Define explain the terms below, Responses are limited to the space provided COMB

Question

Define explain the terms below, Responses are limited to the space provided COMBINED LEVERAGE (CL) FACTOR OPERATING (EBIT) BREAKEVEN FINANCIAL FORECASTING FOR START-UPS Short Answer Question Describe the shoetcomings limitations of the Venture Opportunity Screening (VOS) Model discussed in class. How did we say the Model could be modified (adapted) to make it more useful to entrepreneurs and prospective investors? Short Answer Qnestion Discuss the similarities and differences in the Timmons VOSE and the VOS venture screening methods discussed in class. Comment on the strengths and weaknesses of the models and briefly discuss which method you prefer and why. Short Answer Question Identify the most common categories for which early phase funding is needed in a start-up company. Which category do you think is most important and WHY Identify any categories for which funding may be delayed and describe the impact of a delay on company operations and value Short Answer Question Explain the relationship between the financial accounting Statement of Cash Flows and the Cash Build/Cash Burn calculation? Which calculation provides the more useful (and manageable) financial infomation for entrepreneurs and investors in start-up businesses?

Explanation / Answer

Combined leverage : It is a combination of two leverages. It helps us to identify the effect on eps for every percentage change in sales.

The two leverages are operating leverage and financial leverage.

where as operating levearge = contribution / ebit. ( Contibution = sales - variable cost )

where as financial leverage = ebit/ebt.

So as per the definition combined ebt leverage is combination of both operating and financial levearge

therefore combined leverage = operating leverage * financial leverage

Combined leverage = (contribution/ebit )*( ebit/ebt )

Therefore combined leverage = contribution/ebit.

Operating break even : It is a point where the sales of the business covers all the fixed cost and variable cost. No profit will be produced at this point.

Here, fixed costs means cost that is will not change with the increase and decrease of the number of goods or services produced or sold. Example : Rent , Interest expense on deposits made.

Variable cost is the cost which will change from time to time. Example for variable cost is costs of raw materials , cost of labor.

Financial forecasting : It is a fiscal management tool which presents estimated information based on the past, current and projected financial conditions.

This will make us to identify revenue and expenditure for future period that may have a immediate impact or may be a impact in the long run.

It allows us to improve in decision making and also delivery of essential community services.

Question no : 5

Statement of Cashflow : 1) It ascertains the changes in balance of cash in hand and cash at bank between two dates.

2) It analyses the reasons for changes in cash and bank balances on a particular date and also shows the inflows and outflows of cash.

Cash burn rate : It is the rate at which company uses up its cash reserves or cash balance. It is a measure of negative cashflow.

Calculation of cash burn rate :

1) find out the difference between the opening and ending balance of cash for the period.

2) Divide the total by the number of months in the selected period.

3) Result is the cash burn rate.

For startups it should consider the burn rate. Since the start-ups will not generate revenues it should estimate using forecasted costs.

Question no : 4

Startup Financing at early stage : Following are the categories for funding in early phase :

1) Pre Seed Capital : It is the first stage in the life of a startup. It comprises of three sources Fools, friends and family (fff).

2) Seed : Capital necessary to start a company.

3) Series A : A startup is expected to have a clear and growing evidence of product or market.

4) Series B : Here, the investors are looking for the next stage of growth. In simple words ability to take everything that you have learned and make it over a scale.

5) Series C+ : These are raised to fuel large scale expansion, like moving into a new market or acquisition of other business.

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