Many project (or venture) proponents especially those without much business background have tendency to get mixed up when they try to describe how well their ventures are doing, or before it is launched, how much they should give up of their project (or company or deal) in exchange for outside funding.

This is a very important issue, because if one has no idea of what his project or venture or company is worth, even at startup and more so when operational, he could be offering alices of them for amounts that he would not know are either too high or too low relative to their correct (or intrinsic) value. This would make his company either unattractive or too attractive to those who want to invest money. While a successfully funded venture sounds good because money is not that easy to find, if the proponent turns out to have given away his companhy or project for a song, he will realize that he will find it so much harder to raise money the next time around (which is always sooner than one thinks). Worse, he could place himself in a situation where, he can't raise more money without losing control over his company or project sooner than he planned to. So, how would a prospective entrepreneur know what his company or project is worth, so he can decide whether he is raising money that costs reasonably?

This short memo offers a short and practical answer to this very crucial question. For this the entrepreneur has to understand two concepts, described in two files, namely:

a). Rate of Returns. This is how most people understand how their business is doing, which also means (in another way) how much it is worth to outsiders who want in.

b). Cashflows. The raw material that gets into the calculation of Rates of Returns are cashflows, properly constructed to fit the kind of return being calculated.

These are not very dificult ideas to grasp; they are the minimum that proponents or entrepreneurs are expected to know if they want to make something out of their time and efforts (and risking) other than to just put up a company that pays them a salary.

The cynic will always come up with that inevitable question: Why try to understand these concepts, when all that matters is to always sell at a price higher than cost? Well, once upon a time those simple concepts were sufficient to turn a poor migrant migrant like Henry Sy into one of Asia's richest men. If he were to start afresh now, he wiill not be able to do that anymore - simply because capital has become scarce and smart that he won't even know the first thing about where and how to get it, in the amounts that matter.

So, read these files and try to wrestle with them. If you have a question email it here and I will try to answer it (or perhaps Francine will if I can't). When you master these ideas, I will teach you how to turn them into amazing tools to create value out of thin air. But enough for now, lest you think that you can do it without hard work. You won't because that's just how the real world works.

Note: the third file is an industrial grade worksheet to model cashflows done by a professor whose name I don't know anymore, I used it to teach my students. Please know that it is intellectual property of a person, though you can use it privately.