entrepreneurial finance Exam 1 Chapters 1-5
proprietorship
A business firm owned by an individiaual who possesses the ownership right to the firm's profits and is personally liable for the firm's debts.
liquidity ratios
Financial ratios that measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due
Limited liability company (LLC)
a company owned by shareholders with limited liability; its earnings are taxed at the personal income tax rates of the shareholders.
initial public offering
a corporations first sale of common stock to the investing public
Corporation
a legal entity that separates personal assets of the owners, called shareholders, from the assets of the business.
Sound business model
a plan to generate revenues, make profits and produce free cash flows
Intellectual property
a ventures intangible assets and human capital including inventions that can be protected from being freely used or copied by others.
Partnership agreement
an agreement that spells out how business decisions are to be made and how profits and losses will be shared.
Article of incorporation
basic legal declarations contained in the corporate charter.
Best Practices
best marketing practices, best financial practices, best management practices, best production/operation practices
Time-To-Market
business opportunities exist in real time, narrow window of opportunity for successful business ventures
Partnerships
business venture owned by two or more individuals who are jointly and personally liable for the ventures liability.
cash burn
cash a venture expends on its operating and financing expenses and its investments in assets (income statement-based operating, interest, and tax expenses+increase in inventories- (change in payables and accrued liabilities)+capital expenditures)
cash burn rate
cash burn for a fixed period of time, typically a month.
free cash
cash exceeding that which is needed to operate, pay creditors, and invest assets
cash flow break even
cash flow at zero for a specific period (EBDAT=0)
Operating cash flow
cash flow from producing and selling a product or providing a service
Free cash flow to equity
cash remaining after operating cash outflows, investment in assets needed to sustain the venture's growth and net increases to debt capital
Limited partnership
certain partners' liabilities are limited to the amount of their equity capital contribution.
free cash flow
change in free cash over time
VOS indicator
checklist of selected criteria and metrics used to screen venture opportunities for potential attractiveness as business opportunities.
S corp
corporate forms of organization that provides limited liability for shareholders; plus, corporate income is taxed as personal income to the shareholders.
variable expenses
costs or expenses that vary directly with revenue
fixed expenses
costs that are expected to remain constant over a range of revenues for a specific time period
Financial bootstrapping
creative methods, including barter, to minimize the cash needed to start a venture, minimizing the need for financial capital and finding unique ways of financing a new venture.
Limited liability
creditors can seize the corporation's assets but have no recourse against the shareholders' personal assets.
The Successful Venture Life Cycle
developmental stage, startup stage, survival stage, rapid growth stage, early maturity stage
COGS
direct cost of producing a product of providing a service
Confidential disclosure agreements
documents used to protect and idea or other forms of intellectual property when disclosure must be made to another individual or organization.
Net profit
dollar profit left after all expenses, including financing costs and taxes, have been deducted from revenues.
venture capital
early-stage financial capital often involving substantial risk of total loss
EBITDA
earnings before interest, taxes, depreciation and amortization. This measures a firms revenues minus its variable operating expenses (such as cogs) and its fixed operating expenses
Employment contracts
employer employs the employee in exchange for the employees agreement to keep confidential information secret and to assign ideas and inventions to the employer.
first-round financing
equity funds provided during the survival stage to cover the cash shortfall when expenses and investments exceed revenues
Net cash build
exists when the sum of cash flows from operations and investing is positive
commercial banks
financial intermediaries that take deposits and make business and personal loans
Balance sheet
financial statement that provides a "snapshot" of a business's financial position as of a specific date.
Statement of cash flows
financial statement that shows how cash, as reflected in accrual accounting, flowed into and out of a company during a specific period of operation.
government assistance programs
financial support such as low-interest-rate loans and tax incentives, provided by state and local governments to help small businesses
seasoned financing
financing during the maturity stage that is usually obtained in the form of loans from commercial banks or through new issues of bonds and stocks, usually with the aid of investment bankers
second-round financing
financing for ventures in their rapid-growth stage to support investments in working capital; mezzanine financing - funds for plant expansion, marketing expenditures, working capital, and product or service improvements; liquidity-stage financing - financing during the rapid-growth stage that provides venture investors with an opportunity to cash in on the return associated with their risk and also provides access to public or private capital necessary to continue the firm's mission
trade credit
financing provided by suppliers in the form of delayed payments due on purchases made by the venture
venture capital firms
firms formed to raise and distribute venture capital to new and fast-growing ventures
investment banking firms
firms that advise and assist corporations regarding the type, timing, and costs of issuing new securities
Life style firms
firms that allow owners to pursue specific lifestyles while being paid for doing what they like to do. P39
Entrepreneurial ventures
firms that are cash flow and performance oriented as reflected rapid value creation over time. Normally one person who takes a business from start-up to exit and move onto a new venture P39
secondary stock offering
founder and venture investor shares sold to the public
startup financing
funds need to take a venture from having established a viable business opportunity to initial production and sales
seed financing
funds needed to determine whether an idea can be converted into a viable business opportunity
Gross profit margin
gross profit divided by revenues this is one of the most important measures of a ventures potential. the higher the number the greater the cushion for all expenses.
Generally accepted accounting principles (GAAP)
guidelines that set out the manner and form for presenting accounting information.
Liquidity
how quickly an asset can be converted to cash
cash conversion cycle (c3)
indicates the average time it takes a venture to complete its operating cycle less a deduction for the days supported by trade credit and delayed payroll financing: inventory to sale conversion period+ sale to cash conversion period- purchase to payment conversion period
conversion period ratios
indicates the average time it takes in days to convert certain current assets and current liability accounts into cash
investment banker
individual working for an investment banking firm who advises and assists corporations in their security financing decisions and regarding mergers and acquisitions
venture capitalists
individuals who join in formal, organized firms to raise and distribute venture capital to new and fast-growing ventures
Patents
intellectual property rights granted for inventions that are useful, novel, and non obvious.
Trade secrets
intellectual property rights in the form of inventions and information, not generally known to others that convey economic advantages to the holders.
Trademarks
intellectual property rights that allow firms to differentiate their products and services through the use of unique marks
venture law firms
law firms specializing in providing legal services to young, fast-growing entrepreneurial firms
Joint liability
legal action treats all partners equally as a group
Corporate charter
legal document that establishes the corporation
sale to cash conversion period
measures the average days of sales committed to the extension of trade credit: average receivables/ (net sales/365)
purchase to payment conversion
measures the average time from purchase of materials and labor to actual cash payment: (average payables + average accrued liabilities)/(COGS/365)
ROA
net after tax profit divided by total assets
Net profit margin
net profit divided by revenues
cash build
net sales-increase in receivables
Net cash burn
occurs when the sum of cash flows from operating and investing is negative
industry comparable analysis
one of the three basic ratio analysis techniques that compares a ventures performance against the average performance of other firms in the same industry
cross- sectional analysis
one of the three basic ratio analysis techniques that is a comparison of a ventures performance against another firm at the same point in time
trend analysis
one of the three basic ratio analysis techniques that is an examination of a venture's performance over time.
development stage
period involved the progression from an idea to a promising business opportunity (first stage) Typically financed through seed financing and also receiving funds from owners assets along with friends and family
rapid-growth stage
period of very rapid revenue and cash flow (fourth stage) Typically funded through business operations, investors, commercial banks, mezzanine financing, and liquidity financing
survival stage
period when revenues start to grow and help pay some, but typically not all, of the expenses (most difficult stage) (third stage) Typically financed through Business operations, angel investors, venture capitalists, and commercial banks
early-maturity stage
period when the growth of the revenue and cash flow continues but at a much slower rate than in the rapid-growth stage (fifth stage)
startup stage
period when the venture is organized and developed and an initial revenue model is put in place (second stage) Typically funded with start up financing along with cash from personal assets friends and family
unlimited liability
personal obligation to pay a ventures liabilities not covered by the ventures assets
The Seven Principles of Entrepreneurial Finance
real, human, and financial capital must be rented from owners, risk and expected reward go hand and hand, accounting is the language of business and cash is the currency, new venture financing involved search, negotiation, and privacy, a venture's financial objective is to increase value, it is dangerous to assume that people act against their own self-interests, venture character and reputation can be assets or liabilities
financial ratios
relationship between two or more financial variables or between financial variables and time. they are a useful way to summarize large amounts of financial data to simplify comparisons of a venture's performance with itself and other firms over time.
Salary replacement firm
replacing a salary with income that you generate rather than working for someone else. P39
Gross profit
revenues less the COGS
warrants
rights or options to purchase a venture's stock at a specific price within a specified time period
Corporate bylaws
rules and procedures established to govern corporation.
Seed and start up financing
sources of funding available during the development and start up stages of a venture life cycle.
Joint and several liability
subsets of partners can be the object of legal action related to the partnership.
bridge financing
temporary financing needed to keep the venture afloat until the next offering
inventory to sale conversion period
the cost of doing business: average inventories/(COGS/365)
seasoned securities offering
the offering of securities by a firm that has previously offered the same or substantially similar securities
Accrual accounting
the practice of recording economic activities when it comes to recognized rather than waiting until it is realized.
EBDAT
this is when cash flows break even, it is earnings before depreciation, amortization and taxes (revenues-variable costs-cash fixed costs)
ROA model
this ratio combines data from the income statement and balance sheet and relates net income to average assets (Net income/net sales) x (net sales/ average total assets)
operating cycle
time it takes to purchase required materials, assemble, and sell the product plus the time needed to collect receivables if the sales are on credit
Asset intensity
total assets divided by revenues, the reciprocal of asset turnover.
business angels
wealthy individuals operating as informal or private investors who provide venture financing for small businesses
Business angels
wealthy individuals who invest in early stage ventures in exchange for the excitement of launching a business and a share in any financial rewards.
financial distress
when cash flow is insufficient to meet current debt obligations
