6. Finance (25%) Flashcards
Principle # 1 of entrepreurial finance?
Real, human, and financial Capital must be rented from Owners
Principle # 2 of entrepreurial finance?
Risk and expected Reward go hand in hand
Principle # 3 of entrepreurial finance?
While accounting is the language of business, cash is the currency
Principle # 4 of entrepreurial finance?
New venture Financing involves search, negotiation, and privacy
Principle # 5 of entrepreurial finance?
A venture’s financial Objective is to Increase Value
Principle # 6 of entrepreurial finance?
It is dangerous to assume that people act against their own self-interests
Principle # 7 of entrepreurial finance?
Venture character and reputation can be assets or liabilities
Cash vs. profit
Which principle, and which accounts are relevant?
Principle 3: while accounting is the language of business, cash is the currency
A company that is profitable can go bankrupt
Sales revenue -Accounts receivable
Expenses -Accounts payable
Depreciation/amortization -not cash
Owners’ equity -cash to use for business?
Sales revenue -accounts receivable relation?
if you don’t collect cash from your sales, your income statement will Show Profit, but you will not be able to pay off any debts (no cash)
Expenses -Accounts Payable relation?
You have cash on hand, but you actually owe it to the creditors
Amortization’s cash/profit relation?
not actually cash but valuation. your house doesn’t rain money when it goes up in value
Owners’ Equity in terms of cash/profit
cash to use for business
Survival/cash flow breakeven
some new venture show profitability during the startup stage but
Breakeven
at cash breakeven, EBDAT=0 and revenues=expenses
Drivers
not done
Leverage
Often a company has to tradeoff accepting higher fixed costs VCRR (variable cost revenue ratio). they must increase operating leverage
Ex. a firm could buy a new more highly automated piece of machinery (higher fixed costs) to get lower labour and material costs per unit (lower variable costs)
Leverage: What do higher fixed costs mean?
higher fixed costs mean more has to be sold to cover them. i.e. higher survival revenue (breakeven)=higher risk BUT…
What is the result of lower variable costs?
lower variable costs result in a higher contribution and therefore the return (EBDAT -earnings before depreciation/amortization and taxes) is higher Above breakeven
Principle 2 of entrepreneurial finance: risk and expected reward go hand in hand
