This document summarizes a workshop on key financial fundamentals for entrepreneurs. The workshop objectives are to learn important financial terms and concepts, understand corporate obligations, and gain exposure to basic financial management. The agenda covers corporate record keeping requirements, basic financial statements like the income statement and balance sheet, and key metrics like gross margin, breakeven point, customer acquisition cost and lifetime value. Advanced financing concepts are also discussed such as projecting cash flow, evaluating businesses for traditional debt or venture capital, and types of financing. Real-world examples are provided to illustrate financial statement calculations.

1. Financial FundamentalsThat Every
Entrepreneur Should Know
Facilitated by Dave McEllistrum,
Amplify LLP and RLB
dave@amplifyllp.ca
September 30, 2015

2. Workshop Objectives
• Learn key financial terms and what they mean
to you and your business
• Understand your corporate obligations and
the importance of keeping organized records

3. Workshop Summary
At the end of the workshop participants should
have exposure to basic financial concepts and
corporate government obligations that will help
them in accessing financing and in managing
their business.

4. • TraditionalAccounting Firm with 110 people and offices
in KW, Guelph and Fergus
• Clients are primarily owner managed companies from
start ups to 500 employees in a wide range of industries
• Member of PKF North America (100 firms in North
America)

5. • Online Accounting Firm that is about to launch, aimed at
start-ups and small business
• Disrupt the industry
• Bookkeeping, government filings, monthly reporting, year
end statements, year end personal and corporate tax returns,
and financial, business management and strategic advice all
for a fixed monthly fee

6. Dave McEllistrum
• Managing Partner of RLB
for last 10 years
• Co-founder of aTech
hardware integrator
• Founder and Client
Experience Officer of
Amplify LLP
• Client focus on planning
(tax, financial, strategic,
management)

7. Michael McCutchen
• Senior Manager at RLB
and Amplify LLP
• Focus on all aspects of
small business
accounting and
planning
• Tax and HST resource
for the firms

8. Katie Cheesmond
• Director of Business
Development at RLB and
Amplify LLP
• Entrepreneurial
background with multiple
businesses
• Finance and Lending
• 10 years experience in
evaluating financing for
businesses

9. Aerin Smith
• Bookkeeping Leader at
RLB and Amplify LLP
• AccountingTechnology
expert
• Quickbooks Proadvisor

10. Agenda
Key Corporate Government ObligationsYou Should Know
An overview of government obligations for businesses and the importance of strong recordkeeping
Basic FinancialTerms and Concepts
An overview of key traditional financial terms that every entrepreneur should know
Case Study
Calculate the Gross Margin, Bottom Line and Breakeven Point
Advanced Metrics and FinancingTerms
A selection of more advanced terms and what they mean to you
Case Study
Simple Customer Acquisition Cost (CAC) and Customer LifetimeValue (LTV) Example

11. Key Corporate Government
Obligations

12. What Structure Do I Need?
• Is there liability risk in the company?
• Are there profits to be retained in the company?
• Are there others to participate in profits?
• Is the benefit worth the cost of another corporation?
• Is there potential to sell the business?
• Sole proprietor, corporation, holdings company, family trust

13. Errors Managing Money
• Should have a separate bank account for
business and personal
• Helps maintain good records by using the bank
accounts to build/confirm records from your
receipts
• Avoids surprises by seeing the flow of business
funds

14. Lack of Proper Documentation
• Loans should be documented. If the loans are from
someone other than the shareholder the loan needs to
bear interest
• Unfavourable tax result if money is loaned informally from a non-
participating spouse or family member (ie: parent)
• Shareholder agreements should be in place
• Employment contracts should be in place if there is an
employee/self employment scenario
• Subscription for shares must be paid

15. Inappropriate Draws
• Drawing from the company without
declaring/understanding the source
– Salary requires withholding tax andT4
– Dividends require a resolution andT5
– Management fees may require HST to be paid
• Each have particular requirements, especially for slip filing which
is subject to non-filing/late-filing penalties. For a December 31st
company, waiting until March or April to take the books to the
accountant might be too late.

16. Not Filing on
a timely basis
• Failure to remit payroll taxes
• 20% penalty
• Also interest at 5%
• Failure to fileT4 orT5
• $10 a day to a maximum of $1,000
• Failure to fileT2
• 5% of the liability
• Interest at 5%
• Installment payments
• Failure to remit 5%
• GST /HST
• Penalty by formula based on number of
months
• Interest at 5%
Voluntary disclosure may be
available to avoid penalties on
overdue filing

17. Tax Credits
• SRED – tax credit on eligible expenses for R&D
• Co-op/Apprentice – tax credits on eligible
programs
• Grants ̶ Training & Equipment
• HST ITCs & Rebates- not to be overlooked

18. FinancialTerms

19. Income Statement (Profit & Loss)
• The scorecard for your company’s results for a
period of time (often monthly, quarterly or annually)
• Includes revenue, variable costs, gross margin, fixed
costs, and net income or loss
• The primary building block for cash flow projections

20. Revenue
• The sales of the company for goods delivered or
services completed.
– aka: top line, gross income, run rate (extrapolated), sales
• Many tech firms are quoting bookings rather than
actual revenue
(http://www.wsj.com/articles/how-tech-startups-play-the-numbers-game-
1433903883)

21. Variable Costs
• Costs that vary in relation to changes in
revenue
– aka: cost of sales, cost of goods sold, direct costs
• Landed product cost for companies that sell goods
• Cost of staffing in companies that sell services
• Hosting costs for SaaS companies

22. Gross Margin (Gross Profit)
• Revenue minus variable costs
Gross margin % = gross margin divided by
revenue
A 30% gross margin % means that for every $1
of revenue you will have $0.30 to cover your
fixed costs and add to profitability

23. Contribution Margin
• Contribution margin is the revenue minus
variable costs for 1 unit of sales.

24. Fixed Costs (Overhead/Indirect)
• Don’t have a direct correlation to sales volume
– examples includes occupancy costs, administrative
costs, management costs, sales and marketing costs
• fixed costs will vary with large swings in sales
volume but are generally “stepped” in relation to
sales

25. Net Income or Loss
aka: bottom line, net earnings, net profit,
burn rate (if a loss - http://www.entrepreneur.com/article/242170)
• Revenue less variable costs less fixed costs
• The profitability or loss of the company for a
specific time period

26. Breakeven Point
• The $ of revenue required to breakeven
(no net income or loss) for a specific time period
based on assumptions for gross margin % and
fixed costs
Calculated by Fixed Costs/Gross Margin %
Ex: If we had projected fixed costs of $400,000 and a projected gross
margin % of 20% our breakeven point would be $2 Million in revenue

27. Example
• Our company started selling a fitness tracker in 2014.
• In 2014, we shipped 10,000 units at $55 each through our online channel
and shipped 5,000 units at $40 each to our distributors.
• In 2014, we had further confirmed orders from distributors of an
additional 2,000 units at $40 each that shipped in January 2015.
• The trackers were manufactured in China at a total cost of $23 per unit.
• Freight, duty and brokerage costs were $2 per unit.
• We bought 20,000 units during the year.
• Our rent and occupancy costs were $80,000, our sales and marketing
costs were $200,000, our administrative costs were $75,000 and our
personnel costs were $260,000.

28. Questions
1) What was our topline in 2014?
2) What was our cost of goods sold?
3) What is our gross margin?
4) What is our gross margin %?
5) What is our net profit or loss?
6) What is our burn rate per month?
7) What would our breakeven point be in 2015 if our
gross margin % and fixed costs didn’t change?

29. 1)Topline (Revenue)
• We have $550,000 ($55 x 10,000 units) from
our online channel and $200,000 ($40 x 5,000
units) from our distribution channel
• The 2,000 units not shipped until 2015 won’t
be revenue until 2015.
• Total revenue is $750,000. ($550K + $200K)

30. 2) Cost of Goods Sold
• Our variable costs equal our landed cost in this case
• Our landed cost per unit is $25 ($23 product cost + $2 freight)
• We sold 15,000 units (10,000 online + 5,000 distributors)
Our Cost of Goods Sold is $375,000
($25 cost per unit x 15,000 units sold)
It doesn’t matter how many we bought during the year only
how many we sold to determine our variable costs

31. 3) Gross Margin
• Our gross margin is $375,000
(Revenue of $750,000 – Cost of Goods Sold of
$375,000)

32. 4) Gross Margin %
• Our gross margin % is 50%
(Gross Margin of $375,000/Revenue of $750,000)

33. 5) Profit or Loss
• Our fixed costs are $615,000
($80K+$200K+$75K+$260K)
• Our loss for 2014 is $240,000
($375,000 gross margin - $615,000 in fixed costs)

34. 6) Burn Rate
• Monthly burn rate is $20,000
($240,000 loss divided by 12 months)

35. 7) Break Even Point
• 2015 break even point
Expected gross margin % of 50%
Expected fixed costs of $615,000
= $1,230,000 in revenue
($615,000 divided by 0.5 (50%))

36. Balance Sheet
• a snapshot at a point in time of a company’s
assets, liabilities, and shareholders’ equity.
Assets = Liabilities + Equity

37. Assets
• What a company owns
• Cash
• Accounts receivable (Outstanding customers
balance $ for goods or services that they have
received)
• Inventory (goods purchased but not resold yet)
• Equipment (capital assets)

38. Liabilities
• What a company owes
– accounts payable (Balance outstanding $ you haven’t
paid your suppliers for goods or services you have
received)
– HST payable (HST you have collected on sales but
haven’t paid to the government yet)
– Debt financing (loans that you are required to repay)

39. Equity
• What shareholders have left of their investment if
the company were to sell, after all debts are paid
• Includes
Share investments
+ Plus accumulated profits or - minus accumulated losses
since inception (Retained Earnings/Deficit)
– Less dividends paid to shareholders

40. Simple Example
In our fitness tracker example
• If shareholders had initially invested $500,000
in common shares
• Our customers are fully paid up
• We still owed our suppliers $40,000 …

41. Tracker Balance Sheet • Assets
Cash $175,000
(Investment – losses – inventory + not yet paid for that
inventory)
Inventory $125,000
(5,000 units unsold at $25 landed cost)
• Total Assets $300,000
• Liabilities
Accounts Payable $ 40,000
(still owing to suppliers)
• Shareholders’ Equity
Share Investment $500,000
Accumulated Losses (Deficit) ($240,000)
Total Shareholders’ Equity $260,000
• Total Liabilities plus Equity $300,000

42. Practical Recordkeeping
• Programs like Quickbooks Online make it
easy to produce these reports
– have standard categories for all types of financial
statement items
– accessible from any internet connected device
making it easier to monitor and manage
– easy to use

43. Quickbooks Online…
– Integrations with
• easy data entry and document management tools (Receipt
Bank, Hubdoc)
• business planning tools (Liveplan, Spotlight Forecasting)
• enhanced reporting tools (Spotlight Reporting)
• industry specific tools (Time tracking for service businesses,
inventory)
• non financial SaaS (project management)

44. Advanced Metrics & Financing
Terms

45. UnderstandingYour Key Metrics
• All businesses are different
• Key to understanding what levers to push to
improve your results and meet your
milestones
• Dashboard

46. Custom Acquisition Costs
• The cost of acquiring each customer
Total marketing costs + marketing personnel costs + onboarding
#new customers generated for a period of time
• Compared with Customer Lifetime Value (CLV) to assess viability of
business (CLV divided by CAC)
• CAC payback period – the time period when our gross margin we
get from customers will cover their customer acquisition cost
https://blog.kissmetrics.com/customer-acquisition-cost/

47. Custom LifetimeValue
• Simple calculation requires
• (g) gross margin % per customer
• (r) average monthly or annual revenue per customer
• (l) average customer lifespan in months or years
Calculation CLV = g x r x l
• More complex calculations include varying customer
churn/retention rates, varying margins and annual customer
revenue and often include an inflation impact for businesses with
higher retention rates.

48. Example
• We spend $100,000 on marketing and
$100,000 on marketing personnel
• We get 2,000 new customers
• We have a
• 30% gross margin %,
• average monthly revenue per customer of $40
• and an average customer lifespan of 16 months

49. Questions
1) What is our CAC?
2) What is our CAC payback period?
3) What is our simple CLV?
4) What is our ratio of CLV to CAC?

50. Calculations
1) Our CAC is $100 ($200,000 in marketing and sales costs divided
by 2,000 new customers)
2) Our CAC payback period is 8 1/3 months ($100 CAC divided by $12
(30% of $40) margin per customer per month)
3) Our simple CLV is $192 (30% x $40 x 16 months)
4) Our CLV to CAC ratio is 1.92 to 1 ($192 divided by $100)
Best practice for SaaS businesses seems to be 3 to 1
Lots ofVC blogs and other info on this topic

51. FinancingTerms & Concepts

52. Understanding Projecting Cash Flow
• Income statement projection is basis for cash
flow projections
– understanding
• timing of receiving funds from customers and of paying
government remittances and suppliers
• inventory timing if you sell goods
• capital asset needs (equipment, leasehold improvements
– getting your space ready for use)

53. EvaluatingYour Business
• Consistent Soft Factors evaluated by
traditional debt andVC investors
• team
• product
• market
• and ultimately product/market fit
https://www.linkedin.com/pulse/marc-andreessen-product-market-fit-startups-marc-andreessen

54. Traditional Debt Financing
• Why? - bootstrapped the company and want to retain
as much equity ownership as possible, time to market
not as important
• Traditional debt lenders are concerned with security -
how can they recover their loan if the business fails
(assets of the corporation, guarantees by
shareholders, guarantees by friends and family of
shareholders) …

55. • Financial ratios that traditional debt lenders use
include
– Debt to equity ratio
(total amounts owed divided by total shareholders’ equity)
– Debt service coverage ratio – does the company
have enough cash flow to repay the annual loan
payments and the interest

56. Venture Capital Financing
• Why? Unable to bootstrap the company, importance of time
to market, quick growth translating to quick increase in value
• Convertible debt – loans that can be converted to equity (shares) at
a later date – usually at a future financing round
• Capped – guaranteed to get a % of shares at conversion
• Uncapped – based on the valuation set by the financing round
• Financing round (Seed, Series A etc.) – trade equity (shares –
participation in decision making and future value) for funding,
meet milestones to get to the next round of financing

57. Questions …

58. For the answers & full powerpoint
deck visit:
Amplifyllp.ca