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F317 Quiz 2
Quiz 2 for Dennen
49
Finance
Undergraduate 4
09/14/2014

Additional Finance Flashcards

 


 

Cards

Term
What makes recurring revenue so valuable?
Definition
A start-up can spend more of its energy growing the business rather than on trying to acquire enough new or repeat business just to hit the same revenue level it did the year before
Term
Why do investors like recurring revenue?
Definition
because it can better predict what a start-up is going to earn in future years. In fact, the more recurring revenue a company has,
the higher the valuation it will receive from prospective investors and buyers
Term
Revenue streams
Definition
the specific ways a company brings money into a company
Term
Types of Revenue streams
Definition
Asset sales
Usage
Renting/Leasing
Licensing
Listing
Brokerage
Advertising
Data
Term
Asset sales revenue
Definition
Ownership rights are sold of physical product. Amazon® sells books.
Telsa® sells cars.
Term
Usage revenue stream
Definition
A customer pays a one-time fee for a service. For example, attorneys are
paid a fee to provide legal services (i.e purchasing someone’s time). FedEx® is paid a fee to deliver a package.
Term
Renting/Leasing revenue
Definition
A customer pays for the exclusive right to physical asset for a period of time. Fans purchasing a concert ticket are purchasing the exclusive rights
to a seat at the venue. Hertz® leases a car for a specific period of time.
Term
Licensing revenue stream
Definition
The business retains ownership of content or software and licenses the
same to third parties. Microsoft® sells a license to its desktop software.
Term
Listing revenue fee
Definition
– Business charges a fee to list a product or service for sale. Craigslist®
generates revenue on classified listings and, unlike brokerage below, earns the fee
regardless as to whether a transaction is completed from the listing.
Term
Brokerage revenue stream
Definition
Revenue is derived from connecting two or more parties together for
purposes of consummating a transaction. For example, Real Estate agents receive a
brokerage fee if it brings a buyer and seller together and a transaction is completed.
E*Trade® charges a brokerage fee to its clients whenever they buy or sell a stock.
Term
Advertising revenue stream
Definition
Revenue is generated by selling marketing access to large community
of individuals. Newspapers generate a significant amount of their revenue via
advertising. Facebook® generates nearly $8B per year by selling advertising space
on individuals Facebook pages and timelines.
Term
Data revenue stream
Definition
Online or mobile businesses that collect and monetize personally identifiable
information (PII) and sell the same to third parties. For example, Acxiom® claims to
have 1500 pieces of information on more than 200 million Americans in which it
sells to interest parties.
Term
Single largest cause of start-ups failing
Definition
Lack of product/market fit
Term
The second biggest cause of startup failures
Definition
the cost to acquire a customer is much higher than the lifetime value
of the customer
Term
What are some techniques for entrepreneurs to use to map out a customer acquisition plan?
Definition
Search Engine Optimization (SEO), Search Engine Marketing (SEM), Public Relations (PR), Social Marketing, Direct Sales (start-up selling direct
to the customer), and Channel Sales (selling to consumers through
distributors/retailers)
Term
What are start up prices constrained to?
Definition
what competitors are charging
for a similar type product or service that already exists in the marketplace
Term
What is the current CPM (cost per 1000 impressions) on the Web?
Definition
$1
Term
What is a startups first step when thinking about pricing?
Definition
a start-up should conduct an
exhaustive web search of similar product/service offerings to get a general sense of the overall market
Term
What do successful startups do in terms of creating revenue streams?
Definition
Find a non-commoditized area of the market in which margins are not razor thin and there is opportunity to acquire a large number of customers at reasonable margins
Term
List of strategies to drive more predictable revenue
Definition
Affinity
Membership
Subscription
Marketplace
Community
Experience
Upgrade
Loss Leader
Freemium
Term
Affinity
Definition
a business offers a loyalty or rewards
program to customers in order to increase the frequency and amount of purchases
Some examples include Dicks® Sporting Goods “Scorecard” program. The Delta®
Sky miles program is designed to increase purchase loyalty. Affinity is a strategy
that’s often deployed by businesses that sell commodity-type products and services
Term
Membership
Definition
offer their products and services at a
bigger discount than normal if the consumer or business purchases an annual
membership. An example would be Costco®.
Term
Subscription
Definition
– Subscription is the strategy of a consumer paying a monthly fee to
gain access to an online product or service “or” to receive a certain type of product
on a monthly basis
Term
Marketplace
Definition
Successful start-ups that have utilized brokerage as a revenue
stream have successfully created a large marketplace of buyers and sellers. This
results in a certain level of predictability in terms being able to sell a
product/service or acquire a product/service in as efficient means possible
- the more buyers and sellers aggregated, the less likely the buyers and sellers will move
to a competing offering
Term
Community
Definition
companies that create successful
advertising revenue-based businesses have aggregated a large number of loyal
individuals. For example, Facebook® has not aggregated more than 1 Billion users
with hundreds of millions that come back to the site every month. Advertisers pay
billions to gain access to Facebook’s community of users
- outside monetizing a community via
advertising, building a commmunity can help a company drive sales for physical
products
Term
Experience
Definition
Building a loyal following around brand or product or way of doing
business can help drive recurring revenue
- very difficult
Term
Upgrade
Definition
create recurring income of “one-time
purchased” products by encouraging customers to consistently upgrade to a new
product or service
Term
Loss Leader
Definition
involves a start-up offering a product or service at a
price that is not profitable for the sake of offering another product/service at a
greater profit or to attract new customers. A classic example is that of razor blades
Term
Freemium
Definition
a start-up gives a core product
away for free to a large group of users and sells a premium version of the product to
a smaller group of users
Term
3 ways that you need to be able to read financial statements
Definition
- realize the vital role money plays in every business decision
- determine if you are making a profit or losing money
- calculate your current and future financial needs
Term
For lending purposes, what will financial statements help you determine?
Definition
- if you can afford to pay a loan
- the loan amount
- the loan term (number of years)
- which assets you should buy vs. which assets should be financed
- what collateral is available to secure a loan
Term
What does a balance sheet tell you?
Definition
This statement shows what you own (assets), what you owe (liabilities), and what’s left over (net value or equity in the business). The numbers change every time you receive
money or give credit to a client as well as when you pay for or charge an expense.
Term
What does a balance sheet show you?
Definition
- The net value of the business
- How much of your loan debt is current, and how much is long-term
- Percentages and ratios (which are extracted from the numbers) necessary to analyze your business (see Ratios section)
- Compare two of the same time periods to see changes
Term
What a balance sheet won't show you
Definition
- Income or expenses over a period of time. Remember, the Balance Sheet reflects one moment in time.
- Market value of assets, although it will reflect purchase costs and depreciation according to industry standards
- Quality of assets
- Contingent Liabilities (money you agreed to repay by signing notes, or by being a comaker or guarantor of loans).
- Operating Lease obligations (which allow you to buy the item at the end of the lease, for a set price, do not appear on the Balance Sheet). However, Capital Leases (with buyout price of $1) are shown on the Balance Sheet.
Term
Advances to owners
Definition
Money owners take, in the form of a loan, to be repaid
Term
The Cash Method
Definition
Records a sale when money is collected
Records an expense when it is paid
Term
The Accrual Method
Definition
- Sales are made on credit, and not immediately paid for. The amount customers owe is called Accounts Receivable
- Buy items or incur expenses for the business, but pay later. The amount owed is called Accounts Payable.
- Net worth does not always translate to cash, since money can be tied up in Accounts Receivable, expenses and inventory. To get a better idea of how much cash there is at
the end of the month, learn about the Cash Flow Statement.
- Lenders prefer the accrual method.
Term
Other names for the income statement
Definition
Operating Statement • Earnings Statement • Profit & Loss Statement (P&L)
Term
What the income statement shows you
Definition
If sales are going up or down
 Your gross profit — how much money is left for the rest of the business after deducting
what it costs to produce or purchase the product
 All expenses for the time period it covers
 Increases and decreases in net income
 How much money is left to grow the business
 How much money is left for the owner(s)
 How much money is left to pay debt (principal only)
Term
What the income statement won't show you
Definition
- If your overall financial condition is weak or strong (see the Balance Sheet).
- What’s tied up in Accounts Receivable (money owed to you) and Accounts Payable (money you owe).
- What you own (assets) and what you owe(liabilities)
Term
What does a cash flow statement tell you?
Definition
The Cash Flow Statement shows money that comes into the business, money that goes out
and money that is kept on hand to meet daily expenses and emergencies.
Term
What the cash flow statement shows you
Definition
If the business has enough money to:
- cover day-to-day activities
- pay debts on time
- maintain and grow the business without a negative cash flow
 The need for additional working capital (cash) when sales increase since increased sales
mean increased purchases of material or labor. You should know how much you need.
Show where the additional working capital will come from.
 The maximum loan payment the business can afford
 The breakdown of principal and interest on your loan payments.
Note that the Income Statement only shows interest - not principal.
 Your weaknesses (an inability to keep and generate cash). For lending purposes, explain
how you’ll handle these weaknesses
Term
What the cash flow statement won't show you
Definition
How much you have in Accounts Receivable and Accounts Payable (shown in the Balance Sheet)
 Your balances in assets, liabilities and net worth
 Depreciation of equipment, which is a non-cash expense.
This is dealt with in the Balance Sheet.
Term
When should projecting financials take place?
Definition
The last step in your business plan preparation
Term
Basic "rules of thumb" that every Angel or venture capital equity investor uses
Definition
1. Five-year financial projections are the norm
- the average time to liquidity of an equity investment in a startup is now about five years. Thus most investors ask for 5-year projections
2. Aggressive revenue projections and growth rate. The first filter applied by most investors is to identify high-growth investable startups from ones that may be a good family business with organic growth
3. Gross margins greater than 50 percent
- better climb to the 60 percent range by year five
4. Show red ink to match your funding request - Financial projections shown to investors should always be pre-funding projections, to illustrate what revenues and expenses you think are possible, and how much your current funding falls short
5. Build a path to 10x return
Term
What percent of angel funding requests are satisfied?
Definition
Less than 4%
Term
What are some considerations one should make in regards to assumptions?
Definition
They should be based on some type of data
- Anything in your statements is based on a number of assumptions
- Understand how changes in the environment could change the data over time
Term
What is one common area people leave off startup financials?
Definition
Allowance for bad debts
Term
Areas to consider when deciding a revenue stream
Definition
Product/market fit
Customer acquisition costs
Pricing
Number of customers required
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