Schedule

The schedule from the first half of the course is here
 

Objectives:

• Know how a cash budget is constructed, how it is used, and how it links to the income statement and the balance sheet.
• Understand how working capital affects the financial health of a growing business.
• Understand how a good spreadsheet model is constructed and formatted.

Materials:

Slides for this section
Tyler Paints spreadsheet setup
Tyler Paints finished model
Working Capital illustrative spreadsheet
CFO Magazine's 2006 working capital survey article
Associated PDF with the results for 2005
EVA Example Spreadsheet
CFO Magazine Cash Management Survey Article
    Spreadsheet from the article

Recorded audio from 03/21 Oxford class: Part 1  Part 2
Recorded audio from 03/28 Oxford class: Part 1   Part 2 (ran out of room before end)

Related Links, Materials, and Assignments:

Read and Work Problems:

In Smart, read Chapter 21 and do ALL of the problems. My spreadsheet solutions are here. The authors' solutions are here.

Also read Chapter 22 Section 1 only, and do problems 1,2,6,8-11. The authors' solutions are here.

Optional: If you are still a bit fuzzy, read this supplemental material (same stuff - different book).

Cash Budgeting with Simulation: Read this interesting article on how to put spreadsheet technology to good use in forecasting cash budgets for new ventures.

The future of spreadsheets -- Free alternatives to MS:

http://docs.google.com 
www.zoho.com
www.numsum.com
www.thinkfree.com

Assignment:

Create a cash budget MODEL for your business. Your model needs to list all input assumptions with appropriate justifications. All inputs must be able to be changed from one location. For this first-round part of the analysis you can set the inputs to your base-case (most likely) assumptions. Submit your cash budget in electronic format via email by class time by class time on April 4.

Project Update:

At this point, your marketing plan should be completed. If it isn't, you need to complete it immediately. Further refinement will be acceptable, but you won't have time to work on it much after this. Now you need to build the financial statements.

Start by building a cash budget MODEL. Think about all of the input assumptions concerning revenues (based on your marketing plan's sales forecast) and expenses and set up an entry page in your model for these inputs. Think about which expenses will be related to sales in the short and the long run. Build your cash budget from your inputs. Don't forget about start-up costs. The cash budget needs to be monthly for at least three years, but five is better. Think about all the things that might happen in five years. Your model needs to be able to handle ALL of those contingencies. Think about best-case, expected-case, worst-case scenarios and make sure your model can handle those scenarios. Be sure to include ALL expenses including taxes, insurance, utilities, phones, etc. Be very thorough. Also think about how these expenses will change as the company grows and changes. Pay particular attention to employee costs.

Build your cash budget model RIGHT in the beginning. This will save you a LOT of grief later and greatly improve your planning. Remember two things in setting up your model: (1) I am going to have to read it and have some idea how it works, and (2) you are going to have to print it so it can be included in your written business plan. That means that running 5 years of monthly numbers on one page in the spreadsheet won't work. It has to be broken up into annual pages at least. It also means that it needs to be clearly annotated, easy to use, and well formatted. Good formatting means it looks like you would expect a professional financial report to look.

In the first pass of your cash budget, don't assume any particular type of financing. Just let your cumulative cash deficit or surplus run. Also, do not assume any dividends to shareholders/owners but do include salaries for the active managers (you). Even though you are assuming these items are zero, you will need to build your model to include interest payments and dividend payments so you can add these later.

When you have completed the cash budget model, use it to conduct sensitivity and scenario analysis to test your best/expected/worse case assumptions. The results should show you how much external financing you will need and for how long.

Now build your income statements from your cash budget. This needs to be part of the same MODEL, since the income statements will depend on the settings of the inputs for the cash budget. It is easiest to build the income statements on a monthly basis since that is how the cash budget was constructed. Most of the line items in the income statement will come directly from the cash budget.

Then build the balance sheets, also as part of the same model. Balance sheet items will also depend on what is already in the cash budget and the income statements. As with the income statements, it is easiest to do the balance sheets on a monthly basis. Many items (sales, accounts receivable, inventory, accounts payable, cash) will depend directly on the cash budget and the income statement. Others will depend on your financing plan (loans, equity investors, dividends, etc.)

The final piece in the process will be to add risk analysis to assess the impact of changes in major assumptions. This will be done using scenario analysis in Excel.

CF 21
CF 22.1

WCBP 10

Objectives:

• Know how to project pro-forma statements using the percent-of-sales method.
• Begin to discuss risk in a spreadsheet model.

Materials:

We will work through this problem using a spreadsheet model. The solution to the problem is here.

Valuation introduction (material will be added)
Valuation example is here.

If you need a refresher on account statements and their contents (or even if you think you don't need it), read this excellent article by Aswath Damodaran.

Related articles:

Read this great set of articles from the January 2006 Inc. Magazine special report: The Definitive Valuation Guide, including What's Your Company Worth Now? and Judgment Day.

Read about famous value bubbles and crashes here.

Assignment:

Take your cash budget model and extend it to include pro-forma income statements and balance sheets. The resulting model should be accurate, easy to use, and professional in appearance. This assignment is due by class time next Wednesday in electronic format (email).
 

Notes on leverage
Notes on equity issues
Notes on debt issues
     Financial Leverage Example
     Capital Structure Example
Notes on venture capital
      Risk Analysis in Excel

Note on Tax Loss Carryforwards

Wrapping up the Business Plan

Related Links:

Hoover's IPO Central
Google's post-IPO performance
National Association of SBICs

Assigned Reading:

Chapter 11 (Read for basic overview only)
Chapter 16 and 17/1-17.4 NO MATH
Chapter 26 which is available here. (Read for a basic overview only. What we need most was covered in the presentation.)

For these chapters, concentrate the most on what was covered in the presentations.

Articles:

The True Costs of Raising Money
What Investors Look for in a Plan

Links (a few of many) for Venture Capital Sources:

Idea Cafe
Garage.com
National Venture Capital Association
Capital Connection's Venture Capital News

Also see the Venture Capital Directory at VC Marketplace and vFinance and the great information on raising start-up capital at Inc.com. Also, check the comprehensive list of links at Entrepreneur.com.

Links for information on IPOs:

Hoover's IPO Central
SEC-EDGAR IPO Portal

Other Links:

1999 article on Wit Capital

CF 11,16,17,26

WCBP 11

Work Week -- No Class

Work on finishing your business plan and presentation.

Assignment:

Submit two copies of the final business plan and a CD with all materials, including the presentation, by 5:00 PM on May 1. Note that no changes can be made to the materials after submission.

Business Plan Presentations:

Presentations will be conducted in Conner 110 from 1:00 PM until ...,. You are required to be present for all presentations.

Each group will have a MAXIMUM of 15.000000 minutes for the prepared presentation. This time limit will be strictly enforced. This will be followed by up to 10 minutes of questions from your  instructors and classmates.

Example professor evaluation forms for entire business plan project
 

Other pointers for write-up:

Your final plan should be all in Word. Any material that was done in Excel should be incorporated in the Word document in such a way that it will print on 8.5x11 paper. That is, embed images of your spreadsheets and graphs in the document. Landscape formatting is OK. Deliver your spreadsheet model and your presentation slides on CD with the write-up.

It is best not to justify the right margins in Word documents unless you hyphenate. Word leaves big white spaces all over the document it you justify the right side and don't hyphenate. Left justification is fine.

Remember that a sizable portion of your project grade depends on the professionalism of your presentation and your write-up. Appearance has a lot to do with professionalism, as does spelling, punctuation, and grammar.

Sample instructor evaluation Forms for the write-up and presentation:

Note: These are provided as examples only. The actual content of the forms used for your project may vary from these examples.

Dr. Sloan's Write-up Evaluation Form

Dr. Hawley's Write-up Evaluation Form

Dr. Hawley's Presentation Evaluation Form

Exam 2  -- Finance

May 10 - 1:00 PM

Additional information concerning the exam:

• You will need a calculator, a pencil, and a Scan-Tron answer sheet.

• You may have one 3x5 card with anything on it you would like -- two sides, one layer, and you can't bring a magnifying glass.

• You will have up to three hours for the exam.

• The exam consists of multiple choice questions, true/false questions, short essay questions, and problems.

• The main problem (40% of total points) will be an integrated cash budget, income statement, balance sheet problem similar to your assignment. This will be constructed so you will not have to produce a large multi-month set of statements from scratch, but rather will cover a short time period and have some setup and figures already present. Partial credit will be given.

• The multiple choice and true false questions will be taken primarily from (in order of concentration) material discussed directly in class, assigned chapters from your main text and associated end-of-chapter problems, and other assigned readings. Coverage is spread relatively evenly over the main topic areas listed in this schedule, including types of business structures (from my early class session at the beginning of the semester), cash budgeting and planning, working capital management, and targeting financing sources and acquiring capital.

Please feel free to bring a soft drink and snack.