BUSINESS MODELS AND FINANCIAL ANALYSIS JANUARY 18, 2012 BURGES HALL, RM 411.

BUSINESS MODELS AND FINANCIAL ANALYSIS

JANUARY 18, 2012BURGES HALL, RM 411

BUSINESS PLAN DEVELOPMENT

The Business Plan is a key document that articulates what key features will drive your business opportunity. These can include:

• Mission Statement• Key members of the Team• Technology and intellectual positions• Opportunities and market summary• Business model: entry and growth strategy• Competition• Five-year goals and objectives• Five-year financial plan• Risks and rewards

BUSINESS MODELS

Wikipedia: A business model describes the rationale of how an organization creates, delivers and captures economic, social or other forms of value. The process of business model design is part of the business strategy.

BUSINESS MODELS

There are 9 basic business model building blocks (Osterwalder, Alexander &Pigneur, Yves . Business Model Generation: John Wiley & Sons, Inc. 2010)

What are you going to make and sell or service??

1) Value Propositions2) Key Activities3) Key Resources4) Key Partners5) Customer segments6) Channels—sales and disribution7) Customer Relationships8) Cost Structure9) Revenue Streams

BUSINESS MODELS, continued

1) Value Propositions

a) What will you do to solve customer problems

and satisfy customer (unmet) needs?

b) What will you do to differentiate your product

and/or service?

Impact of Differentiated Products

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+12% Market share

+34% Market share


2) Key Activities

Examples Microsoft—software development

Dell—supply chain management

McKinsey—problem solving

Newco—outsourcing decisions

HOW WILL YOU CREATE A COMPETITIVE ADVANTAGE?


3) Key Resources

a) Physical—manufacturing facilities, buildings,

distribution networks

b) Intellectual—brands, patents and copyrights,

customer databases

c) Human—people are particularly prominent in

certain business models, such as pharma

d) Financial—financial resources or guarantees

such as lines of credit


4) Key Partners

a) Strategic alliances between non-competitors

b) Strategic partnerships between competitors

c) Joint Ventures

d) Buyer-supplier relationships

e) Outsourcing manufacturing


5) Customer Segments—defines the different groups of people or organizations an enterprise aims to reach and serve

a) Mass Market

b) Niche Market

c) Segmented: big/small; innovative/commodity

d) Diversified


6) Channels—how a company communicates with and reaches its customer segments

a) Awareness of our products and services

b) Evaluation of the Value Propositions

c) Purchase (of specific products?) d) Delivery of Value Proposition e) After Sales Support

LIST DIFFERENT SALES CHANNELTYPES

LIST DIFFERENT CHANNELS OF DISTRIBUTION


7) Customer Relationships—what type of relationship does each of our customer segments require (desire)?

Some examples a) Personal assistance b) Dedicated personal assistance c) Self-service d) Automated services ( set up to offer

book or movie recommendations)


8) Cost Structure—describes all costs incurred to operate a business model

a) Cost-driven b) Value-driven c) Fixed costs d) Variable costs e) Economies of scale


9) Revenue Streams

Examples include a) Asset sale b) Usage fee c) Subscription fee d) Lending/renting/leasing e) Licensing

There are a broad range of Pricing Mechanisms including list prices, volume dependent, auctions, product feature dependent, yield management

BUSINESS MODELS

Some Examples:

1) Bait and hook—razor blade strategy; cell phones and air time; computer printers and ink cartridges

2) Southwest airlines—low frills; fast on and off airplane

3) BASF: Verbund—consume everything that goes into plant—”no waste”

SWOT ANALYSIS

Once a business model is developed, it can be tested using a SWOT

analysis on each of the building blocks.

a) Strengths—internal b) Weaknesses--harmful c) Opportunities—external d) Threats—harmful

This analysis can reveal interesting paths to innovation and continuous improvement.

SWOT ANALYSIS, continued

Value Proposition (VP)Assessment Assessing Strengths/Weaknesses1) Our VP are well aligned with customer

needs: scale 5-12) Our VP and customer needs are

misaligned; scale -1 to -5Assessing Opportunities1) What other jobs could we do on behalf of customers?: scale of 1-5

Assessing Threats 1) Are substitute products and services available? Scale of 1-52) Are we in danger of losing any partners? Scale of 1-5

FINANCIAL ANALYSIS DEFINITION

Profit and Loss Statement: A statement showing the revenues, expenses and income of a company. Also known as income statement.

Balance Sheet: A quantitative summary of a company's financial condition including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns and the second part shows all the financing methods.

Cash Flow Statement: A summary of where a company’s money came from and where it went.

Net Present Value (NPV): The difference between the present value of cash inflows and the present value of cash outflows.

PROFIT & LOSS STATEMENT

NEWCO

(000)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Revenues

Sales $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500

Grants $100

Sub-total $40 $600 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500

COGS $16 $206 $401 $609 $1,234 $1,800 $2,432 $3,082 $3,594 $4,067

Gross Margin $24 $394 $599 $891 $1,766 $2,700 $3,568 $4,418 $5,406 $6,433

GM,% 60.0% 58.8% 59.9% 59.4% 58.9% 60.0% 59.5% 58.9% 60.1% 61.3%

SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890

% SAR 440% 70% 43% 38% 20% 18% 18% 18% 18% 18%

Operating Income -$152 $42 $169 $323 $1,166 $1,890 $2,488 $3,068 $3,786 $4,543

Other Income

Taxes $0 $0 $40 $113 $408 $662 $871 $1,074 $1,325 $1,590

Net Income -$152 $42 $129 $210 $758 $1,229 $1,617 $1,994 $2,461 $2,953

PROFIT & LOSS STATEMENT

NEWCO

(000)

2010 2011 2012 2013 2014 COMMENTS

Revenues

Sales $40 $500 $1,000 $1,500 $3,000 Net sales of products and services

Grants $100 Federal/state grants

Sub-total $40 $600 $1,000 $1,500 $3,000

COGS $16 $206 $401 $609 $1,234 Cost Of Goods Sold: includes raw materials and manfg costs

Gross Margin $24 $394 $599 $891 $1,766 Operating profit; also called Gross Profit

GM,% 60.0% 58.8% 59.9% 59.4% 58.9% Ratio of gross margin and sales revenues

SARs $176 $352 $430 $568 $600 Sales, Administration, Research expenses

% SAR 440% 70% 43% 38% 20% Ratio of SAR and sales revenues

Operating Income -$152 $42 $169 $323 $1,166

Other Income Can include revenue from interest

Taxes $0 $15 $59 $113 $408

Net Income -$152 $27 $110 $210 $758

BALANCE SHEET: QUESTIONS

1. How much cash do you have?

2. How much do customers owe you?

3. How much equity has been purchased?

Balance Sheet--#1 (3rd year)

ASSETS LIABILITIES

Current Assets Current Liabilities Cash $130,000 Accounts payable $10,000 Accounts receivable $15,000 Short-term notes

(less doubtful accounts) Current portion of long-term notes Inventory $25,000 Interest payable Temporary investment Taxes payable $5,000 Prepaid expenses Accrued payroll

Total Current Assets $170,000 Total Current Liabilities $15,000

Fixed Assets Long-term Liabilities Start-up Costs $100,000 Mortgage Patent Costs $20,000 Other long-term liabilities $100,000 Buildings Total Long-Term Liabilities $100,000

(less accumulated depreciation) Equipment and computers $65,000 Total Liabilities $115,000

(less accumulated depreciation) Furniture and fixtures $10,000 SHAREHOLDERS' EQUITY

(less accumulated depreciation) Capital stock $500,000 Total Net Fixed Assets $195,000 Retained earnings -$250,000

Total Shareholders' Equity $250,000

TOTAL ASSETS $365,000 TOTAL LIABILITIES & EQUITY $365,000

Balance Sheet Check OK

Balance Sheet--#1 (3rd Year)

ASSETS LIABILITIES

Current Assets Current Liabilities Cash $130,000 Accounts payable $10,000 Accounts receivable $15,000 Short-term notes

(less doubtful accounts) Current portion of long-term notes Inventory $25,000 Interest payable Temporary investment Taxes payable $5,000 Prepaid expenses Accrued payroll

Total Current Assets $170,000 Total Current Liabilities $15,000

Fixed Assets Long-term Liabilities Start-up Costs $100,000 Mortgage Patent Costs $20,000 Other long-term liabilities $100,000 Buildings Total Long-Term Liabilities $100,000

(less accumulated depreciation) Equipment and Computers $65,000 Total Liabilities $115,000

(less accumulated depreciation) Furniture and fixtures $10,000 SHAREHOLDERS' EQUITY

(less accumulated depreciation) Capital stock $500,000 Total Net Fixed Assets $195,000 Retained earnings -$250,000

Total Shareholders' Equity $250,000

TOTAL ASSETS $365,000 TOTAL LIABILITIES & EQUITY $365,000

Balance Sheet Check OK

RATIOSCurrent Ratio 11.33 Current Ratio = Current Assets/Current LiabilitiesQuick Ratio 9.67 Quick Ratio = (Current Assets-Inventories)/ Current LiabilitiesCash Ratio 8.67 Cash Ratio = Cash/Current LiabilitiesWorking Capital $155,000 Working Capital = Current Assets - Current Liabilities

CASH FLOW STATEMENT: QUESTIONS

1. In what year are you cash-flow positive?

2. How much cash do you generate in 2016?

3. How much more working capital do you need in 2013?

CASH FLOW STATEMENT

NEWCO

(000)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Revenues $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500

Grants

Sub-total $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500

COGS $13 $165 $321 $487 $987 $1,440 $1,946 $2,466 $2,875 $3,254

Gross Margin $27 $335 $679 $1,013 $2,013 $3,060 $4,054 $5,034 $6,125 $7,246

SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890

Operating Income -$149 -$17 $249 $445 $1,413 $2,250 $2,974 $3,684 $4,505 $5,356

Other Income

Taxes $0 $0 $87 $156 $495 $788 $1,041 $1,289 $1,577 $1,875

Net Income -$149 -$17 $162 $289 $918 $1,463 $1,933 $2,395 $2,928 $3,481

Working Cap change -$1 -$13 -$14 -$27 -$56 -$64 -$98 -$108 -$132 -$139

Cash from Operations -$150 -$30 $148 $262 $862 $1,399 $1,835 $2,287 $2,796 $3,342

Capital -$35

Investment $200

Cash Flow $15 -$30 $148 $262 $862 $1,399 $1,835 $2,287 $2,796 $3,342

Year-End Cash $15 -$15 $133 $395 $1,257 $2,656 $4,491 $6,778 $9,574 $12,916

FINANCIAL ANALYSIS

Net Present Value (NPV) To calculate in Excel; “=NPV(Discount rate,%, Year 1,$:Year X,

$)” NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation/risk into account. The larger the NPV, the better.

Discount rate represents the business risk. The higher the rate, the greater the risk.

MODIFIED INCOME STATEMENTNEWCO Base Case

(000)2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Revenues $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500

Sub-total $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500

Production, units 1.0 12.7 25.6 39.0 78.9 120.0 162.2 205.5 250.0 295.8

COGS $13 $165 $321 $487 $987 $1,440 $1,946 $2,466 $2,875 $3,254

Gross Margin $27 $335 $679 $1,013 $2,013 $3,060 $4,054 $5,034 $6,125 $7,246GM,% 67.5% 67.1% 67.9% 67.5% 67.1% 68.0% 67.6% 67.1% 68.1% 69.0%

SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890

% SAR 440% 70% 43% 38% 20% 18% 18% 18% 18% 18%


Taxes @ 35% $0 $0 $87 $156 $495 $788 $1,041 $1,289 $1,577 $1,875Net Income -$149 -$17 $162 $289 $919 $1,463 $1,933 $2,395 $2,928 $3,482

Working Cap change $1 $13 $14 $27 $56 $64 $98 $108 $132 $139


Capital $35 Cash Flow -$185 -$29 $148 $263 $863 $1,398 $1,835 $2,287 $2,796 $3,343

Cumulative Cash -$185 -$214 -$66 $197 $1,059 $2,458 $4,293 $6,580 $9,376 $12,719

Discount Rate NPV 35% $1,195 '10-'19

MODIFIED INCOME STATEMENTNEWCO Higher Sales

(000)2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Revenues $40 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500 $12,000

Sub-total $40 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500 $12,000


COGS $13 $329 $481 $974 $1,480 $1,920 $2,432 $2,959 $3,354 $3,718

Gross Margin $27 $671 $1,019 $2,026 $3,020 $4,080 $5,068 $6,041 $7,146 $8,282GM,% 67.5% 67.1% 67.9% 67.5% 67.1% 68.0% 67.6% 67.1% 68.1% 69.0%

SARs $176 $452 $530 $568 $900 $1,080 $1,350 $1,620 $1,890 $2,160

% SAR 440% 45% 35% 19% 20% 18% 18% 18% 18% 18%

Operating Income -$149 $219 $489 $1,458 $2,120 $3,000 $3,718 $4,421 $5,256 $6,122

Taxes @ 35% $0 $0 $171 $510 $742 $1,050 $1,301 $1,547 $1,840 $2,143Net Income -$149 $219 $318 $948 $1,378 $1,950 $2,416 $2,874 $3,416 $3,979


Cash from Operations -$150 $193 $304 $880 $1,322 $1,846 $2,318 $2,726 $3,285 $3,801

Capital $35

Cash Flow -$185 $193 $304 $880 $1,322 $1,846 $2,318 $2,726 $3,285 $3,801Cumulative Cash -$185 $7 $312 $1,192 $2,514 $4,360 $6,678 $9,403 $12,688 $16,489

Discount Rate NPV

35% $1,897 '10-'19

MODIFIED INCOME STATEMENTNEWCO Higher Unit Costs

(000)2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Revenues $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500

Sub-total $40 $500 $1,000 $1,500 $3,000 $4,500 $6,000 $7,500 $9,000 $10,500


COGS $16 $206 $401 $609 $1,234 $1,800 $2,432 $3,082 $3,594 $4,067

Gross Margin $24 $294 $599 $891 $1,766 $2,700 $3,568 $4,418 $5,406 $6,433GM,% 59.4% 58.9% 59.9% 59.4% 58.9% 60.0% 59.5% 58.9% 60.1% 61.3%

SARs $176 $352 $430 $568 $600 $810 $1,080 $1,350 $1,620 $1,890

% SAR 440% 70% 43% 38% 20% 18% 18% 18% 18% 18%


Taxes @ 35% $0 $0 $59 $113 $408 $662 $871 $1,074 $1,325 $1,590Net Income -$152 -$58 $110 $210 $758 $1,229 $1,617 $1,994 $2,461 $2,953



Capital $35 Cash Flow -$189 -$73 $92 $177 $689 $1,148 $1,495 $1,860 $2,296 $2,779

Cumulative Cash -$189 -$262 -$170 $7 $696 $1,844 $3,339 $5,198 $7,494 $10,273

Discount Rate NPV 35% $898 '10-'19

MODIFIED INCOME STATEMENT/PROCESS IMPROVEMENT

1. Which is the better Case and why?

MODIFIED INCOME STATEMENTProcess Improvement Project

Base Case (000) 2X Capital Investment/30% Reduction in COGS2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Revenues $40 $500 $1,000 $1,500 $3,000 $40 $500 $1,000 $1,500 $3,000

Sub-total $40 $500 $1,000 $1,500 $3,000 $40 $500 $1,000 $1,500 $3,000


COGS $13 $163 $325 $488 $975 $10 $125 $250 $375 $750

Gross Margin $27 $338 $675 $1,013 $2,025 $30 $375 $750 $1,125 $2,250GM,% 67.5% 67.5% 67.5% 67.5% 67.5% 75.0% 75.0% 75.0% 75.0% 75.0%

SARs $176 $352 $430 $568 $600 $176 $352 $430 $568 $600

% SAR 440% 70% 43% 38% 20% 440% 70% 43% 38% 20%

Operating Income -$149 -$15 $245 $445 $1,425 -$146 $23 $320 $557 $1,650

Taxes @ 35% $0 $0 $86 $156 $499 $0 $0 $112 $195 $578Net Income -$149 -$15 $159 $289 $926 -$146 $23 $208 $362 $1,073


Cash from Operations -$150 -$27 $145 $263 $871 -$147 $13 $197 $342 $1,030

Capital $35 $70 Cash Flow -$185 -$27 $145 $263 $871 -$217 $13 $197 $342 $1,030

Cumulative Cash -$185 -$212 -$67 $196 $1,067 -$217 -$203 -$7 $335 $1,365

Discount Rate NPV Valuation Discount Rate NPV 35% $180 '10-'14 35% $259 '10-'14

FINANCIAL ANALYSISSUMMARY

Analyzing the financial situation of a company is

a complicated process. One needs to use more than one tool to develop an accurate picture of the true financial situation of a business. The use of a P&L Statement, a Balance Sheet and a Cash-Flow Statement are essential.

Net Present Value (NPV) is a powerful financial

tool and should be used to help analyze different business cases.

BUSINESS MODELS AND FINANCIAL ANALYSIS JANUARY 18, 2012 BURGES HALL, RM 411.

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