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Start up math

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Anjana Vivek
Anjana Vivek

The Basics and More of Math and Finance for entrepreneurs to know as they set-up, manage and grow their business

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TiE Bengaluru TiE Young Entrepreneurs (TYE) StartUp Math 1st December 2018 Anjana Vivek
At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 2 2
BEFORE YOU START What do you want to understand about the Math … of a business..? .. .. of a startup ..? 3
TO TRIGGER THINKING Why Math … An Input/Output: … Helps Measure … Assists in decision making … To Understand if business is healthy or needs improvement.. … etc.. 4
BEFORE YOU START: Recap • WHAT is your Dream? • Dreams get you started Best .. LARGEST.. .. first.. .. contribute.. .. impact.. .. change.. 5
BEFORE YOU START: Recap • WHAT is your motivation .. for this Dream? IMPACT NAME FAME MONEY …. OTHER 6
At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 7 7
FINANCIAL PERSPECTIVES 4 items to think about: • Revenue • Profits/Costs • Cash / Cash Burn • Value 8
REVENUE STREAMS Activity • Pick your business • List individually.. shortlist as a team Who are your CUSTOMERS ? How will you earn REVENUE? 9
PRODUCT/SERVICE OFFERINGS • Product Lines • Service Lines • Combination solutions (product/service) 10
SALES/REVENUE Customer Segments – B2B ; B2 – Corporate/Home – Premium/luxury // Mass/low income – Online/offline in stores …… etc. • Check % of sales quantity and amount category-wise • What should be activities to reach out to customers and get revenue in each segment? ……….. MATH is Language that communicates this s11
EXPENSES Activity • Pick your business • List individually.. shortlist as a team What are your KEY EXPENSES ? Can you sort them into different buckets? 12
EXPENSES: Capital and Revenue • Set up costs – Land, building, machinery etc. • Vehicles, computers etc. • Cost of raw material • Employee costs • Finance costs • Travel costs • Other Expenses … etc. • Depreciation and amortization 13
KEY EQUATION - 1 Profit = Revenue/Income – Expenses 14
KEY EQUATION - 1 Profit = Revenue/Income – Expenses • In the longer term, business must generate profit, i.e. Sales must be greater than cost. • Price and cost both impact profit. – Pricing – an art and science – Costing – math with assumptions 15
16 PRICING • Intuitive • Rule of thumb • Trial and error • Discount • Premium • Cost based • Mark up • …
17 PRICING DECISIONS Influenced by • Costs • Competitors • Customers • Time horizon – short run or long run decisions • Strategic reasons
18 A CUP OF COFFEE • A cup of coffee costs Rs. 15 to make – What are the elements of this cost? • HOW will you plan to price this?
KEY EQUATIONS • Profit = Revenue/Income – Expenses • Shareholders Stake = Assets – Liabilities ( Costs of material used = Opening stock + purchases – closing stock) 19
Where the entrepreneur did not track finance (Based on a true situation) • A services business took advance in cash. • The founder, Tim did not keep track of project-wise expenses, on a regular basis. • 4 months after a project was completed, Tim found out that he had made a substantial loss in the project. • He realised that if he had tracked expenses, he could have contained expenditure and perhaps even been profitable in this key project. • If you had been the founder what would you have done differently, to avoid the situation above? • How can Tim take corrective measures to address loss? MISSING THE MATH? Caselet
Where the entrepreneur did not track finance (Based on a true situation) • Ram Kumar focused on sales and operations. • He did not know to read/interpret financial statements. • After two years of business, there was a conflict between him and co-founder Dinesh. • Ram was given a statement showing loss in business. • Ram was shocked because he had expected the business to be profitable. • If you had been the founder what would you have done differently, to avoid such a situation? • Can you think of how Ram can address this issue? MISSING THE MATH? Caselet
At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 22 22
WHAT IS A BUSINESS MODEL • Investopedia definition “The plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs.” http://www.investopedia.com/terms/b/businessmodel.asp • HBR article by Andrea Ovans: What is a business model https://hbr.org/2015/01/what-is-a-business-model 23
EXAMPLES OF INDIAN COMPANIES… Where the business model was different from those existing at that point in time: Some years ago • Bharti Airtel, Big Bazaar, RedBus, Café Coffee Day Later • E-commerce companies, platform business, for example Flipkart, Zomato, Big Basket, Paytm, Practo, Ola … Now & emerging • Any names to suggest? • YOU and TEAM? 24
BUSINESS MODEL CANVAS: 9 building blocks BUSINESS MODEL CANVAS (BMC) • Customer segments • Value propositions • Channels • Customer relationships • Revenue streams • Key resources • Key activities • Key partnerships • Cost structures SOURCE:http://www.businessmodelgeneration.com/canvas • Acknowledgements: – Wikipedia, the free encyclopedia – http://www.businessmodelgeneration.com – http://www.businessmodelhub.com – Alexander Osterwalder 25
At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 26 26
FINANCIAL STATEMENTS BALANCE SHEET: The State of affairs of the organization PROFIT AND LOSS ACCOUNT: Working results for given period CASH FLOW STATEMENT: Cash receipts, payments during period 27
STRATEGIC FINANCIAL PLANNING Your • Financial Model depends on • Business Model See how changes in these can impact: • Revenue • Profits/Costs • Cash / Cash Burn • Growth • Value 28
FINANCIAL FORECAST: Overview • It helps to take time to think through – Your business strategy and business model – Your key strengths – The pain points you face, financial and non-financial • A financial model develops and evolves over time – it is not static
STRATEGIC FINANCIAL PLANNING In 3 Dimensions of time: • Short term: Typically 1 year; month-wise; sometimes week-wise; more easily available, fewer assumptions • Medium term: Typically 3-5 years; Estimates and Guesstimates… trends • Long term: Typically 10 – 15 years; less numbers Action: THINK and Plan based on above Required: Balancing Act between planned activities and unplanned sudden requirements.. .. 30
PLUS: To Think Through • Requirements of cash at different times and different stages of business • Resource/money constraints • Possible valuations at these stages FINANCIAL FORECAST: Overview
Look at • Various revenue streams • Capital expenditure (land, computers, vehicles, furniture etc.) • Revenue expenditure (Salary, raw material cost, maintenance and repair costs etc.) You may be able to convert a capital expenditure into a revenue and vise-versa .. HOW? FINANCIAL FORECAST: Overview
FINANCIAL FORECASTS • Key elements in a forecast – Revenue – Costs: operational, sales & general admn. – Capital expenses – Working capital expenses – Earnings – Tax, interest and other costs – Sources of funding – Uses of funding 33
FINANCIAL FORECAST: Preparation • Uncertainties and unknowns can be captured through: – Scenario and sensitivity analysis – Templates that allow for different scenarios – i.e. optimistic, pessimistic, expected. For example making the changes in the input, the output financials should show the impact • Use tools available – eg.spreadsheets • Link and create templates, suitable to your requirement
At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 35 35
MEASURE, REVIEW, CORRECT.. MEASURE.. • An individual measures height, weight, BP, sugar levels etc.. as key parameters for wellness • What are the Wellness and Value measures for a business/idea? – Top Line: Revenue – Bottom Line: earnings/profits – Cash Flow – Number of employees – Key costs – … ?? 36
MEASURE, REVIEW, CORRECT.. MEASURE.. • Capture data periodically; monthly/fortnightly/weekly … • Design a reporting Management Information System (MIS) to evaluate – the Key Performance Indices (KPIs) – Key Value Drivers and – Key Value Depleters 37
QUALITY PARAMETERS - EXAMPLE • Illustrative parameters, for Sales – Sales Quantity – Quality of revenue - in terms of product/service/location etc. – Average revenue per employee – Number of customers, number of high value customers – Number of customers who are above a certain revenue or category, eg. large companies, well known brands .. – New customers added – Customers lost – Pipeline customers – Etc. • Quality can impact valuation in addition to Quantity 38
MEASURE, REVIEW, CORRECT.. MEASURE.. • More illustrative indicative parameters – Key expenses – Number of employees – Average cost per employee – Receivables and payables – Cash balance – Key assets – Loans outstanding – Equity capital 39
MEASURE, REVIEW, CORRECT.. MEASURE.. • Design MIS with care: – too little information is not helpful – too much data can be counter productive • Analyse data, look for patterns and trends, recast – Check for variances over time, with underlying causes – Compare with benchmark companies – Factor learnings into business strategy and action plan – Recast and redo projections and plan if required • Periodically revisit MIS framework and add/update 40
At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 41 41
IN SUMMARY • Finance is important for survival, sustainability and success; however finance is not everything • As … All the entrepreneurs who have money are not successful & All those with no money or limited money are not unsuccessful 42
Thanks … and All The VERY BEST 43For more such class and teaching notes/slides check out: www.slideshare.net/anjanavivek

More Related Content

Start up math

  • 1. TiE Bengaluru TiE Young Entrepreneurs (TYE) StartUp Math 1st December 2018 Anjana Vivek
  • 2. At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 2 2
  • 3. BEFORE YOU START What do you want to understand about the Math … of a business..? .. .. of a startup ..? 3
  • 4. TO TRIGGER THINKING Why Math … An Input/Output: … Helps Measure … Assists in decision making … To Understand if business is healthy or needs improvement.. … etc.. 4
  • 5. BEFORE YOU START: Recap • WHAT is your Dream? • Dreams get you started Best .. LARGEST.. .. first.. .. contribute.. .. impact.. .. change.. 5
  • 6. BEFORE YOU START: Recap • WHAT is your motivation .. for this Dream? IMPACT NAME FAME MONEY …. OTHER 6
  • 7. At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 7 7
  • 8. FINANCIAL PERSPECTIVES 4 items to think about: • Revenue • Profits/Costs • Cash / Cash Burn • Value 8
  • 9. REVENUE STREAMS Activity • Pick your business • List individually.. shortlist as a team Who are your CUSTOMERS ? How will you earn REVENUE? 9
  • 10. PRODUCT/SERVICE OFFERINGS • Product Lines • Service Lines • Combination solutions (product/service) 10
  • 11. SALES/REVENUE Customer Segments – B2B ; B2 – Corporate/Home – Premium/luxury // Mass/low income – Online/offline in stores …… etc. • Check % of sales quantity and amount category-wise • What should be activities to reach out to customers and get revenue in each segment? ……….. MATH is Language that communicates this s11
  • 12. EXPENSES Activity • Pick your business • List individually.. shortlist as a team What are your KEY EXPENSES ? Can you sort them into different buckets? 12
  • 13. EXPENSES: Capital and Revenue • Set up costs – Land, building, machinery etc. • Vehicles, computers etc. • Cost of raw material • Employee costs • Finance costs • Travel costs • Other Expenses … etc. • Depreciation and amortization 13
  • 14. KEY EQUATION - 1 Profit = Revenue/Income – Expenses 14
  • 15. KEY EQUATION - 1 Profit = Revenue/Income – Expenses • In the longer term, business must generate profit, i.e. Sales must be greater than cost. • Price and cost both impact profit. – Pricing – an art and science – Costing – math with assumptions 15
  • 16. 16 PRICING • Intuitive • Rule of thumb • Trial and error • Discount • Premium • Cost based • Mark up • …
  • 17. 17 PRICING DECISIONS Influenced by • Costs • Competitors • Customers • Time horizon – short run or long run decisions • Strategic reasons
  • 18. 18 A CUP OF COFFEE • A cup of coffee costs Rs. 15 to make – What are the elements of this cost? • HOW will you plan to price this?
  • 19. KEY EQUATIONS • Profit = Revenue/Income – Expenses • Shareholders Stake = Assets – Liabilities ( Costs of material used = Opening stock + purchases – closing stock) 19
  • 20. Where the entrepreneur did not track finance (Based on a true situation) • A services business took advance in cash. • The founder, Tim did not keep track of project-wise expenses, on a regular basis. • 4 months after a project was completed, Tim found out that he had made a substantial loss in the project. • He realised that if he had tracked expenses, he could have contained expenditure and perhaps even been profitable in this key project. • If you had been the founder what would you have done differently, to avoid the situation above? • How can Tim take corrective measures to address loss? MISSING THE MATH? Caselet
  • 21. Where the entrepreneur did not track finance (Based on a true situation) • Ram Kumar focused on sales and operations. • He did not know to read/interpret financial statements. • After two years of business, there was a conflict between him and co-founder Dinesh. • Ram was given a statement showing loss in business. • Ram was shocked because he had expected the business to be profitable. • If you had been the founder what would you have done differently, to avoid such a situation? • Can you think of how Ram can address this issue? MISSING THE MATH? Caselet
  • 22. At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 22 22
  • 23. WHAT IS A BUSINESS MODEL • Investopedia definition “The plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs.” http://www.investopedia.com/terms/b/businessmodel.asp • HBR article by Andrea Ovans: What is a business model https://hbr.org/2015/01/what-is-a-business-model 23
  • 24. EXAMPLES OF INDIAN COMPANIES… Where the business model was different from those existing at that point in time: Some years ago • Bharti Airtel, Big Bazaar, RedBus, Café Coffee Day Later • E-commerce companies, platform business, for example Flipkart, Zomato, Big Basket, Paytm, Practo, Ola … Now & emerging • Any names to suggest? • YOU and TEAM? 24
  • 25. BUSINESS MODEL CANVAS: 9 building blocks BUSINESS MODEL CANVAS (BMC) • Customer segments • Value propositions • Channels • Customer relationships • Revenue streams • Key resources • Key activities • Key partnerships • Cost structures SOURCE:http://www.businessmodelgeneration.com/canvas • Acknowledgements: – Wikipedia, the free encyclopedia – http://www.businessmodelgeneration.com – http://www.businessmodelhub.com – Alexander Osterwalder 25
  • 26. At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 26 26
  • 27. FINANCIAL STATEMENTS BALANCE SHEET: The State of affairs of the organization PROFIT AND LOSS ACCOUNT: Working results for given period CASH FLOW STATEMENT: Cash receipts, payments during period 27
  • 28. STRATEGIC FINANCIAL PLANNING Your • Financial Model depends on • Business Model See how changes in these can impact: • Revenue • Profits/Costs • Cash / Cash Burn • Growth • Value 28
  • 29. FINANCIAL FORECAST: Overview • It helps to take time to think through – Your business strategy and business model – Your key strengths – The pain points you face, financial and non-financial • A financial model develops and evolves over time – it is not static
  • 30. STRATEGIC FINANCIAL PLANNING In 3 Dimensions of time: • Short term: Typically 1 year; month-wise; sometimes week-wise; more easily available, fewer assumptions • Medium term: Typically 3-5 years; Estimates and Guesstimates… trends • Long term: Typically 10 – 15 years; less numbers Action: THINK and Plan based on above Required: Balancing Act between planned activities and unplanned sudden requirements.. .. 30
  • 31. PLUS: To Think Through • Requirements of cash at different times and different stages of business • Resource/money constraints • Possible valuations at these stages FINANCIAL FORECAST: Overview
  • 32. Look at • Various revenue streams • Capital expenditure (land, computers, vehicles, furniture etc.) • Revenue expenditure (Salary, raw material cost, maintenance and repair costs etc.) You may be able to convert a capital expenditure into a revenue and vise-versa .. HOW? FINANCIAL FORECAST: Overview
  • 33. FINANCIAL FORECASTS • Key elements in a forecast – Revenue – Costs: operational, sales & general admn. – Capital expenses – Working capital expenses – Earnings – Tax, interest and other costs – Sources of funding – Uses of funding 33
  • 34. FINANCIAL FORECAST: Preparation • Uncertainties and unknowns can be captured through: – Scenario and sensitivity analysis – Templates that allow for different scenarios – i.e. optimistic, pessimistic, expected. For example making the changes in the input, the output financials should show the impact • Use tools available – eg.spreadsheets • Link and create templates, suitable to your requirement
  • 35. At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 35 35
  • 36. MEASURE, REVIEW, CORRECT.. MEASURE.. • An individual measures height, weight, BP, sugar levels etc.. as key parameters for wellness • What are the Wellness and Value measures for a business/idea? – Top Line: Revenue – Bottom Line: earnings/profits – Cash Flow – Number of employees – Key costs – … ?? 36
  • 37. MEASURE, REVIEW, CORRECT.. MEASURE.. • Capture data periodically; monthly/fortnightly/weekly … • Design a reporting Management Information System (MIS) to evaluate – the Key Performance Indices (KPIs) – Key Value Drivers and – Key Value Depleters 37
  • 38. QUALITY PARAMETERS - EXAMPLE • Illustrative parameters, for Sales – Sales Quantity – Quality of revenue - in terms of product/service/location etc. – Average revenue per employee – Number of customers, number of high value customers – Number of customers who are above a certain revenue or category, eg. large companies, well known brands .. – New customers added – Customers lost – Pipeline customers – Etc. • Quality can impact valuation in addition to Quantity 38
  • 39. MEASURE, REVIEW, CORRECT.. MEASURE.. • More illustrative indicative parameters – Key expenses – Number of employees – Average cost per employee – Receivables and payables – Cash balance – Key assets – Loans outstanding – Equity capital 39
  • 40. MEASURE, REVIEW, CORRECT.. MEASURE.. • Design MIS with care: – too little information is not helpful – too much data can be counter productive • Analyse data, look for patterns and trends, recast – Check for variances over time, with underlying causes – Compare with benchmark companies – Factor learnings into business strategy and action plan – Recast and redo projections and plan if required • Periodically revisit MIS framework and add/update 40
  • 41. At The Start Key Math Elements in Business Business/Financial Model Financial Planning - Strategic MIS – Measure/Analyse/Reset In Summary Discussion Topics: ’To trigger thinking’ 41 41
  • 42. IN SUMMARY • Finance is important for survival, sustainability and success; however finance is not everything • As … All the entrepreneurs who have money are not successful & All those with no money or limited money are not unsuccessful 42
  • 43. Thanks … and All The VERY BEST 43For more such class and teaching notes/slides check out: www.slideshare.net/anjanavivek