Finance and Accounting: A Deep Dive into Numbers
Welcome
Accelerate Vermilion
What You Need to Know
About the Numbers
Fi
nance & Accounting
February 16, 2021
Dr. Brian Bolton
Professor of Finance
brian.bolton@louisiana.edu
•
A little about me, the finance guy:
•
What are 2 things that I am grateful for:
1.
I am grateful to have a job where I get to work with and learn
from inspiring people who are working to change their lives and
to change their worlds.
2.
I am grateful that Spring has arrived in Acadiana.
Finance & Accounting
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
My plan for the next couple hours:
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We will start being a little bit philosophical in talking about
finance and accounting….just putting things in perspective.
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And then we will spend most of our time be focused more
directly on 3
(hopefully)
relevant areas:
1.
Your Stakeholders
2.
Cash Flows
3.
Tracking Income & Expenses
•
Note: I will talk a little about taxes and tax planning. But a thorough discussion of
taxes requires much more time than we have tonight.
•
Advice: It is never too soon (or too late) to connect with a tax accountant.
Finance & Accounting
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
There are no ‘right’ answers or perfect ways of
understanding finance.
•
Our goal is to use our finance, accounting and strategy
tools to make appropriate & reasonable decisions that
help us pursue our mission.
•
We will go through this material at a pretty high level.
Finance and Accounting require getting into the weeds
at some point.
•
Feel free to ask about those weeds and details today or
in the future.
Finance & Accounting
Accelerate Vermilion 2022: What You Need to Know About the Numbers
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Accelerate Vermilion 2022: What You Need to Know About the Numbers
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How much of your savings is
necessary to start the business?
Maybe you are using your home as
your office.
Maybe you are using your personal
computer to run the business.
Maybe your personal car is integral
to the business.
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How are you going to hire
employees and grow the business?
Are you able to make any
investments outside of the
business?
Can you succeed if you don’t
commit everything to the business?
Can you have a retirement
account?
What physical investments – office,
factory, equipment – will you need
to make?
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Accelerate Vermilion 2022: What You Need to Know About the Numbers
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What insurance do you need for the
business?
What insurance do you need for
YOU, to ensure that the business
can succeed?
What liability do YOU have
personally for what the business
does?
What legal structure will you choose
for the business?
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What legal structure will you choose
for the business?
Will you file taxes as an individual
or as a corporation?
What are the tax benefits available
to entrepreneurs?
How will the business tax issues
impact your family and your long-
term personal goals?
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Accelerate Vermilion 2022: What You Need to Know About the Numbers
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How will the business tax issues
impact your family and your long-
term personal goals?
What are the pros and cons of
making your venture a family affair?
How do you manage family
relationships AND commit yourself
to the business?
What happens to the business
when you retire?
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Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Build your team. Don’t try to do everything on your own.
•
You probably want to have an attorney and a tax accountant on your team.
You may want to connect with other advisors, but having an attorney and
accountant on your team is essential.
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Separate your personal and business lives as much as possible.
•
Get separate bank accounts for the business.
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Establish a credit history for the business.
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Find an accounting system you like. Quicken, Quickbooks, TaxBot, Zero,
Sage, FreshBooks are all decent options. Learn it, live it, love it.
•
Build your business plan. Tell the narrative of your business.
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Banks will want to see this. Investors will want to see this.
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View this as your roadmap or to-do list. Use it to guide both strategy and
decision-making.
What You Can Do Tomorrow
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Nothing is free in finance & entrepreneurship. Every benefit
has a cost. Understand what the benefits are.
•
Financial institutions and advisors are not your friends. They
exist to take your money. Don’t let them.
•
Debt can change your life – for better and for worse. Be careful
with how you use debt.
•
Interest is your friend – when you’re receiving it.
Interest is your enemy – when you’re paying it.
•
Finance is about trading money across time: short-term vs.
long-term. Know the trade-offs you are making.
•
Cash is Queen
(or King)
. Focus on cash inflows & cash outflows.
A Few Finance Morals
Accelerate Vermilion 2022: What You Need to Know About the Numbers
The future enters into us,
In order to transform itself in us,
Long before it happens.
Rainer Maria Rilke
Austrian Poet & Novelist
Don’t wait around for other
people to be happy for you.
Any happiness you get,
You’ve got to make yourself.
Alice Walker
American Novelist, Poet, Teacher, Leader
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Finance & Strategy Connection
Accelerate Vermilion 2022: What You Need to Know About the Numbers
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Finance & Strategy Connection
Accelerate Vermilion 2022: What You Need to Know About the Numbers
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Finance & Strategy Connection
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What is your mission? What is your purpose?
•
The benefits of pursuing this mission are probably
obvious to us all.
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The financial returns associated with this mission
may not be so obvious.
•
The key is people. Stakeholders.
Business Finance & Valuation
Accelerate Vermilion 2022: What You Need to Know About the Numbers
WHO CARES?
For your businesses, make a list of 3-5 groups of
people or entities who care about that project.
Make a list of 3-5 people or entities who will
contribute their human or financial resources to
make that project successful.
As you think about your businesses, your mission,
your dreams, your visions for starting a new
business, and what you want to do with what you get
out of this program, try to answer one key question:
WHO CARES?
For your businesses, make a list of 3-5 groups of
people or entities who care about that project.
Make a list of 3-5 people or entities who will
contribute their human or financial resources to
make that project successful.
As you think about your businesses, your mission,
your dreams, your visions for starting a new
business, and what you want to do with what you get
out of this program, try to answer one key question:
WHO CARES?
For your businesses, make a list of 3-5 groups of
people or entities who care about that project.
Make a list of 3-5 people or entities who will
contribute their human or financial resources to
make that project successful.
As you think about your businesses, your mission,
your dreams, your visions for starting a new
business, and what you want to do with what you get
out of this program, try to answer one key question:
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Stakeholders & Entrepreneurs
•
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Stakeholders & Entrepreneurs
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
The word “VALUE,” meaning financial worth of
something, is the same word as “VALUES”,
meaning intrinsic desirability
•
Something only has financial value because we
–
people or stakeholders
–
decide that it has intrinsic
desirability to us
•
Financial value is just a measuring tool. The real
value is determined by our own desires.
Stakeholders & Entrepreneurs
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Financial value is the result of people finding something
intrinsically desirable.
•
The more intrinsically desirable something is to me, the
more money I will be willing to pay for it.
•
Also applies to non-financial resources
–
I may be
willing to work harder for a cause I believe in than for a
cause that doesn’t align with my own values.
•
Stakeholders will engage with your business because you
are offering utility for them. What you are doing aligns with
their values.
•
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Stakeholders & Entrepreneurs
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
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Stakeholders & Entrepreneurs
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
It all comes back to your mission.
•
Stakeholders engage with
–
and contribute resources
to
–
a business because they value what the
business’s mission is.
•
For a non-profit, people value the mission to alleviate
suffering, fight for justice or to help rescue pets.
•
For Apple and Walmart, people value different
aspects related to their missions: products, prices,
convenience, technology, jobs
…
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Accelerate Vermilion 2022: What You Need to Know About the Numbers
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Stakeholders & Entrepreneurs
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Accelerate Vermilion 2022: What You Need to Know About the Numbers
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Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
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The Most Important Questions in Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
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The Most Important Questions in Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What are the cash flows?
•
This is the most difficult issue in finance.
•
This is especially difficult for entrepreneurs:
•
You know exactly what your short-term cash outflows
are going to be (rent, salaries, raw materials…)
•
It can be very difficult to know – with any confidence –
what your long-term cash inflows are going to be.
–
This is why having a plan, having a strategy, having a
roadmap is so vital
–
You have to survive in the short—term…but if you do not
have a strategy, you won’t go anywhere in the long-term
The Most Important Questions in Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What are the cash flows?
•
We want to identify and consider all direct and indirect
cash flows.
•
“Finance” is the art of predicting these cash flows.
•
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s
c
i
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e
.
The Most Important Questions in Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
When do the cash flows occur?
•
The timing of cash flows is critical.
•
Would you rather have $100 today or $100 in 3 years?
•
Money is not free. It can always be used for
something else (“opportunity cost”).
•
In general, we only want to use money
–
or invest or
spend money
–
if we expect some kind of return.
•
The timing of cash outflows is usually far more certain
and predictable than the timing of cash inflows.
The Most Important Questions in Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
Prediction is very difficult.
Especially when it’s about the future.
Niels Bohr
Danish Physicist
1922 Nobel Prize laureate
•
When do the cash flows occur?
•
What cash flows are certain?
•
Today’s cash outflows, short-term cash inflows,
contractual obligations or benefits.
•
What cash flows are possible?
•
Revenues, partnerships, employee & program expenses
•
As you think about your strategies, create different
scenarios or possible outcomes.
•
We never know exactly what will happen in the future.
We can usually imagine several different scenarios
better than we can predict one specific scenario.
The Most Important Questions in Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What are those cash flows worth today?
•
Once we know what the cash flows are and once we
know when the cash flows occur (or think we
know)
…
determining what those cash flows are
worth today is a simple math problem.
•
We care about estimating what the future cash flows
are worth today because it helps us determine what
short-term and long-term decisions to make today.
The Most Important Questions in Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What are your sources of Revenue?
•
Write down all the ways in which your business will generate cash inflows.
•
What are your Expenses?
•
Write down all the ways in which your business will incur cash outflows.
•
What external financing do you need?
•
Do you have personal resources to start the business?
•
Will you have partners or investors?
•
Will you need bank or SBA financing?
•
Initially, you may not need to include numbers – just know what
the categories or descriptions are – but you will want to know
numbers eventually.
Connecting These 3 Questions
to your Business Plan
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
At least once a week….
•
W
r
i
t
e
d
o
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n
–
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f
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.
HOMEWORK!
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
At least once a week….
•
W
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d
o
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n
–
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p
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k
.
•
Personal finance suggestion:
Do this same exercise for your family and personal
finances, too. Looking in the mirror like this can really help
you appreciate what your cash flows are & what decisions
you are making.
HOMEWORK!
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
P
l
e
a
s
e
d
e
f
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f
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:
V
A
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U
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S
•
N
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:
V
A
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U
E
Remember Value & Values
T
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S
E
A
R
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T
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E
S
A
M
E
W
O
R
D
S
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
V
a
l
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e
i
s
n
o
t
t
h
e
s
a
m
e
a
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m
o
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y
•
Money is one way of measuring value, but value is
about more than money
•
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–
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s
u
a
l
l
y
f
o
l
l
o
w
•
We will talk about measuring value in monetary
terms, but that is just one way of measuring value
•
T
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s
Remember Value & Values
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Once a month or once a year, take an hour to write
down your values.
•
Write down the 10-15 priorities in your life that guide
who you are and what you want.
•
For personal finance, being intentional about what your
values are will help you make sure your financial
decisions are consistent with your personal values.
•
For your business, being intentional about what your
business values are will help you make sure your
business decisions are aligned with your mission & goals.
MORE HOMEWORK!
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
In order to plan for the future
–
to prepare a
strategic plan or to prepare a financial plan
–
we
need to know where we are today.
•
We need to know what resources we have available today.
•
We need to know how we are (or have been) using resources.
•
We need to know if our resource use is consistent with our
mission and strategy.
•
We can accomplish all this by using accounting
information and financial statements.
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Accounting, in general, is backward-looking.
•
It is an accounting of past financial transactions.
•
We’ll focus on 2 primary financial statements:
•
The BALANCE SHEET
–
a picture of financial
condition at a point in time.
•
The INCOME STATEMENT
–
a summary of financial
transactions during some period of time.
•
GAAP
–
Generally Accepted Accounting Principles
guide how we recognize and treat transactions.
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Accounting, in general, is backward-looking.
•
It is an accounting of past financial transactions.
•
But, we will use this accounting of past financial
transactions to help us understand, predict and
plan for the future
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
History does not repeat itself.
But it does rhyme.
Mark Twain
American author and humorist, 19
th
century
•
Three principles of accounting:
1.
M
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.
•
“Double entry accounting” means we need 2 entries for each transaction.
•
If we pay $1000 for a computer, Cash decreases by $1000 and Property
& Equipment increases by $1000.
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
Accounting & Finance
Accelerate St. Landry 2021: What You Need to Know About the Numbers
•
T
h
e
B
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•
Classifies items as “Assets” and “Liabilities”
•
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.
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What are ASSETS?
•
C
a
s
h
&
C
a
s
h
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q
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s
(
l
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)
•
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s
•
Sales we’ve made on credit, loans we’ve made but haven’t been repaid, contract
revenues we’ve been promised but haven’t received cash
•
I
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v
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t
o
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–
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•
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–
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(
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Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What are LIABILITIES?
•
A
c
c
o
u
n
t
s
p
a
y
a
b
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–
T
y
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t
p
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f
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.
•
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t
p
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f
o
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e
t
•
I only receive a paycheck on the last day of the month, but I work all
month long. By the 20
th
of the month, my employer has incurred 2/3 of
my paycheck without paying me. This 2/3 is an accrued liability.
•
D
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f
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•
L
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-
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–
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t
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Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What is NET WORTH?
•
Net Worth represents the accumulated earnings
and investment that is in the business.
•
Frequently called equity.
•
Frequently called book value.
•
Sometimes called market value.
•
This is what we want to maximize.
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
T
h
e
I
N
C
O
M
E
S
T
A
T
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M
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–
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s
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s
o
m
e
p
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r
i
o
d
o
f
t
i
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e
.
•
Classifies items as “Revenues” and “Expenses”
•
“Operating Support & Revenue” and “Operating Expenses”
•
R
e
v
e
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u
e
s
–
I
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f
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•
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a
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R
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–
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g
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d
s
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r
s
e
r
v
i
c
e
s
.
•
This is usually the simplest, most obvious financial statement
account (except maybe Cash)
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Classifies items as “Revenues” and “Expenses”
•
“Operating Support & Revenue” and “Operating Expenses”
•
E
x
p
e
n
s
e
s
–
O
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f
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a
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•
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p
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p
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&
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p
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c
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(
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g
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”
)
:
r
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,
s
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s
,
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g
,
m
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…
Accounting & Finance
Accelerate Vermilion 2022: What You Need to Know About the Numbers
R
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v
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s
–
C
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f
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(
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(
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a
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(
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P
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f
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t
&
L
o
s
s
s
t
a
t
e
m
e
n
t
)
Accounting & Finance: Net Income
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Y
o
u
k
n
o
w
w
h
a
t
t
h
e
y
a
r
e
:
•
Expected inflows and expenses to be incurred by the
business in some future period (such as a year)
•
We set budgeted financial statements
–
typically, Income
Statements
–
before a period in order to manage our
spending or expenses over that period.
•
Useful in terms of managing funds, measuring
performance and efficiency, setting goals and incentives
Budgets & Financial Planning
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
B
u
t
w
h
y
a
r
e
t
h
e
y
s
o
i
m
p
o
r
t
a
n
t
t
o
e
n
t
r
e
p
r
e
n
e
u
r
s
?
•
Entrepreneurs do not have the same access to funds or capital that
more established companies do.
•
Entrepreneurs cannot launch a new product or pivot easily to quickly
generate Revenue
•
For Entrepreneurs…Cash is Queen!
•
Entrepreneurial Finance is a lot like Personal Finance
•
You have to generate cash to pay your bills.
•
Your bills will not be constant or consistent.
•
Having a financial plan can help you better understand when you
will need cash and when you will generate cash
•
Budgets are therefore (probably) more important to entrepreneurs
than they are to more established, larger companies.
Budgets & Financial Planning
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Here’s another exercise for you:
•
Plan out the next 12 months of cash inflows and cash
outflows for your business.
•
What do you notice? What are the trends?
•
What numbers are you certain about?
•
What numbers are just guesses?
•
How can you create a plan to survive and thrive over the next
12 months?
•
If you do not have a business (yet), do this exercise with
your own personal finance, for you and your family.
Budgets & Financial Planning
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
Question:
How do we decide which investments to make?
•
Answer:
We make those investments with the highest
return on investment.
•
Question:
How do we measure return on investment?
•
A
n
s
w
e
r
:
I
n
s
h
o
r
t
…
W
e
u
s
e
s
o
m
e
m
e
a
s
u
r
e
o
f
:
C
a
s
h
I
n
f
l
o
w
s
B
e
n
e
f
i
t
s
C
a
s
h
O
u
t
f
l
o
w
s
C
o
s
t
s
Business Finance & Valuation
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
For individuals, financial return may not be the goal.
•
Should you borrow
$100 to pay for your education?
•
How do we account for the experience, the knowledge, the
opportunities and everything else that education provides?
•
Why are you here right now? Why are you paying –
with time, energy & money – for this experience?
•
This is an investment in your business.
•
This is an investment in your future.
•
This is an investment in your family.
•
This is an investment in your purpose.
Business Finance & Valuation
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
T
h
i
s
i
s
t
h
e
e
s
s
e
n
c
e
o
f
f
i
n
a
n
c
e
–
e
x
c
h
a
n
g
i
n
g
c
a
s
h
f
l
o
w
s
,
o
r
g
o
o
d
s
,
s
e
r
v
i
c
e
s
a
n
d
r
e
s
o
u
r
c
e
s
,
o
v
e
r
t
i
m
e
.
•
We make decisions about what we are willing to give up
today (or receive today) in exchange for receiving
something in the future.
•
We want to make decisions (financial decisions) that make
us better off
…
however we decide to measure “better off”
•
Financially better off, happier,
smarter, healthier
…
Business Finance & Valuation
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
In finance
–
or in business
–
we never want to
make an investment
–
or spend any money
–
where the expected benefits are less that the
expected costs.
•
Thinks of “benefits” and “costs” as economic
benefits and costs, which is NOT necessarily the
same as financial inflows and outflows.
Business Finance & Valuation
Accelerate Vermilion 2022: What You Need to Know About the Numbers
•
What is your mission? What is your purpose?
•
The benefits of pursuing this mission are probably
obvious to us all.
•
The financial returns associated with this mission
may not be so obvious.
•
The key is people. Stakeholders.
How does your mission make lives better?
Business Finance & Valuation
Accelerate Vermilion 2022: What You Need to Know About the Numbers
If you can’t fly, then run.
If you can’t run, then walk.
If you can’t walk, then crawl.
But whatever you do,
You have to keep moving forward.
Reverend Dr. Martin Luther King, Jr.
1964 Nobel Prize laureate
brian.bolton@louisiana.edu
•
T
h
e
B
A
L
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s
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p
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.
•
T
h
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C
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T
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s
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v
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d
o
f
t
i
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e
.
•
B
y
s
t
u
d
y
i
n
g
–
o
r
a
n
a
l
y
z
i
n
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–
b
o
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f
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,
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t
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e
g
i
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p
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a
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.
Accounting & Finance
•
We can study
–
analyze
–
trends, changes and ratios
within the financial statements to learn about:
•
G
r
o
w
t
h
•
P
r
o
d
u
c
t
i
v
i
t
y
•
E
f
f
i
c
i
e
n
c
y
•
P
e
r
f
o
r
m
a
n
c
e
•
P
r
o
b
l
e
m
s
•
S
t
r
a
t
e
g
y
•
M
i
s
s
i
o
n
•
There is a near infinite amount of analysis we could
perform with the financial statements, but we’ll just
focus on a few big picture tools.
Financial Statement Analysis
P
e
r
c
e
n
t
a
g
e
C
h
a
n
g
e
S
t
a
t
e
m
e
n
t
s
/
A
n
a
l
y
s
i
s
(
H
o
r
i
z
o
n
t
a
l
A
n
a
l
y
s
i
s
)
•
Calculate how much each account
–
such as Revenue
–
changes from year-to-year.
•
We can see if certain Revenue accounts are changing more
than others
…
and determine if this is consistent with our
strategy and skills
•
We can see if Expenses are increasing more than Revenues
and use that information to affect operations or structure
•
We can see if Assets are increasing more than Liabilities and
see if that is effective cash management
Financial Statement Analysis
C
o
m
m
o
n
S
i
z
e
S
t
a
t
e
m
e
n
t
s
/
A
n
a
l
y
s
i
s
(
V
e
r
t
i
c
a
l
A
n
a
l
y
s
i
s
)
•
See how much of the ‘size’ of each statement is in each
account
•
For the Income Statement
…
We divide each account by
“Total Revenue”
•
For the Balance Sheet
…
We divide each account by “Total
Assets”
•
Margins
–
Help us determine if we are using resources
effectively to produce our Revenues
•
Profit Margin = (Revenue – Cost of Goods Sold) / Revenue
•
Net Margin = Net Income / Revenue
Financial Statement Analysis
O
t
h
e
r
R
a
t
i
o
s
/
C
a
l
c
u
l
a
t
i
o
n
s
o
f
I
n
t
e
r
e
s
t
•
COGS Expenses / Total Expenses
•
Administrative or Overhead Expenses / Total Expenses
•
Analysis of Revenue Sources
•
Are we relying on too few large customers?
•
Are we relying on contracts that will expire?
•
Is our Revenue season or cyclical?
•
Is our advertising working?
Financial Statement Analysis
O
t
h
e
r
R
a
t
i
o
s
/
C
a
l
c
u
l
a
t
i
o
n
s
o
f
I
n
t
e
r
e
s
t
•
Working Capital = Current Assets
–
Current Liabilities
•
A measure of short-term financial health
•
Bigger is not necessarily better, as excessive short-term assets
do not serve the mission
•
Current Ratio = Current Assets / Current Liabilities
•
A measure of short-term financial health
•
Debt Ratio = Long-Term Debt / Total Assets
•
A measure of financing and possibly financial distress
•
Receivables Turnover = Revenue / Receivables
•
A measure of how quickly (or often) receivables are converted
into cash
•
Smaller numbers indicate better collections
Financial Statement Analysis
•
W
h
a
t
a
r
e
t
h
e
F
U
T
U
R
E
c
a
s
h
f
l
o
w
s
g
o
i
n
g
t
o
b
e
?
•
B
u
d
g
e
t
s
T
y
p
i
c
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l
l
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p
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t
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a
m
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m
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1.
Determine overall market size.
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Estimate your market share.
3.
Add any known non-recurring revenues
4.
Calculate Revenue.
5.
Growth over time is based on an annual
growth rate applied to all Revenue.
Budgets & Financial Planning
•
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Determine Revenue.
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Using the Common-Size Income Statement, determine
Expenses as a percentage of Revenues (“margins”)
•
Could be average of past years, could be most recent
or relevant year, could be estimate of future years
3.
Include all Expenses
–
direct and indirect Expenses
Budgets & Financial Planning
•
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2.
Determine the sales price per unit.
3.
Add any known non-recurring revenues.
4.
Calculate Revenue.
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Growth over time is based on specific changes
in number of units and prices.
Budgets & Financial Planning
•
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Determine how many units will be sold.
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Determine the production costs of each unit.
3.
Calculate Direct Costs.
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Add on any additional overhead or indirect
costs incurred due to the investment.
Budgets & Financial Planning
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Notes:
Expenses are not directly related to Revenues.
The only connection is through number of units.
Bottom-Up approach feels more detailed and specific. But
small mistakes in estimates can become magnified for
bigger problems.
Budgets & Financial Planning
•
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•
All business and financial decisions involve risk.
•
None of us know what will happen in the future.
•
Those of us who appreciate this, and have the mental
perspective to allow for this and the capability to plan for it
are likely to be more successful in the future.
Budgets & Financial Planning
•
Sensitivity Analyses
•
In your financial models, pro-forma projections and
budgets, see how much the result changes when
you change one variable at a time.
•
What happens if the revenue growth rate is 3%
instead of the 5% you projected?
•
What happens if COGS expenses are 90%
instead of 80%?
•
What happens if your contract expected grants
are delayed by 6 months?
Budgets & Financial Planning
•
Sensitivity Analyses
•
In these cases, the concern is not just that “financial
results” will be affected, but the concern is that
operations and mission will be affected.
•
How do you develop contingency plans plans for
situations that do not go as planned?
•
How do you adjust your strategic plans based on
certain possible outcomes?
Budgets & Financial Planning
•
Sensitivity Analyses
•
In risk management, we typically focus on situations
where the outcome is worse than expected
–
we try to
plan to avoid such situations.
•
But, if our original projections are truly objective (rather
than optimistic or pessimistic), the outcomes could be
better than expected.
•
How does this affect strategic planning and operations?
•
If you have excess funds, but the timing is not right for
investment, do you have to make less-than-desirable investments
just to use the funds?
Budgets & Financial Planning
•
Scenario Analyses
•
“Sensitivity Analysis” looks at one variable at a time.
•
“Scenario Analysis” creates entirely new scenarios,
changing as many variables as might possibly change.
•
Might be more appropriate in some situations if
multiple variables are interrelated.
–
Expenses might be tied directly to specific revenues
which could influence operating expenses.
–
In specific projects, external factors may impact multiple
variables at the same time rather than individually.
Budgets & Financial Planning
•
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Create as many scenarios as you think might be possible.
•
Finance textbooks suggest doing 3 scenarios:
Base Case, Optimistic Case, Pessimistic Case.
–
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•
Create distinct scenarios. It is rarely helpful to just
change a few variables by a small amount.
–
Some scenarios might be associated with certain events
–
elections, crises,
grants
–
and might not be “better” or “worse” than the base or expected case.
•
Be able to tell the economic story behind each scenario.
What’s the business case?
What are the drivers?
Budgets & Financial Planning
•
S
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•
Once we have the distinct scenarios created, we have
several different options on how to proceed:
1.
We may only care about the worst case scenario. We
may only want to know what the greatest risk is.
2.
We may only want to think about the different
scenarios at a high level, understand the different
variables and external factors involved.
3.
We may want to use the scenarios to estimate an
“expected” value or scenario.
This may be the most
interesting.
Budgets & Financial Planning
•
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We may want to use the scenarios to estimate an
“expected” value or scenario.
•
For each scenario, estimate the probability of it occurring.
Assign this probability as a weight.
•
Using the weights, calculate an expected value using the
weighted average of all possible outcomes.
•
Use this expected value to make managerial or strategic
decisions.
Budgets & Financial Planning
•
Scenario planning IS NOT about the math.
•
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Financial planning IS NOT about the math.
•
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Budgets & Financial Planning
brian.bolton@louisiana.edu
Delve into the world of finance and accounting with Dr. Brian Bolton as he discusses the fundamentals, including stakeholder management, cash flows, income tracking, and more. Learn about personal and business finance, bookkeeping, financial planning, and corporate finance in this informative session. Gain insights on making sound financial decisions to pursue your mission effectively.
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Presentation Transcript
Accelerate Vermilion Welcome
What You Need to Know About the Numbers Finance & Accounting February 16, 2021 Dr. Brian Bolton Professor of Finance
Finance & Accounting A little about me, the finance guy: What are 2 things that I am grateful for: 1. I am grateful to have a job where I get to work with and learn from inspiring people who are working to change their lives and to change their worlds. 2. I am grateful that Spring has arrived in Acadiana. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Finance & Accounting My plan for the next couple hours: We will start being a little bit philosophical in talking about finance and accounting .just putting things in perspective. And then we will spend most of our time be focused more directly on 3 (hopefully) relevant areas: 1. Your Stakeholders 2. Cash Flows 3. Tracking Income & Expenses Note: I will talk a little about taxes and tax planning. But a thorough discussion of taxes requires much more time than we have tonight. Advice: It is never too soon (or too late) to connect with a tax accountant. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Finance & Accounting There are no right answers or perfect ways of understanding finance. Our goal is to use our finance, accounting and strategy tools to make appropriate & reasonable decisions that help us pursue our mission. We will go through this material at a pretty high level. Finance and Accounting require getting into the weeds at some point. Feel free to ask about those weeds and details today or in the future. Accelerate Vermilion 2022: What You Need to Know About the Numbers
What is Finance & Accounting PERSONAL FINANCE BUSINESS FINANCE BOOKKEEPING & ACCOUNTING BUSINESS FINANCE FINANCIAL PLANNING & MANAGEMENT CORPORATE FINANCE INVESTING & CAPITAL RAISING Accelerate Vermilion 2022: What You Need to Know About the Numbers
What We Will Cover Today PERSONAL FINANCE BUSINESS FINANCE BOOKKEEPING & ACCOUNTING BUSINESS FINANCE FINANCIAL PLANNING & MANAGEMENT CORPORATE FINANCE INVESTING & CAPITAL RAISING Accelerate Vermilion 2022: What You Need to Know About the Numbers
What We Will Cover Today PERSONAL FINANCE Your life as an entrepreneur will regularly overlap with your life as an individual. Knowing where to take advantage of the overlaps (such as in tax planning) and where to create an intentional divide (such as with relationships) can be critical to both your success in business and your happiness as a human. Be intentional with your choices. Accelerate Vermilion 2022: What You Need to Know About the Numbers
What We Will Cover Today PERSONAL FINANCE Your life as an entrepreneur will regularly overlap with your life as an individual. Knowing where to take advantage of the overlaps (such as in tax planning) and where to create a necessary divide (such as with relationships) can be critical to both your success in business and your happiness as a human. Be intentional with your choices. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Personal Financial Planning FINANCIAL MANAGEMENT INVESTMENTS INSURANCE TAXES ESTATE PLANNING FAMILY IN YOUR PERSONAL LIFE, YOU CONTROL HOW THESE DIMENSIONS ARE CONNECTED Accelerate Vermilion 2022: What You Need to Know About the Numbers
Personal Financial Planning for Entrepreneurs FINANCIAL MANAGEMENT INVESTMENTS AS AN ENTREPRENEUR, ALL OF THESE PERSONAL DIMENSIONS CAN BE CONNECTED TO YOUR BUSINESS. INSURANCE TAXES FAMILY ESTATE PLANNING Accelerate Vermilion 2022: What You Need to Know About the Numbers
Personal Financial Planning for Entrepreneurs FINANCIAL MANAGEMENT How much of your savings is necessary to start the business? INVESTMENTS Maybe you are using your home as your office. INSURANCE Maybe you are using your personal computer to run the business. TAXES Maybe your personal car is integral to the business. FAMILY ESTATE PLANNING Accelerate Vermilion 2022: What You Need to Know About the Numbers
Personal Financial Planning for Entrepreneurs How are you going to hire employees and grow the business? FINANCIAL MANAGEMENT INVESTMENTS Are you able to make any investments outside of the business? INSURANCE Can you succeed if you don t commit everything to the business? TAXES FAMILY Can you have a retirement account? ESTATE PLANNING What physical investments office, factory, equipment will you need to make? Accelerate Vermilion 2022: What You Need to Know About the Numbers
Personal Financial Planning for Entrepreneurs FINANCIAL MANAGEMENT What insurance do you need for the business? INVESTMENTS What insurance do you need for YOU, to ensure that the business can succeed? INSURANCE TAXES What liability do YOU have personally for what the business does? FAMILY ESTATE PLANNING What legal structure will you choose for the business? Accelerate Vermilion 2022: What You Need to Know About the Numbers
Personal Financial Planning for Entrepreneurs FINANCIAL MANAGEMENT What legal structure will you choose for the business? INVESTMENTS INSURANCE Will you file taxes as an individual or as a corporation? TAXES What are the tax benefits available to entrepreneurs? FAMILY How will the business tax issues impact your family and your long- term personal goals? ESTATE PLANNING Accelerate Vermilion 2022: What You Need to Know About the Numbers
Personal Financial Planning for Entrepreneurs FINANCIAL MANAGEMENT How will the business tax issues impact your family and your long- term personal goals? INVESTMENTS INSURANCE What are the pros and cons of making your venture a family affair? TAXES How do you manage family relationships AND commit yourself to the business? FAMILY ESTATE PLANNING What happens to the business when you retire? Accelerate Vermilion 2022: What You Need to Know About the Numbers
What You Can Do Tomorrow Build your team. Don t try to do everything on your own. You probably want to have an attorney and a tax accountant on your team. You may want to connect with other advisors, but having an attorney and accountant on your team is essential. Separate your personal and business lives as much as possible. Get separate bank accounts for the business. Establish a credit history for the business. Find an accounting system you like. Quicken, Quickbooks, TaxBot, Zero, Sage, FreshBooks are all decent options. Learn it, live it, love it. Build your business plan. Tell the narrative of your business. Banks will want to see this. Investors will want to see this. View this as your roadmap or to-do list. Use it to guide both strategy and decision-making. Accelerate Vermilion 2022: What You Need to Know About the Numbers
A Few Finance Morals Nothing is free in finance & entrepreneurship. Every benefit has a cost. Understand what the benefits are. Financial institutions and advisors are not your friends. They exist to take your money. Don t let them. Debt can change your life for better and for worse. Be careful with how you use debt. Interest is your friend when you re receiving it. Interest is your enemy when you re paying it. Finance is about trading money across time: short-term vs. long-term. Know the trade-offs you are making. Cash is Queen (or King). Focus on cash inflows & cash outflows. Accelerate Vermilion 2022: What You Need to Know About the Numbers
The future enters into us, In order to transform itself in us, Long before it happens. Rainer Maria Rilke Austrian Poet & Novelist
Dont wait around for other people to be happy for you. Any happiness you get, You ve got to make yourself. Alice Walker American Novelist, Poet, Teacher, Leader
Finance & Strategy Connection MISSION What is your mission? What is your purpose? What problem are you trying to solve? What opportunity are you working to fill? What are you trying to accomplish? Accelerate Vermilion 2022: What You Need to Know About the Numbers
Finance & Strategy Connection MISSION STRATEGY OPERATIONS FINANCE Accelerate Vermilion 2022: What You Need to Know About the Numbers
Finance & Strategy Connection MISSION STRATEGY OPERATIONS FINANCE Accelerate Vermilion 2022: What You Need to Know About the Numbers
Business Finance & Valuation What is your mission? What is your purpose? The benefits of pursuing this mission are probably obvious to us all. The financial returns associated with this mission may not be so obvious. The key is people. Stakeholders. Accelerate Vermilion 2022: What You Need to Know About the Numbers
As you think about your businesses, your mission, your dreams, your visions for starting a new business, and what you want to do with what you get out of this program, try to answer one key question: WHO CARES? For your businesses, make a list of 3-5 groups of people or entities who care about that project. Make a list of 3-5 people or entities who will contribute their human or financial resources to make that project successful.
As you think about your businesses, your mission, your dreams, your visions for starting a new business, and what you want to do with what you get out of this program, try to answer one key question: WHO CARES? For your businesses, make a list of 3-5 groups of people or entities who care about that project. Make a list of 3-5 people or entities who will contribute their human or financial resources to make that project successful.
As you think about your businesses, your mission, your dreams, your visions for starting a new business, and what you want to do with what you get out of this program, try to answer one key question: WHO CARES? For your businesses, make a list of 3-5 groups of people or entities who care about that project. Make a list of 3-5 people or entities who will contribute their human or financial resources to make that project successful.
Stakeholders & Entrepreneurs Family Investors Employees The Business Entity Customers Community Others: future generations, trade associations, unions, activists, competitors, the media, business partners, the public, society The Suppliers Government
Stakeholders & Entrepreneurs Please define the following word: VALUES Now define this word: VALUE Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs The word VALUE, meaning financial worth of something, is the same word as VALUES , meaning intrinsic desirability Something only has financial value because we people or stakeholders decide that it has intrinsic desirability to us Financial value is just a measuring tool. The real value is determined by our own desires. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Financial value is the result of people finding something intrinsically desirable. The more intrinsically desirable something is to me, the more money I will be willing to pay for it. Also applies to non-financial resources I may be willing to work harder for a cause I believe in than for a cause that doesn t align with my own values. Stakeholders will engage with your business because you are offering utility for them. What you are doing aligns with their values. What you are doing makes their life better. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs What you are doing makes their life better. Most people are not going to give you money just because they like you. But they will give you money if you and your business make their lives better. It all comes back to your mission. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs It all comes back to your mission. Stakeholders engage with and contribute resources to a business because they value what the business s mission is. For a non-profit, people value the mission to alleviate suffering, fight for justice or to help rescue pets. For Apple and Walmart, people value different aspects related to their missions: products, prices, convenience, technology, jobs Mission Strategy Operations Finance Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Family Investors Employees The Business Entity Customers Community Others: future generations, trade associations, unions, activists, competitors, the media, business partners, the public, society The Suppliers Government
Stakeholders & Entrepreneurs Revenues Cost of Goods Sold = Gross Margin Operating Expenses = Operating Income Other Expenses = Taxable Income Income Taxes = Net Income Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Revenues Cost of Goods Sold = Gross Margin Operating Expenses = Operating Income Other Expenses = Taxable Income Income Taxes = Net Income Revenues: Customers give us money to make their lives better. Every dollar of Revenue any business has ever received has come from Customers. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Revenues Cost of Goods Sold = Gross Margin Operating Expenses = Operating Income Other Expenses = Taxable Income Income Taxes = Net Income Cost of Goods Sold: We give cash to employees and suppliers to create the goods and services we provide to customers Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Revenues Cost of Goods Sold = Gross Margin Operating Expenses = Operating Income Other Expenses = Taxable Income Income Taxes = Net Income Operating Expenses: We give cash to employees, the landlord, the advertising agency, the utilities company and others in exchange for giving us the infrastructure to run our business Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Revenues Cost of Goods Sold = Gross Margin Operating Expenses = Operating Income Other Expenses = Taxable Income Income Taxes = Net Income Other Expenses: We give cash to the bank and other non- recurring, non-operating sources in exchange for certain benefits. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Revenues Cost of Goods Sold = Gross Margin Operating Expenses = Operating Income Other Expenses = Taxable Income Income Taxes = Net Income Income Taxes: We give cash to the governments because they give us the social infrastructure for our business to succeed (in theory, at least, if not always in practice) Accelerate Vermilion 2022: What You Need to Know About the Numbers
Stakeholders & Entrepreneurs Net Income: Revenues Cost of Goods Sold = Gross Margin Operating Expenses = Operating Income Other Expenses = Taxable Income Income Taxes = Net Income After we make our customers happy and we pay all other stakeholders who made our business possible, whatever cash is leftover is ours to keep, to give to our family, to re- invest in the business, to buy a boat, to return to outside investors. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Finance & Strategy Connection MISSION STRATEGY OPERATIONS FINANCE Accelerate Vermilion 2022: What You Need to Know About the Numbers
The Most Important Questions in Finance What are the cash flows? When do the cash flows occur? What are those cash flows worth today? Accelerate Vermilion 2022: What You Need to Know About the Numbers
The Most Important Questions in Finance What are the cash flows? Cash Inflows & Cash Outflows Revenues & Expenses There may also be non-cash issues to keep on your mind: Benefits & Costs (Reputation, branding, goodwill, relationships all that may eventually lead to actual cash flows) Accelerate Vermilion 2022: What You Need to Know About the Numbers
The Most Important Questions in Finance What are the cash flows? This is the most difficult issue in finance. This is especially difficult for entrepreneurs: You know exactly what your short-term cash outflows are going to be (rent, salaries, raw materials ) It can be very difficult to know with any confidence what your long-term cash inflows are going to be. This is why having a plan, having a strategy, having a roadmap is so vital You have to survive in the short term but if you do not have a strategy, you won t go anywhere in the long-term Accelerate Vermilion 2022: What You Need to Know About the Numbers
The Most Important Questions in Finance What are the cash flows? We want to identify and consider all direct and indirect cash flows. Finance is the art of predicting these cash flows. People think that finance is all math and problem solving. But finance is as much telling the story of an investment the art as it is doing the math related to any investment the science. Accelerate Vermilion 2022: What You Need to Know About the Numbers
The Most Important Questions in Finance When do the cash flows occur? The timing of cash flows is critical. Would you rather have $100 today or $100 in 3 years? Money is not free. It can always be used for something else ( opportunity cost ). In general, we only want to use money or invest or spend money if we expect some kind of return. The timing of cash outflows is usually far more certain and predictable than the timing of cash inflows. Accelerate Vermilion 2022: What You Need to Know About the Numbers
Prediction is very difficult. Especially when it s about the future. Niels Bohr Danish Physicist 1922 Nobel Prize laureate
The Most Important Questions in Finance When do the cash flows occur? What cash flows are certain? Today s cash outflows, short-term cash inflows, contractual obligations or benefits. What cash flows are possible? Revenues, partnerships, employee & program expenses As you think about your strategies, create different scenarios or possible outcomes. We never know exactly what will happen in the future. We can usually imagine several different scenarios better than we can predict one specific scenario. Accelerate Vermilion 2022: What You Need to Know About the Numbers
