more

• Develop and document all your assumptions
• Unit sales
• Profit margins
• Interest rates
• Project the key items in income statement based
  on rate of growth
• Project other items in relation to the key items

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Presenting your Financials

• Monthly for first year
• Quarterly for second year
• Annually after that
• Investors look for 3 to 5 years of projections