Business

lindasa

ch09.pdf

Home >Business & Finance homework help >Management homework help >Business

Resource Management

Patterns of Entrepreneurship Management 5th Edition, Chapter 9

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Managing Money and People

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Presentation Outline

• Understanding Financial Statements

– The Value of the Balance Sheet

– The Value of the Income Statement

– The Value of the Statement of cash flows

• Preparing financial projections

• Preparing Budget projections

• Prepare a Forecast of cash Flow

• Building a Culture for Innovation

• Human Resources Management

– Hiring, Interviewing, Firing and Resignations

– Conflict of Interest Resolution

• Important Legal Documents

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

The Three Basic Financial Documents

1. The balance sheet (also called the statement

of financial position)

2. An income statement or profit-and-loss

(P&L) statement.

3. The statement of cash flows (also called

source and use of funds).

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

➢ Balance sheet = Liabilities + Shareholders

equity

➢ Book Value = total of the tangible assets less

subtracting all the liabilities

➢ Book value does not include intangible assets

like Intellectual Property and goodwill

➢ Goodwill includes factors like brand, market

share, and human capital

Value of the Balance Sheet Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

How to use Ratios for Financial Analysis - 1

➢ Current Ratio ➔ total current assets divided by the

current liabilities

➢ Quick Ratio ➔ Only liquid current assets such as cash

and account receivables divided by current liabiliti

Financial Ratios are used by managers to monitor

the health of the company and its operations. They

are often used by bankers when lending to the

company.

These Two Ratios are used as a guide to the health

of the company’s balance sheet:

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

➢ Current Liabilities to Net Worth

➢ Total Liabilities to Net Worth

➢ Fixed Assets to Net Worth

How to use Ratios for Financial Analysis - 2

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

These Three Solvency Ratios are used to

gauge the sustainability and financial health

of the company:

➢ Return on Investment (ROI) ratio

compares the net profit of the business to

the investment (net worth) of the business.

It is calculated as net income after taxes

(from the income statement) divided by

total owner’s equity (from the balance

sheet)

➢ ROI = Net Income

Shareholders’ equity

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

How to use Ratios for Financial Analysis - 3

EBITDA is the earnings before interest

expense, interest income, income taxes,

depreciation and amortization. It measures

the profitability of a company’s operations

without the impact of its debt, investments

and long-term assets. It is the basic

measurement of the day-to-day health of the

company’s operations.

Financial Definitions - 1

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

• A Break-even analysis is the point at

which a given output results in neither

profit or loss.

• It is a decision-making tool that helps

the entrepreneur determine whether a

certain volume of output will result in a

profit or loss, or the minimum volume

necessary to be just profitable.

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Financial Definitions - 2

The formula: the price per unit (P) multiplied by the number of units sold (X) is equal to the fixed costs (F) plus the variable costs (V) multiplied by the number of units produced expressed as the following formula:

P(X) = F + V(X)

The Break-even Formula

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

As an example, if fixed costs (F) are $40,000, the variable costs per unit (V) are $15 and the price per unit (P) is $20, the break-even point (X) can be calculated by plugging these values into the equation:

➢20(X) = 40,000 + 15(X)

➢20X – 15X = 40,000

➢5X = 40,000

➢X = 8,000 units

Example of Break Even

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Young companies are usually short of cash and therefore it is important to forecast cash needs long before starting to raise capital as equity or debt.

A Forecast of Cash Flow is a month to month projection of receipts and disbursements activity including:

• Receipts from Sales. The detail from sales, the payment terms the company extends its customers, and the company’s collection history

• Other Receipts. Other receipts include bank loans, equity investments, tax refunds or any other inflows of cash

• Disbursements from Expenses. The detail from expenses and the payment terms

• Other Disbursements. This includes capital equipment acquisitions and payment of debt.

Forecast of Cash Flow

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

• The annual budget presents a month-by-month

projection of revenues.

• It is used for planning and control. Each month

compare actual with budget and make adjustments

as necessary.

• The budget is the foundation for projecting the

other financial statements.

• An entrepreneur must always be aware of how long

the current cash reserves will last…..the cash

“runway”.

• It always takes much longer to raise funds than

planned.

Annual Budget

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Developing a Culture for Innovation

•The ability to lead an organization on a mission where everyone

is involved everyday in moving forward toward clearly defined

goals makes the difference between success and failure.

•There are 10 leadership attributes that, above all others, should

be practiced within companies to insure successful innovation.

•Building a culture Is a top-down, everyday leadership

responsibility.

•EVERY action must reflect the culture that you are building and

there should be NO inconsistences in behaviors.

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

10 Attributes of a Successful Innovative Company-1

Attribute Definition Example

Honesty Degree to which employee has confidence in integrity,

ability, and character of

others within the

organization

“I trust people I work with

and find it easy to be open

and honest with people

from all over the company”

Alignment Degree to which the interests and actions of each

employee support the

clearly stated and

communicated key goals of

the organization

“We have clear aims and

objectives which everyone

understands; we build

consensus around key

objectives; we recognize

and reward loyalty”

Risk Degree to which organization and

individuals take risks

“I am encouraged to

experiment; we take

calculated risks; we

encourage and reward

error”

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

10 Attributes of a Successful Innovative Company-2

Attribute Definition Example

Teams The degree to which team performance is

emphasized over

individual performance

“We promote teamwork,

it’s the center of

everything we do”

Empowerment The degree to which each employee feels empowered

by managers and the org.

“As a manager I’m

expected to delegate; we

have a no-blame culture;

we allow our staff to make

decisions

Freedom The degree to which self- initiated and unofficial

activities are tolerated and

approved throughout the

organization

“I’m allowed to do my

own thing; we encourage

people to take initiative;

we recognize the

individual”

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

10 Attributes of a Successful Innovative Company-3

Attribute Definition Example

Support The degree to which new ideas are welcomed from

all sources and responded

to promptly and

appropriately

“We encourage fresh

ideas; we reward

innovative individuals and

teams”

Engagement The degree to which all levels of the organization

are engaged with the

customer and the

operations of the

organization

“Management understands

the operations of the

company; I can share my

problems with my

managers; I know my job

is important”

Stimuli The degree to which it’s understood that unrelated

knowledge can impact

product, service, and

operations improvements

“I am encouraged to search

externally for information

and obtain data from many

sources; we listen to

suppliers’ suggestions”

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

10 Attributes of a Successful Innovative Company-4

Attribute Definition Example

Communication The degree to which there is both planned and

random interaction

between functions and

divisions at all levels of

the organization

“I am kept in the picture

on how we’re performing;

we have excellent formal

channels of

communication; we use

best practice knowledge

transfer between our

departments; we actively

manage our intellectual

assets

•Does your leadership style exhibit these attributes?

•Work on demonstration each of these EVERY day

•A vibrant culture results from top-down leadership

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Hiring

• Your company is only as good as the

people that you hire

• Use networks to access potential hires

• Beware hiring friends and family

members

• Hire to match your culture

• Values are inherent, skills can be learned

• If in doubt, don’t hire for expediency

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Interviewing

• Be prepared and punctual

• Relax the candidate by telling YOUR story

• Clearly establish the cultural values of the company

• Invite them to tell their story

• Explore values, creativity and ambitions

• Use open-ended questions, challenge, change topics

• Invite their questions before summarizing

• Record impressions immediately

• Act promptly whether no or yes

• Check references if a hire is contemplated

• Seek second opinion if possible

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

5 Reasons to Fire an Employee

• The company is short of funds

• The company is changing direction and

no longer needs their specific skills

• Repeated poor performance

• Disruptive behavior

• For actual cause

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Firing Procedures

• Try to avoid surprises. Have a warning system. It is

better to help someone perform better than to fire them

• When there is no alternative, act promptly

• Remind them of their contractual obligations

• If you have to fire someone, keep the discussions

unemotional, and try to retain trust

• If possible, allow them to preserve their self-esteem

• Offer to help if appropriate

• Ask them to leave the premises immediately

• “The day you enjoy firing someone, its time to leave

yourself”

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Dealing with a Key Person Resignation

• Agree the procedures for hand-over

• Avoid taking it personally

• Keep the door open, you may want to re-hire them

later

• Celebrate and let everyone know that you regret the

decision but you wish them success

• Conduct an exit interview

• Remind them of their contractual obligations

• Analyze what went wrong – learn.

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Conflicts of Interest

• Be continually aware that you may slip

into a “conflict of interest” situation

• Carefully analyze any situation where a

conflict may arise

• Even if there is no real conflict, others

may not understand – make a point of

explaining the issues and your position

• Take steps to resolve any perceived or

actual conflict quickly

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Three Steps to Resolve Ethical Dilemmas

• The “Gut-feel” test. If you have a feeling that there

is a conflict or ethical issue, then there most likely is.

Don’t try to hide it – deal with it.

• Stake-holder analysis. There are no GRAY or

FUZZY LINES. Understand who is affected, how,

and what obligations all parties have to each other.

• Full Disclosure. Expose and discuss the issues and

concerns with ALL possible affected stakeholders. If

in doubt, tell more parties than less, and provide more

information, not less.

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Key Legal Documents - Employment Agreement

• Every employee should execute this agreement

which must contain at least these five

obligations:

- Confidentiality during and after employment - Return all company materials when they leave

- Cannot work for another business

- Cannot compete while employed or for an agreed

period after leaving

- All inventions must be assigned to the company

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Key Legal Documents - Consulting Agreement

• Work-for-hire requirement

• All work output belongs to the company

• Confidentiality is required

• Project is clearly defined

• Consultant must keep records of time spent

and out-of-pocket expenses

• Company is not responsible for insurances and

taxes other than those required by the law

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Key Legal Documents – Separation Agreement

• Used when an employee leaves voluntarily or is fired

• Re-define both parties obligations with regard to

confidentiality

• Re-assert non-compete obligations with specific terms

and conditions

• Agree and define any public statements that either may

make

• General release from all other future legal obligations

by both parties

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Key Legal Documents – Sales and Marketing Agreement

• An agreement between two companies, one of

which will market and sell the products or

services of the other

• Important to clearly define the responsibilities

of both parties

• Exclusive or not?

• Define products, pricing, payments, regions,

commissions, publicity, quality, support etc.

• State term, renewable options, and

terminatioin procedures

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Key Legal Documents - Confidentiality Agreement

• Entered into between two or more parties to

protect exchange of information needed to

explore a possible business relationship

• May protect the information of one or more

parties

• Defines the information to be disclosed and

procedures for its treatment and return

• The term for confidentiality must be stated

together with legal ramifications if the

confidentiality is breached

• Also known as a “Non-Disclosure Agreement”

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Key Legal Documents – Stock Option Agreement

• Used to incentivize key employees

• Component of compensation that can help preserve cash

reserves

• Only available to employees of the company

• Two forms, ISO and NSO – differ in their tax implications

• Need to be approved by board and stock-holders

• Usual to set aside 10-15% of the outstanding shares of the

company held in a pool for future key employees – this

must be disclosed and approved by potential investors

• The tax implications can be complex and the entrepreneur

should get professional advice when setting up the plan.

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters

Final Points

• A young company should try to minimize its legal

costs as they can rapidly escalate

• But it is important that the legal affairs of the

company are well managed

• Learn to use free legal documents whenever

possible, but if in doubt, seek legal counsel

• Develop a relationship with a law firm that has

experience with young companies – often they will

reduce their fees in the hope that you will be a

large client sometime in the future

• A good law firm can be invaluable in providing

sound advice and access to their networks.

Chapter 9

Financial Statements

Financial Analysis

Budget Projections

Cash Flow Forecasts

Building the Culture

Hiring and Firing

Conflicts of Interest

and Ethics

Legal Matters