Accounting, Finance

and Financial Modeling

Tallahassee Presentation

The Company Process

The Make-up of Financial
Transactions

Development & productization

Marketing
Production
Sales
Investment and bank & other loans

The Accounting Process

Revenue from sales
(Direct expenses of sales COGS)
Gross profit
( Overhead expenses)

R&D
Marketing and sales
Accounting
Sue

Pre-tax Profit
(Tax)
Net income

Some Accounting Anomalies

Accrual accounting
Cash accounting
An aside about cash
Cash is King
With it you may survive; without it you will
die

The Accounting Format

Income statement
An overview over time of the health of the
business

Balance sheet
A snapshot of the state of the business

Cash flow statement

Converts from accrual to cash

Financial Modeling
What is it?
Simply stated, a math model of the business
that projects the future performance and
health of the business
What are the benefits of financial modeling?
Predictive tool
Analytic tool
Convey understanding of market and business
model

Financial Modeling
What should the final output of the
financial model be?
Balance Sheet
Income Statement
Statement of Cash Flows

-- pro forma --

Balance Sheet
Shows what the company owns (assets)
and what it owes (liabilities & net worth)
at a given moment in time.
Changes in the balance sheet over time
can reveal important information about
the companys business trends.

Balance Sheet

Assets =
Liabilities + Equity

Balance Sheet
Current Liabilities

Current Assets
Cash
Accounts Receivable
Inventory
Other Prepaids

$37,494
250,000
300,000
55,000

$ 642,494
Fixed Assets
Notes Receivable
Equipment
Acc Depreciation
Other Assets
Goodwill

Total Assets

$183,750
95,000
(33,400)
20,000
2,500,000

$ 3,407,844

Accounts Payable
Accrued Expenses
Notes Payable (current)
Other
Notes payable (less current)

$110,000
31,000
15,000
5,000
171,000
175,000

$ 346,000
Equity
Preferred Stock
Common Stock
Additional Paid-in Capital
Retained Earnings

Total Liabilities
& Equity

5,000
15,000
3,250,000
(208,156)

$ 3,407,844

Balance Sheet
Liquidation Value =
What you owe + Everything Else

Income Statement
Measures all of a companys revenues
versus all expenses over a specific
period of time
Provides key financial indicators on
companys performance (Profit, COGS,
Gross Margins...)

Income Statement
Revenues
Cost of Sales
Gross Profit
Expenses
Salaries & employee benefits
Advertising & marketing
Professional & reg. Fees
Occupancy & maintenance
Depreciation & amortization
Interest expense
Other
Total expenses
Income (loss)
Income tax expense
Net Income

$1,805,000
630,000
1,175,000
325,000
175,000
78,000
118,250
26,200
24,000
12,000
758,450
416,550
156,206
260,344

Statement of Cash Flows

Converts the accrual basis of accounting
used to prepare the income statement
and balance sheet to a cash basis.
Monitors the flow of cash in and out of the
company from operating, investing, and
financing activities a must to determine
a companys cash position and future
cash needs.

Statement of Cash Flows

Operating Activities: Cash transactions
related to revenues and expenses.

Investing Activities:

Cash transactions
related to the acquisition and disposal of all
non-current assets property, equipment and
investments.

Financing Activities:

Cash transactions
related to the issuance and retirement of debt
and issuance and re-purchase of capital stock.

Statement of Cash Flows

CF Operating activities
Net Income (loss)
Depreciation & amortization
Change in:
Accounts receivable
Inventory
Prepaid & other assets
Accounts pay & accrued exp

$ 260,344
26,200
(100,000)
(175,000)
(7,300)
(39,000)

(34,756)
CF Investing activities
Purchase of equipment
Payments on notes payable

(59,000)
(43,750)

(102,750)
CF Financing activities
Proceeds from notes

Net Cash
Cash a beginning of period
Cash at end of period

100,000

(37,506)
75,000
$ 37,494

Another Anomaly
Free cash flow
Operating cash flow

Financial Modeling
What are the primary purposes of financial
modeling for a NV?

Financial Modeling
What are the primary purposes of financial
modeling for a NV?
Provide the founders and investors a realistic
forecast of the NVs market potential.
Project the investment needed to reach
positive cash flow.
Provide a basis to indicate the NVs value.

Financial Modeling
How can you produce a realistic forecast
of the market potential?

Financial Modeling
How can you produce a realistic
forecast of the market potential?
Have a clearly defined marketing & sales
strategy
Use market-based conservative
assumptions to forecast revenue
Use granular details

Financial Modeling
How can you project the cash needed to
reach positive cash flow?

Financial Modeling
How can you project the cash needed to
reach positive cash flow?
Have a clearly defined business model
Use market-based conservative
assumptions to forecast the costs to
acquire the revenue streams.
Use granular details

The Segway to Budgeting

It is difficult; Everyone struggles with it
Like the financial model:
Project what has to be done and when
Be conservative and use accepted standards

Project the resources needed to accomplish

the initiatives
Be conservative and use accepted standards

Put these together and convert into a budget

statement

Questions?