Your class project will be an exciting project. You will build your OWN company. A company of your dreams. I have been consulting for a number of years. People do not start paying attention to “Finance stuff” until they open a business. However, that is really the wrong time to learn how to financially architect a company. So this project will come as close to reality as possible. The more serious you take this project, the better equipped you will be to run your company or someone else’s.
What is your passion? What is your dream company? More importantly, how much profit will it generate? How much cash will you need to start your company? Will enough money be generated to take care of you and your family? Whatever company you want to start, you must be able to identify 3 public companies that can act as BENCHMARKS. You will extract so much information from these companies that you will be able to build a very precise financial company. Not convinced yet? This is exactly how I am building my brother’s printing company that is currently seeking bank financing. More on that when we start our classes.
Your final class project will need to be submitted. However, based upon previous students’ time tracking, you will need to invest anywhere from 2-3 hours to complete this project. Project Management and time management are very serious in this class. Those are 2 of the most important critical competencies company look for in new hires. Need more convincing? Let’s look at Apple. They innvovate a new product. They get the planet excited. Then they communicate the RELEASE DATE. For the next 18 months (assuming 18 month timeline), people’s careers will be in the balance based on their ability to HIT that release date. Want to earn high six-figure salaries? Do NOT let another day go by without becoming a MASTER at project and time management.
Here are your mini-release dates:
#1 decide on your startup company. Identify 3 public companies that will be your financial benchmarks.
#2 – download benchmark PDF template and start building your benchmark shell. Oh, BTW, you will get very good at Excel in this class 🙂
#3 – you should be completed your 3 financial benchmarks. you should be reviewing the template for Industry Overview.
#4 – you should be completed your Industry Overview. you should be reviewing the 5 Year Projection template.
#5 – you should be completed your 5 Year Projection template. It is during this class you must bring in FINAL questions and challenges.
#6 – you must submit to me your completed Class Project. Additionally, you should be prepared to do a 6-10 minute presentation to class.
Some Guidance for your Class Presentation
Ordinarily, I do not allow students to do any type of Powerpoint presentations. But I am rethinking that strategy. Before you develop your presentation, I want you to watch 3 episodes of SHARK TANK. And ask these questions to yourself:
1. How well do they know their market?
2. How well do they know their competition?
3. How well do they know their target audience?
4. What is their selling price? What is their markup? How much are their direct costs? What are their primary cost components?
5. What kind of funding do they need? How much equity? How much debt?
6. Do they know their NUMBERS?
Here is how I am grading your presentation. This is what a SOLID A+ looks like:
1. Information presented is thorough, complete, organized and professional looking.
2. You demonstrate a high working knowledge level of the industry.
3. You know your benchmarks and key ratios — backwards and forwards.
4. Your demonstrate a DEEP INSIGHT of your 5 Year Projections and what it all means.
5. At the end of your presentation, your classmates (the sharks) will decide if they want to invest in YOUR company.
Hmmm .. that sounds interesting right. I like it. Great idea Rich 🙂 Each student will be given $100,000 of virtual dollars. At the end of each presentation, students will be asked if they want to invest in your company. Top 3 companies (with largest capital contributions) get bonus points. Top 3 students that generate the highest IRRs will get bonus points. If FINANCE is the art and science of managing money — then LEARNING should be one part experiential and one part entertainment. I wish I was in this class! Oh right – I am the teacher ….
YOU ARE EXPECTED TO BUILD THIS SPREADSHEET FROM SCRATCH. IF IT COMES TO MY ATTENTION THAT YOU HAVE USED A SOFTWARE PROGRAM (OR ANY OTHER MEANS) TO CONVERT MY PDF DOCUMENT INTO AN EXCEL DOCUMENT, YOU WILL RECEIVE A ZERO FOR THE ENTIRE ASSIGNMENT. IT IS JUST NOT WORTH IT.
Step by step guidance as follows:
1. Select your company based on your “passion.”
2. Select PRIMARY competitive benchmark. Should be US public company.
3. Go to Yahoo Finance.
4. Download Income Statement and Balance Sheet Data for current 3 years into Excel worksheet.
5. Click on COMPETETORS link on Yahoo Finance to see the competitors to your PRIMARY company benchmark.
6. Download 2 other competitor benchmarks to Excel worksheet.
7. Now start BUILDING your excel shell.
8. Work on Income Statement first. Ratios here are a function (denominator) of Total Revenue (Sales).
9. Next work on Balance Sheet. Ratios should be a function of Total Assets.
10. Make sure that your NET INCOME totals and TOT ASSETS totals match totals on Yahoo Finance.
11. Now start building your RATIO equations.
12. Review my EXAMPLE. Make sure you can figure out the Numerator and Denominator for EACH metric.
13. Now – complete your RATIO equations.
14. Once you have completed ONE YEAR, just copy and paste to the other 2 years.
15. You should REPLICATE Quad Graphics worksheet FIRST. This is perhaps the best idea here!
16. When you complete your first company, cut and paste this shell into 2 more tabs.
17. REMEMBER – it is a clear VIOLATION of academic policy for sharing your excel spreadsheet with students. The penalty is ZERO for both parties for this assignment.
18. Your goal should be complete 95% of your 3 benchmarks.
YOU ARE EXPECTED TO BUILD THIS SPREADSHEET FROM SCRATCH. IF IT COMES TO MY ATTENTION THAT YOU HAVE USED A SOFTWARE PROGRAM (OR ANY OTHER MEANS) TO CONVERT MY PDF DOCUMENT INTO AN EXCEL DOCUMENT, YOU WILL RECEIVE A ZERO FOR THE ENTIRE ASSIGNMENT. IT IS JUST NOT WORTH IT.
Step-by-step guidance:
1. Build excel shell. Create all line item descriptions first.
2. Import (manually) key ratios from your benchmarks for your two best companies.
3. You select 2 best companies by seeing which ratios align best with each other.
4. CAUTION: make sure when you are dealing with numbers in THOUSANDS vs WHOLE DOLLARS.
5. INCOME STATEMENT SECTION. You will have 2 deviations from your Benchmarks. Your Interest Expense Ratio will come from an estimate you create from the CURRENT DEBT section. And you are to use a FIXED 30% for taxes.
6. Revenue per Employee will allow you to estimate the number of people you can afford to hire.
7. DIVIDEND SECTION. You are to use the FIXED dividend payout ratios that I have in my spreadsheet. Starts at 30% and ends at 70% in year 5. The residual (CUM RETAINED EARNINGS) becomes the number that goes into the Equity section of your Balance Sheet.
8. REMEMBER: your company ratios for the entire spreadsheet are a SIMPLE AVERAGE of your 2 benchmark companies.
9. ASSETS SECTION. Now you can build your Assets using the benchmark ratios. Cash becomes the “plug” so that A = L+E. See calculation section right below total assets.
10. LIABS+EQUITY SECTION. Continue to build your Liabs/Equity accounts from your benchmark ratios. Your Capital Ratio which is the % of total equity will determine how much your investors will need to contribute to start your business.
11. CURRENT DEBT SECTION. You will need to use the PMT excel function to calculate your Loan Payment. It is easy to use.
12. TARGET RETURN SECTION. Keep your target return at 20%. You calculate your DISCOUNT RATES for each year just like we did when we were playing “Shark Tank.” Your equity stake % becomes the % of company that will be owned by your investors. You take the invested capital / total PV of the company.
13. IRR SECTION. Remember to ONLY use the Net Income of the 5 years BEFORE any present value calculations. You should be able to see that on my model. Use the IRR function in excel. You should be able to validate the calculation with your HP12c using the CFo and CFj functions.
EFFICIENCY IS ALL ABOUT DOING THINGS FAST. EFFECTIVE IS ALL ABOUT DOING THINGS RIGHT. I HIGHLY RECOMMEND TO STUDENTS WHO ARE EXCEL NOVICES TO FIRST BUILD YOUR WORKSHEET USING MY NUMBERS IN THE EXAMPLE. WHEN YOU HAVE REPLICATED MY NUMBERS, YOU CAN JUST DROP YOUR NUMBERS IN WITH CONFIDENCE.
Dear Class – I am NOT providing a template for your Class Presentation. The primary reason is to remove a project burden from you. However – you are expected to provide a professional presentation of your company. Pretend that you are on SHARK TANK and we are your investors. You decide if you want to have talking notes. It is NOT acceptable for you to READ aloud your talking notes. You would be kicked off Shark Tank if you did that, right?
Here is my presentation guidance:
1. Total presentation should be 3-5 minutes. It will be timed.
2. You will need to confidently and credibly answer questions from the “investors.”
In your presentation, you must discuss (include) the following:
1. Earnings per Share. Assume that you have 50,000 shares outstanding.
2. Dividend Yield.
3. Dividend Payout Ratio.
4. IRR.
5. Payback — how many months does it take to recoup your capital contribution through dividends.
6. Net Income Margin and how that compares to large companies in general.
7. Revenue Growth.
8. Use Dividend Growth Rate Model to estimate your STOCK PRICE in Year 1 and in Year 5. Talk about its potential for capital appreciation. Use your revenue growth for the dividend growth. Assume the Required Rate of Return is 25%.
9. Explain your primary strategy to differentiate yourself from your competition.
10. How many employees can you hire in year 1 and in year 5.
11. What is your Debt %. Equity %. How does that compare to large companies.
12. Return on Assets? How will you improve it?
13. Return on Equity?
14. What is your Working Capital in Years 1, 3 and 5? Working Capital = Current Assets – Current Liabs. How will you improve that over time?
15. Total Asset Turnover. What is it in years 1,3 and 5? How will you improve it over time?